##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

FORM 10-K

|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|x |  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|  |  | For the fiscal year ended December 31, 2002                                         

or


|o |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ----------------------------------------------------------------------------------------
|  |  |                                                                                         

Commission File No. 0-12708


CANDLEWOOD HOTEL COMPANY, INC.

(Exact name of registrant as specified in its charter)


|                                |  |                    
|------------------------------- |  | -------------------
|Delaware                        |  | 48-1188025         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)

8621 East 21st Street North, Suite 200, Wichita, Kansas 67206
(Address of principal executive offices and Zip Code)


Registrants telephone number, including area code: (316) 631-1300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes
x  No o

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes
o  Nox

The aggregate market value of common stock held by non-affiliates of the
registrant, as of June 28, 2002, was $8,769,434 based on the closing sales
price of $1.35 on such date.

The number of shares outstanding of the registrants common stock, as of
March 24, 2003, was 9,025,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement for its 2003 Annual Meeting of
Stockholders are incorporated by this reference into Part III as set forth
herein.

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TABLE OF CONTENTS



|               |                                                                                                |  |  |  |  |  |  | 
|-------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I        
|               | ITEMS 1 AND 2. BUSINESS AND PROPERTIES                                                        
|               | ITEM 3. LEGAL PROCEEDINGS                                                                     
|               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   
|PART II       
|               | ITEM 5. MARKET FOR REGISTRANT's COMMON STOCK AND RELATED STOCKHOLDER MATTERS                  
|               | ITEM 6. SELECTED FINANCIAL DATA                                                               
|               | ITEM 7. MANAGEMENT's DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
|               | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           
|               | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  
|PART III      
|               | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                   
|               | ITEM 11. EXECUTIVE COMPENSATION                                                               
|               | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                       
|               | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                       
|               | ITEM 14. CONTROLS AND PROCEDURES                                                              
|               | PART IV                                                                                       
|               | ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K 
|Signatures    
|CERTIFICATIONS
|EXHIBIT 10.35 
|EXHIBIT 10.36 
|EXHIBIT 10.37 
|EXHIBIT 10.38 
|EXHIBIT 12.1  
|EXHIBIT 23.1  



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PART I




ITEMS 1 AND 2. BUSINESS AND PROPERTIES

Introduction

Candlewood Hotel Company, Inc. owns, operates, franchises and manages
high-quality, value-oriented, business-travel hotels. Our hotel properties
cater to mid-market and upscale business and personal travelers seeking
multiple night stays. At December 31, 2002, we had 77 company-operated hotels
(which is comprised of owned, leased and joint venture hotels), two managed
hotels and 30 franchised hotels. In addition, at December 31, 2002,
franchisees had six new hotels under construction. See Properties below.

Candlewood Hotel Company, Inc. was incorporated in the State of Delaware
in August 1996 and our principal executive offices are located at 8621 East
21st Street North, Suite 200, Wichita, Kansas 67206, telephone (316) 631-1300.
Our website address is www.candlewoodsuites.com and our periodic and current
reports are available on our website, free of charge, as soon as reasonably
practicable after they are filed with the Securities and Exchange Commission
(SEC). Electronic or paper copies of our filings are also available free of
charge upon request.

Our Brands

We operate two brands in the lodging market  Candlewood Suites and
Cambridge Suites. Each brand is built on the foundation of providing
exceptional value to all guests and designed to appeal to different price
points in the lodging market.

Candlewood
Suites

Candlewood Suites hotels offer spacious accommodations at competitive
rates that we believe are attractive to mid-market business and personal
travelers. Each Candlewood Suites hotel is comprised of studios and
one-bedroom suites, both of which contain business and other amenities
consistent with amenities found in upscale, full-service hotels. We believe
that the 350 square foot studio suites are larger than most full-service hotel
rooms. Up to 25% of the rooms in a standard Candlewood Suites hotel are
one-bedroom suites, which are approximately 525 square feet, and are designed
to accommodate guests who desire a bedroom separated from the kitchen and
office area.

We believe that Candlewood Suites hotels offer the accommodations and
amenities that are desired by guests staying an extended period of time. Each
Candlewood Suites hotel is equipped with the following amenities and values,
which we refer to as Candlewood values:



| |  |  | an exercise room;                                                                                      
| | - |  | -------------------------------------------------------------------------------------------------------
|
| |  |  | a complimentary guest laundry facility;                                                                
|
| |  |  | a convenient dry cleaning drop, with same-day service;                                                 
|
| |  |  | free local calls and low-priced long distance calls;                                                   
|
| |  |  | the self-service Candlewood Cupboard featuring value-priced
packaged foods and 25 cent beverages; and
|
| |  |  | a free First Night Kit complete with items such as coffee
and popcorn.                               

In addition, each Candlewood Suites studio and one-bedroom suite offers
amenities designed to accommodate the needs of the business traveler. These
amenities include the following:

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| |  |  | two telephones, with two incoming direct dial lines and computer
connections;                                                                                                               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an oversized executive desk with a quad-outlet to accommodate
office equipment needs, an executive chair, a bulletin board, a
guest chair and personalized remote accessible telephone mail;
|
| |  |  | a 25-inch television, video cassette player and compact disc player;                                                                                                                        
|
| |  |  | an iron and ironing board; and                                                                                                                                                              
|
| |  |  | a fully equipped kitchen, including a full-size refrigerator,
full-size microwave oven, dishwasher, two burner stovetop, coffee
maker, toaster and a complete set of utensils and cookware. 

Cambridge
Suites

Cambridge Suites hotels offer spacious accommodations at competitive rates
that we believe are attractive to upscale-market business and personal
travelers. Building on our value positioning, Cambridge Suites offers the
upscale business traveler exceptional amenities and comfort at competitive
rates. Each Cambridge Suites hotel offers the following amenities:



| |  |  | Candlewood values;                                                                   
| | - |  | -------------------------------------------------------------------------------------
|
| |  |  | a recreational facility (such as a swimming pool or fitness center) or access to one;
|
| |  |  | a full kitchen in every suite;                                                       
|
| |  |  | a complimentary cooked to order breakfast; and                                     
|
| |  |  | a hospitality area for breakfast and socializing.                                    

The Lodging Industry

We operate in the extended-stay segment of the U.S. lodging industry.
Extended-stay hotels are generally characterized as hotels, which accept
reservations, do not require a lease and provide a fully equipped kitchenette
in each guestroom. An extended-stay is defined as a stay of seven consecutive
nights or longer. We believe that the extended-stay market can be divided into
four general sectors:



| |  |  | the upscale sector;    
| | - |  | -----------------------
|
| |  |  | the mid-priced sector; 
|
| |  |  | the economy sector; and
|
| |  |  | the budget sector.     

We operate largely in the mid-priced and upscale sectors of the
extended-stay market. We believe that hotels in the mid-priced sector,
including our Candlewood Suites hotel brand, generally operate at average daily
rates exceeding $45, but less than $90. Our Cambridge Suites brand operates in
the upscale extended-stay sector, which we believe consists of hotels that
operate with average daily rates exceeding $90. We believe that the high
quality of Candlewood hotels, relative to their daily rate, attract certain
guests who otherwise would stay at traditional hotels, including business
travelers, professionals on temporary work assignment, consultants and
government employees.

Hotel Operations

Our focused approach to customer service enables each Candlewood hotel to
employ generally only 10 to 12 employees, which helps minimize operating costs.
Our hotel staff generally consists of one on-site general manager, one
director of sales, one operations manager and seven to nine front desk,
housekeeping and maintenance personnel. The on-site general manager at each
hotel is responsible for adhering to Candlewoods quality control standards and
procedures, which govern management, operations, maintenance, regulatory
compliance, reporting and marketing. Each hotel is measured against guest
service standards and a detailed revenue and expense budget, as well as against
the performance of our other hotels. Key on-site personnel participate in an
incentive program based on hotel revenues,

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market share performance and expense
management. Our quality assurance division conducts periodic
inspections of each hotel to ensure compliance with Candlewoods quality
control standards. Personnel at our corporate headquarters provide each hotel
with certain management services, such as accounting and payroll services,
which allow our on-site hotel general managers to focus on providing guest
services and result in economies of scale. We have recently upgraded our IT
systems and now have technology that can be scaled to accommodate in excess of
400 hotels.

Each Candlewood hotel on-site general manager and director of sales are
required to complete classroom courses, which we administer through Candlewood
University, our in house training program. In addition, our general managers
and directors of sales are required to undergo on-the-job training which is
tailored to teach them our marketing and operational systems, how to maximize
operating efficiencies and how to attract extended-stay guests. In addition,
dedicated pre-opening teams (consisting of our experienced general managers and
directors of sales) deliver on-site training to new employees to ensure that a
guests experience at a newly opened Candlewood hotel is consistent with the
standards set by existing properties. Customer service is further enhanced
through the presence of an experienced team of operations area coaches. The
primary role of the area coach is to provide direction, training and mentoring
support to staff at individual hotels.

Weekly housekeeping is provided to guests of our Candlewood Suites hotels,
offering less intrusion and greater privacy, while lowering hotel expenses.
Guests of our Cambridge Suites hotels receive daily housekeeping on stays of
six nights or less and weekly housekeeping on stays of seven nights or longer.

Sales and Marketing

Each Candlewood hotel has an on-site director of sales dedicated to
marketing and direct sales efforts. The sales and marketing division uses
direct mail solicitations and targets institutions and employers located near
our hotels.

To provide additional marketing and sales support, we have an experienced
team of strategic sales directors. Each sales director oversees between six to
thirteen hotels and provides direction and training to the hotel director of
sales and general manager on customer leads, repeat business and pricing
strategies.

We have established a toll free telephone number, 1-888-226-3539
(1-888-CANDLEWOOD), to enable our guests to make reservations at any of our
hotels. Our reservation system enables travel agents throughout the world to
book rooms and allows us to more effectively manage our hotels inventory and
access current information on productivity and guest arrivals in real-time.

Our guests can access information concerning our company and hotels on our
website, candlewoodsuites.com. For example, our guests can do the following
on our web site:



| |  |  | book a room;                            
| | - |  | ----------------------------------------
|
| |  |  | find a map and directions to our hotels;
|
| |  |  | find our current stock price; and       
|
| |  |  | explore employment opportunities.       

We also use wholesale websites to sell excess inventory.

Franchising Operations

We have established a national franchising program. Candlewood Suites
franchise efforts are focused on new construction whereas Cambridge Suites by
Candlewood targets conversion of existing

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upscale suite hotels. At December
31, 2002, we had 27 Candlewood Suites franchise hotels open, six hotels under
construction and 20 executed franchise agreements for hotels not yet under
construction.
The Cambridge Suites brand was introduced by Candlewood in 2000 and as of
December 31, 2002, we had three franchise hotels open and two executed
franchise agreements for hotels not yet under construction. See Properties
below.

Each franchise agreement provides for the payment of an application fee
and two types of ongoing fees - a royalty fee and a marketing fee. The
franchise application fee is paid upon execution of the franchise agreement and
varies based upon the brand and size of the hotel. The royalty and marketing
fees are based upon a percentage of the franchisees gross room revenues. The
royalty fee is four to five percent of gross room revenues, depending upon
hotel age, and is intended to cover our operating expenses, such as costs
incurred in providing quality assurance, administrative support and other
franchise services, and to provide us with operating profits. The marketing
fee is used to pay for the costs of developing and preparing advertising and
direct sales materials, national advertising and certain promotional programs.

We make the services and expertise of our franchising, facilities
management, marketing and sales and operations divisions available to our
franchisees in order to ensure high quality facilities and customer service.
Additional fees may be charged for facilities management, marketing and other
services provided to the franchisees, which are not within the scope of the
franchise agreement. Our facilities management division advises on the
construction and development of franchised hotels. In addition, after
commencing operations, all franchised Candlewood hotels are subject to periodic
inspection to ensure that they are in compliance with our quality control
program and maintenance and updating standards. Franchise agreements for newly
developed Candlewood Suites and Cambridge Suites hotels have a 20-year term.
For converted Cambridge Suites hotels, the franchise agreement term is 10
years. Our franchise agreements provide for a variety of conditions in regards
to the franchisees obligations to build the hotels and, accordingly, these
hotels may never be constructed or opened.

Hotel Joint Ventures

As of December 31, 2002, we had nine joint venture hotels that we had
developed with third parties. Eight joint venture hotels were developed under
an agreement with Boston Capital and Mass Mutual. The remaining joint venture
hotel is located on the campus of Michigan State University in East Lansing,
Michigan. All of the joint venture hotels are Candlewood Suites franchise
hotels, which we operate under separate management agreements. As a result, we
receive royalty fees, management fees, and equity income (where there are
distributable funds) from these hotels. These hotels are classified as joint
venture hotels in our property table. See Properties below.

Hotel Management

In addition to our company-operated hotels, we manage hotels owned by
third parties. As of December 31, 2002, we managed two such properties; one
Cambridge Suites hotel and one non-Candlewood brand hotel, the Hotel at Old
Town, both located in Wichita, Kansas. See Properties below. Jack DeBoer,
our Chairman and Chief Executive Officer, has an ownership interest in each of
these hotels. See Certain Transactions in our Proxy Statement for our 2003
Annual Meeting of Stockholders.

Our revenues for managing these hotels consist primarily of management
fees that are based on a percentage of gross revenues, operating profits, cash
flow or a combination thereof. Under the management contracts, we manage,
operate and supervise all aspects of the hotels operations. The owner of the
hotel property is generally responsible for all costs, expenses and liabilities
incurred in connection with operating the hotel, including the expenses and
salaries of all hotel employees. Each contract is generally for a term of up
to five years with certain renewal rights. Either party, in the event of an

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uncured default, may terminate the management contract. Certain other
termination provisions may also be included in the contract.

We anticipate that some franchisees may want to utilize our experience and
expertise to manage their hotels and believe that our management of such hotels
helps to maximize the consistency of the Candlewood hotel system. As of
December 31, 2002, we had two franchise hotels that we operate for the
respective franchisees under separate management agreements. Our revenues for
managing these hotels consist primarily of management fees that are based on a
percentage of gross revenues, operating profits, cash flow or a combination
thereof.

Lease of Hotels

In order to provide funds for our operating needs and development
activities, we completed four separate sale-leaseback transactions with
Hospitality Properties Trust, a Maryland real estate investment trust (HPT).
These transactions were completed in stages commencing in December 1997 with
the most recent transaction completed in April 2002.

In April
2002, we sold 21 hotels for $145 million. We
used the majority of these proceeds to repay debt of $130.4 million.

As of
December 31, 2002, we had sold 57 hotels to HPT for an aggregate purchase price
of $434.8 million. See Properties below. Each of the hotels sold is leased
back to Candlewood pursuant to an operating lease, which expires in December
2018. The lease provides for two types of rent: base rent, which is a fixed
amount, and contingent rent, which is equal to 10% of the increase in gross
hotel sales over the amount generated in each hotels second year of operation.
As of December 31, 2002, the annual base rent for the 57 leased hotels was
approximately $45.5 million. In addition, the lease requires that 5.0% of
gross revenues be set aside in the form of a furniture, fixtures and equipment
(FF&E) reserve. The FF&E reserve is for replacement and refurbishment of
hotel furniture and fixtures.

The lease also requires us to guarantee the
payment of rent for the duration of
the lease, and, as guarantor, to maintain a minimum net worth, as defined, of at
least $75 million. At December 31, 2002, our net worth as defined in the
guarantee agreement was $68.3 million. Although there has been no payment
default under the lease, this breach of the guarantee agreement gives HPT the
right to start proceedings that would result in the cancellation of the lease,
which would result in us losing our rights as a tenant of the hotels. In
addition, we would remain obligated to HPT for payment of any potential
shortfalls in net rental proceeds incurred by HPT from releasing the hotels to
another hotel operator. HPT has agreed to take no action prior to
January 1,
2004 with respect to the breach of this provision of the guaranty, provided that
we maintain a minimum net worth of at least $60 million throughout the 2003
calendar year.

Hotel Development

Our facilities management division is responsible for the oversight and
coordination of the construction and ongoing maintenance of hotels developed by
Candlewood. Most of our hotels are designed and constructed according to
uniform plans and specifications. We believe that our coordination of the
construction of our hotels and our use of a comprehensive design manual has
lowered costs and resulted in consistent quality and appearance. We have made
design variations, including changes in the number of studio suites,
double-doubles (two double beds) and one-bedroom suites, based on market
demographics and site restrictions, among other factors. As of December 31,
2002, existing Candlewood Suites hotels ranged in size from 59 to 276 rooms.

As of December 31, 2002, we did not have any company-operated hotels under
construction nor had we entered into any contracts for the purchase of any
hotel sites. We do not currently expect to develop hotels for ourselves in
2003.

In March 2002, we purchased the San Antonio, Texas franchise hotel from an
unaffiliated third party for the outstanding debt balance of $4.7 million. As
of December 31, 2002, we did not have any hotel acquisitions pending and do not
currently expect to acquire any hotels in 2003.

Properties

We classify our hotels into five categories: owned, leased, managed,
joint venture and franchised. Owned hotels are those hotels that we have
independently developed or acquired and own. Leased hotels are those hotels
that we previously sold and currently lease from a third party. Managed hotels
are those hotels that we manage for a third party. Joint venture hotels are
those hotels that we developed and own with our joint venture partners.
Franchised hotels are those hotels developed and

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owned by third parties that
utilize one of our franchise brands, Candlewood Suites or Cambridge Suites.
The following tables set forth information by brand as of December 31, 2002
with respect to these properties, all of which are Candlewood Suites unless
otherwise noted as Cambridge Suites:

Existing hotels as of December 31, 2002:

Company-owned:

|                                     |  |                |  |          |       | 
|------------------------------------ |  | -------------- |  | -------- | ----- | 
|                                     |  |                |  | Number  
|Location                             |  | Date Opened    |  | of Rooms
|                                     |  |                |  |         
|Kansas City  Overland Park, Kansas  |  | October, 1997  |  |          | 122   | 
|Charlotte, North Carolina  Coliseum |  | November, 1997 |  |          | 81    | 
|Dallas / Ft. Worth - Fossil Creek    |  | March, 1998    |  |          | 98    | 
|Raleigh, North Carolina  Cary       |  | April, 1998    |  |          | 81    | 
|Detroit  Auburn Hills, Michigan     |  | May, 1998      |  |          | 110   | 
|Detroit  Troy, Michigan             |  | June, 1998     |  |          | 118   | 
|Dallas / Ft. Worth  Plano           |  | October, 1998  |  |          | 122   | 
|San Antonio, Texas                   |  | December, 1998 |  |          | 110   | 
|Greensboro, North Carolina           |  | December, 1998 |  |          | 122   | 
|Chicago  Hoffman Estates, Illinois  |  | April, 1999    |  |          | 122   | 
|Jersey City, New Jersey              |  | April, 2001    |  |          | 214   | 
|                                     |  |                |  |          |       | 
|                                     |  |                |  |          | 1,300 | 

Leased:

|                                          |  |                 |  |          |     | 
|----------------------------------------- |  | --------------- |  | -------- | --- | 
|                                          |  |                 |  | Number  
|Location                                  |  | Opening Date    |  | of Rooms
|                                          |  |                 |  |         
|Wichita, Kansas  Northeast               |  | May, 1996       |  |          | 107 | 
|Denver, Colorado - Tech Center            |  | February, 1997  |  |          | 131 | 
|Omaha, Nebraska                           |  | January, 1997   |  |          | 130 | 
|Cincinnati  Blue Ash, Ohio               |  | May, 1997       |  |          | 78  | 
|Louisville, Kentucky - Jeffersontown      |  | May, 1997       |  |          | 78  | 
|Birmingham, Alabama                       |  | September, 1997 |  |          | 98  | 
|Hampton, Virginia                         |  | September, 1997 |  |          | 98  | 
|Orange County, California  Irvine East   |  | October, 1997   |  |          | 122 | 
|Philadelphia, Pennsylvania  Willow Grove |  | October, 1997   |  |          | 110 | 
|Wichita, Kansas  Airport                 |  | November, 1997  |  |          | 81  | 
|Houston, Texas - Clear Lake               |  | November, 1997  |  |          | 122 | 
|Salt Lake City, Utah - Ft. Union          |  | November, 1997  |  |          | 98  | 
|Phoenix, Arizona                          |  | December, 1997  |  |          | 98  | 
|Knoxville, Tennessee                      |  | December, 1997  |  |          | 98  | 
|Salt Lake City, Utah - Airport            |  | November, 1997  |  |          | 122 | 
|Jacksonville, Florida                     |  | December, 1997  |  |          | 111 | 
|Huntsville, Alabama                       |  | December, 1997  |  |          | 123 | 
|Detroit  Southfield, Michigan            |  | December, 1997  |  |          | 121 | 
|Houston, Texas  Galleria                 |  | December, 1997  |  |          | 122 | 
|Phoenix, Arizona  Tempe                  |  | March, 1998     |  |          | 122 | 
|Houston, Texas  Town & Country           |  | April, 1998     |  |          | 122 | 
|Detroit  Warren, Michigan                |  | April, 1998     |  |          | 122 | 
|Pittsburgh, Pennsylvania  Airport        |  | April, 1998     |  |          | 123 | 
|Des Moines, Iowa                          |  | May, 1998       |  |          | 98  | 
|Chicago  Libertyville, Illinois          |  | June, 1998      |  |          | 122 | 
|Dallas / Ft. Worth  Las Colinas          |  | June, 1998      |  |          | 117 | 
|Austin, Texas  Northwest                 |  | June, 1998      |  |          | 125 | 

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|                                            |  |                 |  |          |       | 
|------------------------------------------- |  | --------------- |  | -------- | ----- | 
|                                            |  |                 |  | Number  
|Location                                    |  | Opening Date    |  | of Rooms
|                                            |  |                 |  |         
|Charlotte, North Carolina  University      |  | July, 1998      |  |          | 122   | 
|Dallas / Ft. Worth  Arlington, Texas       |  | August, 1998    |  |          | 125   | 
|Orange County, California - Anaheim South   |  | August, 1998    |  |          | 133   | 
|Orange County, California  Irvine Spectrum |  | September, 1998 |  |          | 122   | 
|Albuquerque, New Mexico                     |  | September, 1998 |  |          | 123   | 
|Nashville  Brentwood, Tennessee            |  | October, 1998   |  |          | 122   | 
|Houston, Texas  Westchase                  |  | October, 1998   |  |          | 123   | 
|Somerset, New Jersey                        |  | October, 1998   |  |          | 110   | 
|Dallas / Ft. Worth  Galleria               |  | October, 1998   |  |          | 134   | 
|Orlando  Altamonte Springs, Florida        |  | November, 1998  |  |          | 122   | 
|Minneapolis St. Paul, Minnesota - Airport   |  | November, 1998  |  |          | 134   | 
|Denver, Colorado  Lakewood                 |  | November, 1998  |  |          | 122   | 
|Boston  Braintree, Massachusetts           |  | November, 1998  |  |          | 133   | 
|Ann Arbor, Michigan                         |  | November, 1998  |  |          | 122   | 
|Chicago  Waukegan, Illinois                |  | December, 1998  |  |          | 123   | 
|Austin, Texas  South                       |  | December, 1998  |  |          | 122   | 
|Baltimore, Maryland - Airport               |  | December, 1998  |  |          | 125   | 
|Clearwater  St. Petersburg, Florida        |  | December, 1998  |  |          | 104   | 
|Dallas / Ft. Worth  North / Richardson     |  | January, 1999   |  |          | 122   | 
|Chicago  Schaumburg, Illinois              |  | February, 1999  |  |          | 122   | 
|Chicago  Warrenville, Illinois             |  | February, 1999  |  |          | 122   | 
|Atlanta, Georgia  Gwinnett Place           |  | February, 1999  |  |          | 122   | 
|St. Louis, Missouri                         |  | March, 1999     |  |          | 122   | 
|Cleveland  North Olmstead, Ohio            |  | April, 1999     |  |          | 125   | 
|Columbus, Ohio  Airport                    |  | May, 1999       |  |          | 123   | 
|Oklahoma City, Oklahoma                     |  | June, 1999      |  |          | 122   | 
|Philadelphia  Mt. Laurel, New Jersey       |  | June, 1999      |  |          | 123   | 
|Miami, Florida  Airport West               |  | August, 1999    |  |          | 129   | 
|Chicago - OHare                            |  | November, 1999  |  |          | 160   | 
|Las Vegas, Nevada                           |  | February, 2000  |  |          | 276   | 
|                                            |  |                 |  |          |       | 
|                                            |  |                 |  |          | 6,888 | 

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Managed:

|                                    |  |                |  |          |     | 
|----------------------------------- |  | -------------- |  | -------- | --- | 
|                                    |  |                |  | Number  
|Location                            |  | Inception Date |  | of Rooms
|                                    |  |                |  |         
|Wichita, Kansas  Cambridge Suites  |  | April, 1997    |  |          | 88  | 
|Wichita, Kansas  Hotel at Old Town |  | March, 1999    |  |          | 115 | 
|                                    |  |                |  |          |     | 
|                                    |  |                |  |          | 203 | 

Joint Venture:

|                                        |  |                |  |          |       | 
|--------------------------------------- |  | -------------- |  | -------- | ----- | 
|                                        |  |                |  | Number  
|Location                                |  | Opening Date   |  | of Rooms
|                                        |  |                |  |         
|San Jose, California  Silicon Valley   |  | April, 2000    |  |          | 122   | 
|Morris Plains, New Jersey               |  | June, 2000     |  |          | 122   | 
|Detroit - Farmington Hills, Michigan    |  | June, 2000     |  |          | 125   | 
|Chicago  Wheeling, Illinois            |  | June, 2000     |  |          | 143   | 
|Hartford  Meriden, Connecticut         |  | June, 2000     |  |          | 124   | 
|Boston  Burlington, Massachusetts      |  | November, 2000 |  |          | 149   | 
|Orange County, California - Santa Ana   |  | February, 2001 |  |          | 122   | 
|East Lansing, Michigan  Michigan State |  | March, 2001    |  |          | 128   | 
|Clarkstown  Nanuet, New York           |  | May, 2001      |  |          | 124   | 
|                                        |  |                |  |          |       | 
|                                        |  |                |  |          | 1,159 | 

Franchised:

|                                          |  |                 |  |          |     | 
|----------------------------------------- |  | --------------- |  | -------- | --- | 
|                                          |  |                 |  | Number  
|Location                                  |  | Opening Date    |  | of Rooms
|                                          |  |                 |  |         
|Hillsboro, Oregon - Portland              |  | June, 1997      |  |          | 126 | 
|San Francisco - Pleasanton, California    |  | August, 1997    |  |          | 126 | 
|Rockford, Illinois *                      |  | November, 1997  |  |          | 67  | 
|Sacramento, California                    |  | March, 1998     |  |          | 126 | 
|Dallas / Ft. Worth  Dallas Market Center |  | March, 1998     |  |          | 150 | 
|Syracuse, New York                        |  | August, 1998    |  |          | 92  | 
|Bellevue, Washington  Seattle            |  | September, 1998 |  |          | 126 | 
|Milpitas, California                      |  | November, 1998  |  |          | 126 | 
|Salina, Kansas                            |  | February, 1999  |  |          | 69  | 
|Richmond, Virginia  West                 |  | October, 1999   |  |          | 122 | 
|Louisville, Kentucky  Airport            |  | April, 2000     |  |          | 100 | 
|Durham, North Carolina                    |  | July, 2000      |  |          | 122 | 
|Green Bay, Wisconsin                      |  | July, 2000      |  |          | 86  | 
|Richmond, Virginia  South                |  | September, 2000 |  |          | 104 | 
|Washington DC  Dulles-Herndon            |  | October, 2000   |  |          | 133 | 
|Fairfax, Virginia  Washington DC         |  | November, 2000  |  |          | 122 | 
|Topeka, Kansas                            |  | January, 2001   |  |          | 78  | 
|Raleigh, North Carolina  Crabtree        |  | February, 2001  |  |          | 122 | 
|Charlotte, North Carolina  Huntersville  |  | May, 2001       |  |          | 75  | 
|Emporia, Kansas                           |  | May, 2001       |  |          | 60  | 
|Wichita, Kansas (Cambridge Suites)        |  | July, 2001      |  |          | 82  | 
|Indianapolis, Indiana                     |  | August, 2001    |  |          | 125 | 
|Hopewell / Petersburg, Virginia           |  | September, 2001 |  |          | 60  | 
|Brunswick, Georgia (Cambridge Suites)     |  | September, 2001 |  |          | 44  | 
|Rogers, Arkansas                          |  | September, 2001 |  |          | 78  | 
|Colorado Springs, Colorado  North        |  | November, 2001  |  |          | 122 | 

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|                                     |  |               |  |          |       | 
|------------------------------------ |  | ------------- |  | -------- | ----- | 
|                                     |  |               |  | Number  
|Location                             |  | Opening Date  |  | of Rooms
|                                     |  |               |  |         
|Round Rock, Texas                    |  | January, 2002 |  |          | 100   | 
|Columbia, Missouri                   |  | April, 2002   |  |          | 81    | 
|Tulsa, Oklahoma (Cambridge Suites)   |  | May, 2002     |  |          | 135   | 
|Newport News (Yorktown), Virginia ** |  | October, 2002 |  |          | 59    | 
|                                     |  |               |  |          |       | 
|                                     |  |               |  |          | 3,018 | 



|*  |  | Represents a franchise, joint venture and managed hotel as of December 31,
2002.
|-- |  | --------------------------------------------------------------------------------
|  
|** |  | Represents a franchise and managed hotel as of December 31, 2002.               

Hotels under construction as of December 31, 2002:

Franchised:

|                           |  |                 |  |          |     | 
|-------------------------- |  | --------------- |  | -------- | --- | 
|                           |  | Projected       |  | Number  
|Location                   |  | Opening Date    |  | of Rooms
|                           |  |                 |  |         
|Lake Mary, Florida         |  | March, 2003     |  |          | 122 | 
|Appleton, Wisconsin        |  | April, 2003     |  |          | 80  | 
|Tyler, Texas               |  | May, 2003       |  |          | 66  | 
|Wilkes-Barre, Pennsylvania |  | June, 2003      |  |          | 78  | 
|Anaheim, California        |  | September, 2003 |  |          | 128 | 
|Plymouth, Minnesota        |  | January, 2004   |  |          | 89  | 
|                           |  |                 |  |          |     | 
|                           |  |                 |  |          | 563 | 

In addition to the properties described above, we also maintain our
corporate headquarters in Wichita, Kansas, at 8621 East 21st Street North,
Suite 200. We lease this office space under a five-year lease expiring in
February 2004, exclusive of four five-year renewal options. We anticipate that
our office space will be adequate for the foreseeable future.

Government Regulation

The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to building and zoning
requirements. In addition, Candlewood and our franchisees are subject to laws
governing our relationships with employees, including minimum wage
requirements, overtime, working conditions and work permit requirements. We
are also subject to federal regulations and certain state laws that govern the
offer and sale of franchises. Many state franchise laws impose substantive
requirements on franchise agreements, including limitations on non-compete
provisions and termination or non-renewal of a franchise. Some states require
that certain materials be approved before franchises can be offered or sold in
that state. The failure to obtain permits or licenses or approvals to sell
franchises, or an increase in the minimum wage rate, employee benefit costs or
other costs associated with employees, could adversely affect our business and
results of operations. Both at the federal and state level from time to time,
there are proposals under consideration to increase the minimum wage.

Under the Americans with Disabilities Act (ADA), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. Although we have attempted to satisfy ADA
requirements in the designs of our facilities, no assurance can be given that a
material ADA claim will not be asserted against us. Such a claim could result
in a judicial order requiring compliance and the expenditure of substantial
sums to achieve compliance, an imposition of fines, or an award of damages to
private litigants. These and other initiatives could adversely affect us as
well as the lodging industry in general.

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Environmental Matters

Our operating costs may be affected by the obligation to pay for the cost
of complying with existing environmental laws, ordinances and regulations. In
addition, in the event any future legislation is adopted, we may, from time to
time, be required to make significant capital and operating expenditures in
response to such legislation. We attempt to minimize our exposure to potential
environmental liability through our site selection procedures. Accordingly, we
typically enter into contracts to purchase real estate subject to certain
contingencies. In addition, prior to purchasing a property, we generally
conduct a Phase I environmental assessment, which generally includes a physical
inspection and database search, but not soil or groundwater analyses.

Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Certain environmental laws and common law
principles could be used to impose liability for release of asbestos-containing
materials (ACMs) into the air, and third parties may seek recovery from
owners or operators of real properties for personal injury associated with
exposure to released ACMs. Environmental laws also may impose restrictions on
the manner in which property may be used or businesses may be operated, and
these restrictions may require expenditures. In connection with the ownership
or operation of hotels, we may be potentially liable for any such costs.
Although we are currently not aware of any material environmental claims
pending or threatened against us or any of our managed or franchised hotels, no
assurance can be given that a material environmental claim will not be asserted
against us or against us and our managed or franchised hotels. The cost of
defending against claims of liability or of remediating a contaminated property
could have a material adverse effect on our results of operations.

Insurance

We currently have the types and amounts of insurance coverage that we
consider appropriate for a company of our size in our business. While we
believe that our insurance coverage is adequate, if we were held liable for
amounts exceeding the limits of our insurance coverage or for claims outside of
the scope of our insurance coverage, our business, results of operations, and
financial condition could be materially and adversely affected. Specifically,
there are certain types of hotel-related losses, generally of a catastrophic
nature, such as earthquakes and floods that may be uninsurable or not
economically insurable. We use our discretion in determining amounts, coverage
limits and deductibility provisions of insurance, with a view to obtaining
appropriate insurance on Candlewood hotels at a reasonable cost and on suitable
terms. Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make it unfeasible to use insurance
proceeds to replace a hotel after it has been damaged or destroyed. Under
these circumstances, the insurance proceeds received by us might not be
adequate to restore our economic position with respect to such hotel. In
addition, property and casualty insurance rates have and may continue to
increase depending on claims experience, insurance market conditions and the
replacement value of our hotels. Mr. DeBoer is affiliated with an insurance
broker we utilize. See Certain Transactions in our Proxy Statement for our
2003 Annual Meeting of Stockholders and Note 10 to the Consolidated Financial
Statements.

Employees

As of December 31, 2002, Candlewood and its subsidiaries employed on a
full or part-time basis 1,295 persons, 1,190 of whom were employed at our
hotels and 105 of whom were employed at our corporate headquarters. Our
employees are not subject to any collective bargaining agreements, and our
management believes that its relationship with our employees is good.

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ITEM 3. LEGAL PROCEEDINGS

We are and from time to time have been party to commercial litigation
relating to our business. We believe that none of these matters is material
individually or in the aggregate and intend to defend ourselves vigorously.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Candlewoods initial public offering of common stock was made on November
5, 1996. The common stock trades on the Over The Counter Bulletin Board under
the symbol CNDL. The following table sets forth the high and low sales
prices per share, as reported by Nasdaq, during the periods indicated:

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|2002           |  | High |      | Low
|               |  |      |      |    
|Fourth Quarter |  | $    | 0.78 |     |  | $ | 0.42 | 
|Third Quarter  |  |      | 1.35 |     |  |   | 0.68 | 
|Second Quarter |  |      | 2.45 |     |  |   | 0.75 | 
|First Quarter  |  |      | 2.29 |     |  |   | 1.45 | 

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|2001           |  | High |      | Low
|               |  |      |      |    
|Fourth Quarter |  | $    | 2.00 |     |  | $ | 1.10 | 
|Third Quarter  |  |      | 2.30 |     |  |   | 1.21 | 
|Second Quarter |  |      | 2.99 |     |  |   | 2.00 | 
|First Quarter  |  |      | 3.50 |     |  |   | 2.50 | 

The closing sales price of our common stock on March 24, 2003 was $0.65.
The approximate number of beneficial stockholders on March 24, 2003 was 1,246.
The approximate number of stockholders of record on March 24, 2003 was 157.

We have not paid dividends on our Common Stock. The Series A and Series B
Preferred Stock accumulate dividends at a rate of 7.5% of the stated value of
the shares ($1,000 per share), and are in preference to any dividend on our
Common Stock. We have not made the last six scheduled preferred stock dividend
payments (including the February 2003 payment) and have approximately $12.6
million in preferred stock dividends in arrears. See Managements Discussion
and Analysis of Financial Conditions and Results of Operations  Liquidity and
Capital Resources.

We currently do not anticipate paying any cash dividends on our Common
Stock in the foreseeable future. Any future payment of dividends on the Common
Stock will be at the discretion of the Board of Directors and will be dependent
upon our financial condition, results of operations, capital requirements and
other factors deemed relevant by the Board of Directors. We anticipate that
future financing, including any lines of credit, may restrict or prohibit our
ability to pay dividends.

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ITEM 6. SELECTED FINANCIAL DATA                (In thousands, except share and per share data)

The
selected consolidated financial data set forth below has been derived
from our audited consolidated financial statements and the notes
thereto.  The selected consolidated financial information should be
read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated
financial statements.

|                                                                                                   |  |              |           |              |  |              |           |              |  |              |           |   |  |   |           |   |  |   |           |  
|-------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ------------ |  | ------------ | --------- | ------------ |  | ------------ | --------- | - |  | - | --------- | - |  | - | --------- | -
|                                                                                                   |  | Year Ended   |           | Year Ended   |  | Year Ended   |           | Year Ended   |  | Year Ended  
|                                                                                                   |  | December 31, |           | December 31, |  | December 31, |           | December 31, |  | December 31,
|                                                                                                   |  | 2002         |           | 2001         |  | 2000         |           | 1999         |  | 1998        
|                                                                                                   |  |              |           |              |  |              |           |              |  |             
|Statement of Operations Data:                                                                      |  |              |           |              |  |              |           |              |  |              |           |   |  |   |           |   |  |   |           |  
|Hotel operations revenues                                                                          |  | $            | 123,626   |              |  | $            | 127,092   |              |  | $            | 127,771   |   |  | $ | 105,467   |   |  | $ | 47,278    |  
|Franchise and management fee income                                                                |  |              | 4,456     |              |  |              | 4,126     |              |  |              | 3,282     |   |  |   | 1,550     |   |  |   | 776       |  
|(Loss) Income from joint ventures                                                                  |  |              | (6,290    | )            |  |              | (1,095    | )            |  |              | 176       |   |  |   | (91       | ) |  |   | (104      | )
|Hotel operating expenses                                                                           |  |              | 79,791    |              |  |              | 74,451    |              |  |              | 67,993    |   |  |   | 60,217    |   |  |   | 28,266    |  
|Rent expense on leased hotels                                                                      |  |              | 41,008    |              |  |              | 26,523    |              |  |              | 25,056    |   |  |   | 24,821    |   |  |   | 12,365    |  
|Corporate operating expenses                                                                       |  |              | 5,978     |              |  |              | 7,162     |              |  |              | 6,392     |   |  |   | 5,431     |   |  |   | 3,906     |  
|Abandoned site costs                                                                               |  |              |          |              |  |              |          |              |  |              |          |   |  |   | 2,043     |   |  |   | 3,799     |  
|Depreciation and amortization                                                                      |  |              | 6,123     |              |  |              | 11,641    |              |  |              | 10,578    |   |  |   | 8,412     |   |  |   | 3,565     |  
|Interest income                                                                                    |  |              | 339       |              |  |              | 761       |              |  |              | 1,150     |   |  |   | 1,034     |   |  |   | 1,166     |  
|Interest expense                                                                                   |  |              | (7,285    | )            |  |              | (17,081   | )            |  |              | (18,577   | ) |  |   | (10,053   | ) |  |   | (214      | )
|Income (loss) before preferred dividends
and cumulative effect of a change in
accounting principle |  |              | (27,323   | )            |  |              | (5,138    | )            |  |              | 5,687     |   |  |   | (2,791    | ) |  |   | (2,480    | )
|Cumulative effect of a change in
accounting principle                                              |  |              |          |              |  |              |          |              |  |              |          |   |  |   |          |   |  |   | (3,857    | )
|Net loss available to common
stockholders                                                          |  |              | (35,724   | )            |  |              | (13,163   | )            |  |              | (2,338    | ) |  |   | (10,816   | ) |  |   | (12,625   | )
|Net loss per share                                                                                 |  |              | (3.96     | )            |  |              | (1.46     | )            |  |              | (0.26     | ) |  |   | (1.20     | ) |  |   | (1.40     | )
|Weighted average shares outstanding                                                                |  |              | 9,025,000 |              |  |              | 9,025,000 |              |  |              | 9,025,000 |   |  |   | 9,025,000 |   |  |   | 9,025,000 |  

|                                                      |  |              |         |              |  |              |         |              |  |              |         |  |  |   |         |  |  |   |         | 
|----------------------------------------------------- |  | ------------ | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                      |  | December 31, |         | December 31, |  | December 31, |         | December 31, |  | December 31,
|                                                      |  | 2002         |         | 2001         |  | 2000         |         | 1999         |  | 1998        
|                                                      |  |              |         |              |  |              |         |              |  |             
|Balance Sheet Data:                                   |  |              |         |              |  |              |         |              |  |              |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents (including
restricted cash) |  | $            | 9,270   |              |  | $            | 17,966  |              |  | $            | 21,834  |  |  | $ | 18,624  |  |  | $ | 23,155  | 
|Total assets                                          |  |              | 168,337 |              |  |              | 321,338 |              |  |              | 359,309 |  |  |   | 341,277 |  |  |   | 293,358 | 
|Accounts payable and other accrued
expenses           |  |              | 15,083  |              |  |              | 16,364  |              |  |              | 21,686  |  |  |   | 22,874  |  |  |   | 40,277  | 
|Mortgages and notes payable                           |  |              | 58,932  |              |  |              | 191,456 |              |  |              | 214,575 |  |  |   | 190,545 |  |  |   | 114,742 | 
|Redeemable preferred stock                            |  |              | 113,762 |              |  |              | 103,538 |              |  |              | 100,689 |  |  |   | 100,689 |  |  |   | 100,737 | 
|Stockholders equity                                  |  |              | (45,470 | )            |  |              | (7,783  | )            |  |              | 6,228   |  |  |   | 8,566   |  |  |   | 19,382  | 

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Consolidated
Financial Statements and notes thereto.

General

Candlewood operates, franchises, owns and manages Candlewood Suites and
Cambridge Suites hotels to serve extended-stay business and personal travelers.
At December 31, 2002, we had a total of 77 company-operated hotels (which is
comprised of owned, leased and joint venture hotels), two managed hotels and 30
franchise hotels located in 34 states. In addition, at December 31, 2002, we
had six franchise hotels under construction and 22 franchise agreements for
hotels not yet under construction, which are subject to a variety of
conditions.

We classify our hotels into five categories: owned, leased, managed,
joint venture and franchised. Owned hotels are those hotels that we have
independently developed or acquired and own. Leased hotels are those hotels
that we previously sold and currently lease from a third party. Managed hotels
are those hotels that we manage for a third party, but do not lease or own.
Joint venture hotels are those hotels that we developed and own with our joint
venture partners. Franchised hotels are those hotels developed and owned by
third parties that utilize one of our franchise brands, Candlewood Suites or
Cambridge Suites. The following tables set forth our property portfolio and
hotel development, respectively, at December 31, 2002 and December 31, 2001:

|              |       |  |                  |     |            |  |              |     |                 |  |      |   |            |  |       |        |  |  |       |        |  |  |        |     | 
|------------- | ----- |  | ---------------- | --- | ---------- |  | ------------ | --- | --------------- |  | ---- | - | ---------- |  | ----- | ------ |  |  | ----- | ------ |  |  | ------ | --- | 
|              |       |  | Number of Hotels |     |            |  |              |     | Number of Rooms |  |      |   |           
|              |       |  | December 31,     |     |            |  | December 31, |     |                
|              |       |  |                  |     | Increase / |  |              |     | Increase /     
|              |       |  | 2002             |     | 2001       |  | (Decrease)   |     | 2002            |  | 2001 |   | (Decrease)
|              |       |  |                  |     |            |  |              |     |                 |  |      |   |           
|Owned         |       |  | 11               |     |            |  | 31           |     |                 |  | (20  | ) |            |  | 1,300 |        |  |  | 3,783 |        |  |  | (2,483 | )  
|Leased        |       |  | 57               |     |            |  | 36           |     |                 |  | 21   |   |            |  | 6,888 |        |  |  | 4,294 |        |  |  | 2,594  |    
|Managed       |       |  | 2                |     |            |  | 2            |     |                 |  |     |   |            |  | 203   |        |  |  | 191   |        |  |  | 12     |    
|Joint Venture |       |  | 9                |     |            |  | 9            |     |                 |  |     |   |            |  | 1,159 |        |  |  | 1,159 |        |  |  |       |    
|Franchised    |       |  | 30               |     |            |  | 27           |     |                 |  | 3    |   |            |  | 3,018 |        |  |  | 2,759 |        |  |  | 259    |    
|              |       |  |                  |     |            |  |              |     |                 |  |      |   |            |  |       |        |  |  |       |        |  |  |        |    
|              | Total |  |                  | 109 |            |  |              | 105 |                 |  |      | 4 |            |  |       | 12,568 |  |  |       | 12,186 |  |  |        | 382 | 

At December 31, 2002, we managed two hotels, which are independently owned
by our Chief Executive Officer, the Cambridge Suites by Candlewood and the
Hotel at Old Town, both located in Wichita, Kansas. Our revenues for managing
these hotels consist primarily of management fees that are based on a
percentage of gross revenues, operating profits, cash flow or a combination
thereof. These revenues are included in other income in our consolidated
statements of operations. In the management of these hotels, we have in the
past advanced funds and paid expenses on behalf of the hotels. We are not
currently advancing any funds to these hotels and do not intend to do so in the
future.

Our consolidated statements of operations includes revenues and expenses
for only those hotels which are owned or leased by consolidated subsidiaries of
Candlewood Hotel Company, Inc. (owned and leased hotels). We refer to these
hotels collectively as our corporate hotels. Revenues and expenses from
franchise hotels and unconsolidated subsidiary hotels (joint venture hotels
accounted for under the equity method of accounting) are not included in our
revenues and expenses. Franchise fees, royalty fees, management fees, equity
income from investment in joint ventures and other fees received from
franchise, managed and joint venture hotels are included in other income in our
consolidated statements of operations.

We have sold and leased back 57 hotels to Hospitality Properties Trust, a
Maryland real estate investment trust (HPT). We operate the hotels, as
lessee, pursuant to a lease that expires in 2018. Our results from operations
reflect these transactions. As a result of the sale-leaseback transactions, we
have

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recorded rent expense on the hotels leased back from HPT. Since these
hotels are leased and not owned, the financial statements do not reflect any
depreciation and amortization or interest expense for these hotels after the
date of sale. The proceeds from the sales of the hotels is recorded net of the
deferred gain on sale. The gain is deferred and recognized into earnings over
the remaining lease term. See Note 12 to Consolidated Financial Statements.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, which
require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosures. We
believe that the following critical accounting policies involve significant
judgments and estimates used in the preparation of our consolidated financial
statements.

Impairment of Long-Lived Assets

We periodically evaluate our long-lived assets, including our investments
in real estate for impairment indicators in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. The judgments regarding the existence of
impairment indicators are based on factors such as operational performance,
market conditions and legal factors. Future events could occur which would
cause us to conclude that impairment indicators exist and an impairment loss is
warranted.

Sale / Leaseback of Hotels

We have accounted for our sale-leaseback of hotels in accordance with SFAS
No. 28, Accounting for Sales with Leasebacks and SFAS No. 98, Accounting for
Leases. Management is required to make estimates and judgments to determine
if the resulting lease agreement for the leaseback of hotels qualifies for
classification as an operating lease under SFAS No. 28 and SFAS No. 98.

Depreciation of Investment in Hotels

We depreciate our investment in hotels over a 40-year useful life, which
is a judgmental determination.

Fair Value of Financial Instruments

The valuation of financial instruments under SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, and derivative financial
instruments under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, requires us to make estimates and judgments that affect
the fair value of the instruments. Where possible, we base the fair values of
our financial instruments on listed market prices and third party quotes.
Where these are not available, we base our estimates on other factors relevant
to the financial instrument.

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Results of Operations

Year Ended December 31,
2002 Compared to Year Ended December 31, 2001

Hotel Operations

Hotel Operations Revenue

Hotel operations revenue, which includes room revenue and other revenue
(e.g. guest telephone and sales of products from the Candlewood Cupboard), was
$123.6 million for the year ended December 31, 2002, compared to $127.1 million
for the year ended December 31, 2001. The decrease in revenue is a result of
reduced average daily room rates, primarily attributable to pricing competition
caused by the slowdown in the economy and a reduction in business travel,
partially offset by the addition of one hotel purchased in March 2002. The
following table sets forth the operating statistics for all our corporate
hotels for the years ended December 31, 2002 and December 31, 2001:

|                           |  |                                 |       |      |  |        |       |   |  |   |       |  
|-------------------------- |  | ------------------------------- | ----- | ---- |  | ------ | ----- | - |  | - | ----- | -
|                           |  | For the Year Ended December 31,
|                           |  |                                
|                           |  | 2002                            |       | 2001 |  | Change
|                           |  |                                 |       |      |  |       
|Occupancy                  |  |                                 | 74.4  | %    |  |        | 73.5  | % |  |   | 0.9   | %
|Average Daily Rate         |  | $                               | 53.96 |      |  | $      | 57.32 |   |  | $ | (3.36 | )
|Revenue per available room |  | $                               | 40.17 |      |  | $      | 42.14 |   |  | $ | (1.97 | )

Average occupancy rate, which is determined by dividing the number of
guestrooms occupied on a daily basis by the total number of guestrooms
available for the period, was 74.4% for corporate hotels for the year ended
December 31, 2002, compared to 73.5% for the year ended December 31, 2001. Our
focus in 2002 was to improve or maintain occupancy at our hotels by marketing
to long-term extended-stay guests, particularly those staying seven or more
nights, which generally are at a lower rate. Occupancy rates for the year
ended December 31, 2001 were negatively impacted by the slowdown in the economy
and to a lesser extent the attacks on the World Trade Center.

The average daily room rate for corporate hotels for the year ended
December 31, 2002 was $53.96, compared to $57.32 for the year ended December
31, 2001, a decrease of 5.9%. Average daily room rates are determined by
dividing room revenue by the number of guestrooms occupied on a daily basis for
the applicable period. The decrease in the average daily rate for the year
ended December 31, 2002 is primarily a result of our commitment to improve or
maintain occupancy at our hotels by targeting long-term extended-stay business,
which is charged at a lower daily rate, and adjusting rates in todays
competitive environment. Other factors that influence average daily rates
include higher rates for our one-bedroom suites and higher rates in certain
hotel locations. It is our practice to continuously review individual markets
to assess the impact of competition on local supply and demand and establish
room rates that balance occupancy to produce optimal revenue.

Revenue per available room (RevPAR), calculated as the average occupancy
rate multiplied by the average daily rate, was $40.17 for the year ended
December 31, 2002, compared to $42.14 for the year ended December 31, 2001, a
4.7% decrease. This decrease was primarily due to the lower average daily rate
we experienced in 2002 compared to 2001.

Hotel Operating Expenses

Hotel operating expenses for the year ended December 31, 2002 totaled
$79.8 million, compared to $74.5 million for the year ended December 31, 2001.
Hotel operating expenses consist of all expenses directly applicable to the
operation of the hotels, including corporate allocations for various operating,
marketing and accounting functions. The largest portion of hotel operating
expenses consisted of salaries, wages and fringe benefits. The balance of
hotel operating expenses was comprised of normal operating

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items, such as
utilities, property taxes, insurance, supplies, promotional materials,
maintenance items and similar expenses. The increase in hotel operating expenses is largely due
to increased wages, media advertising, sales and promotional costs, operating
costs for one additional hotel acquired in March 2002 and higher maintenance
and insurance costs.

Rent Expense on Leased Hotels

Rent expense on the 57 leased hotels for the year ended December 31, 2002
was $41.0 million, compared to $26.5 million for the year ended December 31,
2001. Rent expense is comprised of two elements, a base fixed rent and a
contingent rent. Contingent rent expense is a variable expense based on a
property achieving improved year over year revenue growth and is calculated on
an individual property basis. The increase in rent expense is due to an
increase in base rent as a result of the sale and leaseback of 21 additional
hotels in April 2002.

Hotel Opening Costs

Opening costs are costs incurred prior to the opening of a hotel and
include costs related to the hiring and training of hotel personnel, such as
travel, compensation and relocation costs. There were no opening costs for the
year ended December 31, 2002, as we had no hotel openings or projects under
construction during the period. We do not anticipate having any hotel opening
costs in 2003.

Hotel Depreciation and Amortization

Depreciation and amortization expense applicable to hotel operations
(e.g., building, furniture, fixtures and equipment, loan fees and closing
costs) for the year ended December 31, 2002 totaled $5.4 million, compared to
$10.9 million for the year ended December 31, 2001. The decrease in
depreciation and amortization expense is the result of the sale and leaseback
of 21 hotels in April 2002. We do not record depreciation and amortization
expense for properties that have been sold and leased back.

Corporate Operations

Other Income

Franchise and management fee income consists primarily of royalty fees
(revenue-based fees received over the life of a franchise agreement), franchise
application fees (a one-time fee received upon execution of a franchise
agreement) and management fees. For the year ended December 31, 2002,
franchise and management fee income totaled $4.5 million, compared to $4.1
million for the year ended December 31, 2001. The increase in franchise and
management fee income is due to higher franchise royalty and management fee
income as a result of the increased number of franchise and managed hotels open
at December 31, 2002, the full year impact of franchise and managed hotels
opened in 2001 and the ramp-up of royalty fees from 4.0% to 5.0% for franchise
hotels open greater than two years, partially offset by a reduction in
franchise application revenue as a result of executing fewer new franchise
agreements in 2002. For the year ended December 31, 2002, we executed a
combined total for both brands of 9 new franchise agreements compared to 11
franchise agreements for the year ended December 31, 2001.

(Loss) income from joint ventures represents our share of the net profits
of unconsolidated joint venture hotels. For the year ended December 31, 2002,
we recorded a loss of ($6.3 million) on our joint venture hotels, compared to
($1.1 million) for the year ended December 31, 2001. This loss is due to the
reduced profitability of the joint venture hotels as a result of the slowdown
in the economy and the reduction in business travel, an impairment loss on one
of the joint venture hotels, and the amortization of the difference between the
amount at which the Boston Capital joint venture investment is carried on our
accounting records and the amount of the underlying book equity in the net
assets of the joint venture. This difference is primarily comprised of
carrying costs incurred from the time we purchased the land

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until the hotel was
contributed to the joint venture. We anticipate other income to continue to
decline in the year ended December 31, 2003 as a result of our agreement with Boston
Capital, pursuant to which we agreed to bear all losses from the operation of
the Chicago, Illinois  Wheeling hotel beginning July 26, 2002.

We sold 21 hotels during the year ended December 31, 2002 and recognized
$1.5 million of the total deferred gain on hotels sold. We sold two hotels
during the year ended December 31, 2001 and recognized $1.3 million of the
total deferred gain on hotels sold.

Corporate Operating Expenses

Corporate operating expenses for the year ended December 31, 2002 totaled
$6.0 million, compared to $7.2 million for the year ended December 31, 2001,
and included all expenses not directly related to the development or operations
of specific hotels. The largest portion of corporate operating expenses
consisted of salaries, wages and fringe benefits. The balance of other
corporate operating expenses was comprised of normal operating costs, such as
office space lease, travel, utilities, advertising, professional fees and
similar expenses. The decrease in corporate operating expense is primarily due
to lower franchise sales and service costs and other general corporate
expenses.

Corporate Depreciation and Amortization

Depreciation and amortization applicable to corporate operations for the
year ended
December 31, 2002 totaled $766,000, compared to $745,000 for the year ended
December 31, 2001. Depreciation and amortization reflects depreciation and
amortization of intangible assets (e.g. patents, trademarks), leasehold
improvements and furnishings in our corporate office, and depreciation of
financial system hardware, software and peripheral equipment.

Interest Income and Expense

Interest income for the year ended December 31, 2002 was $339,000,
compared to $761,000 for the year ended December 31, 2001. Interest income for
the year ended December 31, 2002 resulted primarily from the temporary
investment of cash provided by operations and proceeds from the April 2002
sale-leaseback transaction of 21 hotels. For the year ended December 31, 2001,
interest income resulted primarily from the temporary investment of cash
provided by operations and proceeds from the August 2001 sale-leaseback
transaction of two hotels. The decrease in interest income for the year ended
December 31, 2002 is largely due to lower cash levels and lower investment rate
yields.

Interest expense, net of capitalized interest, for the year ended December
31, 2002 was $7.3 million, compared to $17.1 million for the year ended
December 31, 2001. The decrease in interest expense is due to lower debt
levels as a result of the repayment of certain obligations with the proceeds
from the April 2002 sale-leaseback transaction and lower LIBOR interest rates,
partially offset by a reduction in the amount of interest capitalized to
development projects as a result of not having any projects under construction
during 2002.

Sales of Hotels

As of December 31, 2002, we had sold to and leased back from HPT 57
hotels, 21 of which were sold during the year ended December 31, 2002. A
deferred gain was recorded on the sales, a portion of which has been recorded
in income in the years ended December 31, 2002 and December 31, 2001. The
following table sets forth the rent expense and deferred gain recognized into
earnings related to our leased hotels for the years ended December 31, 2002 and
December 31, 2001 (in thousands):

|                              |  |                    |        |      |  |  |        | 
|----------------------------- |  | ------------------ | ------ | ---- |  |  | ------ | 
|                              |  | For the year ended
|                              |  | December 31,      
|                              |  |                   
|                              |  | 2002               |        | 2001
|                              |  |                    |        |     
|Rent expense on leased hotels |  |                    | 41,008 |      |  |  | 26,523 | 
|Gain recognized into earnings |  |                    | 1,450  |      |  |  | 1,280  | 

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Year Ended December 31,
2001 Compared to Year Ended December 31, 2000

Hotel Operations

Hotel Operations Revenues

For the year ended December 31, 2001, hotel operations revenue totaled
$127.1 million, compared to $127.8 million for the year ended December 31,
2000. Occupancy rates were lower in 2001 as a result of the slowdown in the
economy and a reduction in business travel. The decrease in revenue was
partially offset by the impact of the opening of the Jersey City, New Jersey
hotel in April 2001. The following table sets forth the operating statistics
for all our corporate hotels for the years ended December 31, 2001 and December
31, 2000:

|                           |  |                                 |       |      |  |        |       |   |  |   |       |   
|-------------------------- |  | ------------------------------- | ----- | ---- |  | ------ | ----- | - |  | - | ----- | --
|                           |  | For the Year Ended December 31,
|                           |  |                                
|                           |  | 2001                            |       | 2000 |  | Change
|                           |  |                                 |       |      |  |       
|Occupancy                  |  |                                 | 73.5  | %    |  |        | 76.0  | % |  |   | (2.5  | %)
|Average Daily Rate         |  | $                               | 57.32 |      |  | $      | 56.98 |   |  | $ | 0.34  |   
|Revenue per available room |  | $                               | 42.14 |      |  | $      | 43.29 |   |  | $ | (1.15 | ) 

The average occupancy rate for corporate hotels for the year ended
December 31, 2001 was 73.5%, compared to 76.0% for the year ended December 31,
2000. We believe the decline in occupancy experienced in 2001 was consistent
with the overall lodging industry and the result of a slower U.S. economy and
to a lesser extent the impact of the World Trade Center attacks on business
travel. Overall, the decrease in occupancy was experienced in both short and
long-term stays, but was particularly prevalent in our short-term stays, which
we consider to be six nights or less.

The average daily room rate for corporate hotels for the year ended
December 31, 2001 was $57.32, compared to $56.98 for the year ended December
31, 2000. The increase in average daily rate in 2001 was largely due to the
opening of the Jersey City, New Jersey hotel, which has a significantly higher
room rate than other corporate hotels. This was partially offset by a
reduction in the number of short-term stays, which are charged at a higher
daily rate. RevPAR was $42.14 for the year ended December 31, 2001, compared
to $43.29 for the year ended December 31, 2000, a 2.7% decrease. This decrease
in RevPAR was due to the lower average occupancy rate in 2001.

Hotel Operating Expenses

Hotel operating expenses for the year ended December 31, 2001 totaled
$74.5 million, compared to $68.0 million for the year ended December 31, 2000.
The increase in hotel operating expenses was largely due to increased wages,
promotional costs associated with sales promotions and operating costs for the
Jersey City, New Jersey hotel, which opened in April 2001. Other items
contributing to the increase in hotel operating expenses included higher
maintenance and utility costs and costs related to the restructuring of our
operations field administration team.

Rent Expense on Leased Hotels

Rent expenses on the 36 leased hotels for the year ended December 31, 2001
was $26.5 million, compared to $25.1 million for the year ended December 31,
2000. The increase in rent expense was due to the sale and leaseback of two
additional hotels in 2001.

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Hotel Opening Costs

Opening costs for the year ended December 31, 2001 totaled $230,000
compared to $279,000 for the year ended December 31, 2000.

Hotel Depreciation and Amortization

Depreciation and amortization expense attributable to hotel operations for
the year ended December 31, 2001 totaled $10.9 million, compared to $9.8
million for the year ended December 31, 2000. The increase in depreciation and
amortization expense in 2001, compared to 2000, was a result of the opening of
the Jersey City, New Jersey hotel in April 2001. This hotel is in a higher
priced, primary market where building costs are higher. In addition, leasehold
improvement depreciation expense was higher due to increased capital
expenditures at our leased hotels, and software amortization expense increased
as a result of the full year depreciation of the field property management
system purchased in 2000.

Corporate Operations

Other Income

Franchise and management fee income for the year ended December 31, 2001
totaled $4.1 million, compared to $3.3 million for the year ended December 31,
2000. The increase in franchise and management fee income is due to higher
franchise royalty and management fee income as a result of the increased number
of franchise and managed hotels open at December 31, 2001, the full year impact
of franchise and managed hotels opened in 2000 and the ramp-up of royalty fees
from 4.0% to 5.0% for franchise hotels open greater than two years, partially
offset by a reduction in franchise application revenue as a result of executing
fewer new franchise agreements in 2001. For the year ended December 31, 2001,
we executed a combined total for both brands of 11 new franchise agreements
compared to 24 franchise agreements for the year ended December 31, 2000.

(Loss) income from joint ventures for the year ended December 31, 2001
totaled a loss of ($1.1 million), compared to $176,000 of income for the year
ended December 31, 2000. This loss is due to the reduced profitability of the
joint venture hotels as a result of the slowdown in the economy and the
reduction in business travel and the amortization of the difference between the
amount at which the Boston Capital joint venture investment is carried on our
accounting records and the amount of the underlying book equity in the net
assets of the joint venture. This difference is primarily comprised of
carrying costs incurred from the time we purchased the land until the hotel was
contributed to the joint venture.

We sold two hotels during the year ended December 31, 2001 and recognized
$1.3 million of the total deferred gain on hotels sold. We did not sell any
hotels during the year ended December 31, 2000, and recognized $2.2 million of
the deferred gain on hotels sold.

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Corporate Operating Expenses

Corporate operating expenses for the year ended December 31, 2001 totaled
$7.2 million, compared to $6.4 million for the year ended December 31, 2000.
The increase in 2001 was primarily due to increased salaries and wages, a
change in the capitalization of internal hotel development costs, and the
accounting treatment afforded certain internal personnel costs related to the
development and installation of the new field property management system in
2000. Beginning in June 2001, in response to our limited amount of hotel
development activity, we ceased capitalization of internal real estate
development costs. As for the field property management system, pursuant to
accounting Statement of Position 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, certain specific internal
personnel costs were capitalized as part of the system. This project was
completed in the third quarter of 2000 and the costs of these personnel were
subsequently recorded as an expense. The increase in corporate operating
expense in 2001 was partially offset by a reduction in the amount of corporate
incentive bonus costs and franchise sales commissions. Franchise sales
personnel are paid sales commissions on new franchise agreements. As
previously noted, during the year 2001, we executed 11 new franchise
agreements, compared to 24 agreements in 2000.

Corporate Depreciation and Amortization

Depreciation and amortization applicable to corporate operations for the
year ended December 31, 2001, totaled $745,000 compared to $751,000 for the year ended
December 31, 2000.

Interest Income and Expense

Interest income for the year ended December 31, 2001 totaled $761,000,
compared to $1.2 million for the year ended December 31, 2000. Interest income
for the year ended December 31, 2001 resulted primarily from the temporary
investment of cash provided by operations and proceeds from the third quarter
2001 sale-leaseback transaction. For the year ended December 31, 2000,
interest income resulted primarily from the temporary investment of cash
provided by operations. The decrease for the year ended December 31, 2001 was
largely due to lower cash levels and lower investment rate yields.

Interest expense, net of capitalized interest, for the year ended December
31, 2001 was $17.1 million, compared to $18.6 million for the year ended
December 31, 2000. The decrease in interest expense in 2001 was due to lower
LIBOR interest rates and lower debt levels, partially offset by a reduction in
the amount of interest capitalized to development projects. We had fewer
projects under construction during 2001, thereby reducing the amount of
interest capitalized.

Sales of Hotels

As of December 31, 2001, we had sold to and leased back from HPT 36
hotels, two of which were sold during 2001. One of these hotels was sold at a
loss of $214,000. The $64,000 gain from the sale of the other hotel was
deferred and will be recognized over the remaining lease term. The following
table sets forth the rent expense and deferred gain recognized into earnings
related to our leased hotels for the years ended December 31, 2001 and December
31, 2000 (in thousands):

|                              |  |      |                    |      |  |  |        | 
|----------------------------- |  | ---- | ------------------ | ---- |  |  | ------ | 
|                              |  |      | For the year ended
|                              |  |      | December 31,      
|                              |  |     
|                              |  | 2001 |                    | 2000
|                              |  |      |                    |     
|Rent expense on leased hotels |  |      | 26,523             |      |  |  | 25,056 | 
|Gain recognized               |  |      | 1,280              |      |  |  | 2,183  | 

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Liquidity and Capital Resources

We had cash and cash equivalents of $9.3 million at December 31, 2002,
compared to $18.0 million at December 31, 2001. Net cash used in operating
activities totaled $5.1 million for the year ended December 31, 2002, compared
to $1.2 million of net cash provided by operating activities for the year ended
December 31, 2001. For the year ended December 31, 2002, we recorded a net
loss from operations of $27.3 million, including an impairment loss on hotels
held for sale of $8.6 million, $6.1 million of non-cash depreciation and
amortization expense, $6.0 million of loss on investment in joint ventures,
$2.1 million of loss on the extinguishment of debt and $1.5 million of non-cash
deferred gain income on hotels sold. Sources of cash included a $1.3 million
decrease in other assets. This decrease in other assets is largely due to the
refund of excess cash from the FF&E reserve accounts. The excess funds were
returned to us as part of the sale-leaseback and refinancing transactions in
April 2002. For the year ended December 31, 2001, we recorded a net loss from
operations of $5.1 million including $11.6 million of non-cash depreciation and
amortization expense, $1.3 million of non-cash deferred gain income on hotels
sold and $1.1 million of loss on investment in joint ventures. Uses of cash
for the year ended December 31, 2001 included a $4.6 million increase in other
assets (primarily FF&E reserve payments).

Net cash provided by investing activities for the year ended December 31,
2002 totaled $128.9 million, compared to $24.0 million of net cash provided by
investing activities for the year ended December 31, 2001. Sources of cash for
the year ended December 31, 2002 consisted of $145.0 million in proceeds from
sales of hotels to HPT and $10.4 million of guaranty deposit refunded to us by
HPT as part of the April 2002 sale-leaseback transaction. Uses of cash for the
year ended December 31, 2002 consisted of $16.0 million of cash paid for
security deposits related to the 21 hotels sold and leased back from HPT in
April 2002, $8.6 million of expenditures for property, equipment and
leasehold improvements in connection with completed and leased hotels
and $1.8 million of contributions to joint ventures. Sources
of cash for the year ended December 31, 2001 consisted of $28.9 million in
proceeds from sales of hotels, $3.0 million of refunded guaranty deposits and
$1.8 million of cash distributions from joint ventures. Uses of cash for the
year ended December 31, 2001 consisted of $3.8 million of cash paid for
security deposits related to the sale of two hotels in August 2001,
$4.4 million of contributions to joint ventures and $1.0
million of expenditures for property and equipment.

For the year ended December 31, 2002, net cash used in financing
activities was $132.5 million, compared to $29.1 million of net cash used by
financing activities for the year ended December 31, 2001. Net cash used in
financing activities during year ended December 31, 2002 consisted of $192.2
million of principal payments on notes payable, partially offset by $59.7
million of proceeds from mortgages and notes payable. The principal payments
on notes payable represent payments made to pay off note balances on hotels
sold in the April 2002 sale-leaseback transaction. The proceeds from mortgages
and notes payable represent the proceeds from the refinancing of certain debt
in 2002. For the year ended December 31, 2001, net cash used in financing
activities included $28.6 million of principal payments on notes payable and
$6.0 million of preferred stock dividend payments, partially offset by $5.4
million of proceeds from mortgages and notes payable.

Under
the terms of our lease agreement with HPT, we are required to maintain a
minimum net worth, as defined, of at least $75 million. At
December 31, 2002,
our net worth as defined in the guarantee agreement was $68.3 million. Although
there has been no payment default under the lease, this breach of the guarantee
agreement gives HPT the right to start proceedings that would result in the
cancellation of the lease agreement, which would result in us losing our rights
as a tenant of the hotels. In addition, we would remain obligated to HPT for
payment of any potential shortfalls in net rental proceeds incurred by HPT from
releasing the hotels to another hotel operator. HPT has agreed to take no action
prior to January 1, 2004 with respect to this provision of the guaranty,
provided that we maintain a net worth of at least $60 million throughout the
2003 calendar year. We expect that our net worth will decline during the year
ended December 31, 2003, and we cannot assure you that it will not decline below
$60 million. We also cannot assure you that we will be able to obtain another
waiver from HPT in the future or that our net worth will increase to satisfy the
$75 million minimum net worth requirement on January 1, 2004.

As of December 31, 2002, we have guaranteed approximately $45.3 million of
the construction debt on the Boston Capital joint venture properties. Maturity
dates for this debt range from June 2003 to December 2007. Approximately $13.3
million of this debt is scheduled to mature in 2003. As of December 31, 2002,
$5.8 million of the debt scheduled to mature in 2003 can be extended, under the
terms of the existing loan agreement, for an additional year. Since this
guaranteed debt relates to an entity, which we do not wholly-own or control,
it is not included in our consolidated financial statements. No liability has
been recorded related to this guarantee based on the estimated values of the
properties collateralizing the construction debt.

As of December 31, 2002, we had borrowed $58.9 million from GMAC and one
other financial institution. This debt has scheduled maturity dates ranging
from May 2005 to June 2011 with interest rates, which range from 7.75% to
8.30%.

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Our Series A and Series B Preferred Stock accumulate dividends at a rate
of 7.5% on its stated value plus any accrued but unpaid dividends with dividend
payments made quarterly, upon approval of the board of directors, and in
preference to any dividend on our Common Stock. These payments are
approximately $2.0 million per quarter. If we fail to make a scheduled
preferred stock dividend payment, the dividends accumulate and compound at a
rate of 7.5%. As of December 31, 2002, we had not made the last five scheduled
preferred stock dividend payments and we had approximately $10.4 million of
accumulated unpaid dividends. We intend to assess our cash position on a
quarterly basis and will likely elect to forego additional scheduled dividend
payments on our preferred stock. Series A and B Preferred Stockholders have
the right to convert, at any time at their option into shares of Common Stock.
We did not make the February 2003 dividend payment, which together with past
non-payment of dividends and diluted stock option grants has resulted in an
adjustment of the conversion price of the Preferred Stock from $9.50 to $7.50.
A failure to make future dividend payments will result in a further reduction
in the conversion price of the Preferred Stock and, in the case of the Series B
Preferred Stock, may result in a future adjustment to the dividend rate to 12%.

Pursuant to a mandatory redemption clause in the Certificates of
Designation for the Series A and Series B Cumulative Convertible Preferred
Stock, we are required to redeem the Series A and Series B Preferred Stock in
September 2004. The mandatory redemption amount is equal to $107 million plus
unpaid dividends. As of December 31, 2002, the mandatory redemption amount was
approximately $117.4 million. If we fail to redeem the Preferred Stock when
due, we are required to issue to each holder of Preferred Stock on such date,
and on each three month anniversary thereafter, warrants to purchase 25% of the
number of shares of Common Stock into which such holders outstanding shares of
Preferred Stock would be convertible on such date. The warrants would be
immediately exercisable at a purchase price of $.01 per share of Common Stock.

In the event we liquidate, the holders of the Series A and Series B
Preferred Stock are entitled to receive a payment equal to the stated value of
their shares, plus any accrued but unpaid dividends (the Liquidation Amount),
prior to any distribution or payment to the holders of our Common Stock. As of
December 31, 2002, the Liquidation Amount was $117.4 million, including $10.4
million of unpaid dividends. Alternatively, the holders of the Series A and
Series B Preferred Stock may convert any or all of their shares into shares of
Common Stock. In the event of a corporate transaction that constitutes a
change of control, we are required to offer to redeem all of the outstanding
shares of Series A and Series B Preferred Stock for a price equal to the
greater of the Liquidation Amount or 175% of the stated value of the shares.
As of December 31, 2002, one hundred seventy five percent of the stated value
of the shares was $187.3 million. If we do not redeem the Preferred Stock upon
a change of control, the conversion price of the Preferred Stock will be
reduced to the lower of the then applicable conversion price or the market
price of the Common Stock on the redemption date divided by 1.75, provided that
the conversion price will not be reduced to an amount less than the par value
of the Common Stock.

Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders agreement.
Each Preferred Stockholder will vote together with the Common Stockholders as a
single class, on an as-converted basis, on all matters to be approved by the
Common Stockholders. For certain actions, approval of two-thirds of the shares
owned by Preferred Stockholders, as a single class, is required.

The carrying amount of the redeemable preferred stock is being increased
by periodic accretions using the interest method, so that the carrying amount
will equal the mandatory redemption amount at the mandatory redemption date.
For the year ended December 31, 2002, approximately $1.8 million was recorded
as an increase to the carrying value of the preferred stock.

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The following table summarizes our contractual cash and debt obligations
for the next five years as of December 31, 2002 (in thousands):

Payments due by Period:

|                                 |       |   |         |         |        |   |           |        |           |   |         |         |  |   |        |        |       |   |         |         | 
|-------------------------------- | ----- | - | ------- | ------- | ------ | - | --------- | ------ | --------- | - | ------- | ------- |  | - | ------ | ------ | ----- | - | ------- | ------- | 
|                                 |       |   |         |         |        |   | Less than |        |           |   |         |         |  |   |        |        | After
|                                 |       |   | Total   |         | 1 year |   | 1-3 years |        | 4-5 years |   | 5 years
|                                 |       |   |         |         |        |   |           |        |           |   |        
|Long-Term Debt                   |       | $ | 58,932  |         |        | $ | 542       |        |           | $ | 54,618  |         |  | $ | 131    |        |       | $ | 3,641   |        
|Rent Expense for Leased Hotels   |       |   | 728,116 |         |        |   | 45,507    |        |           |   | 91,015  |         |  |   | 91,015 |        |       |   | 500,579 |        
|Rent Expense on Corporate Office |       |   | 646     |         |        |   | 554       |        |           |   | 92      |         |  |   |       |        |       |   |        |        
|Rent Expense on hotel equipment  |       |   | 1,008   |         |        |   | 610       |        |           |   | 379     |         |  |   | 19     |        |       |   |        |        
|Preferred Stock Redemption       |       |   | 117,402 |         |        |   |          |        |           |   | 117,402 |         |  |   |       |        |       |   |        |        
|                                 |       |   |         |         |        |   |           |        |           |   |         |         |  |   |        |        |       |   |         |        
|                                 | Total |   | $       | 906,104 |        |   | $         | 47,213 |           |   | $       | 263,506 |  |   | $      | 91,165 |       |   | $       | 504,220 | 

We believe that a combination of our cash and cash equivalents and cash
from operations will be sufficient to provide capital for operations through
December 31, 2003. However, if we experience a material decline in operating
performance (including RevPAR), we may not generate sufficient cash flow to
support our operations through the end of such twelve-month period. In
addition, in order to meet our long-term financing obligations, we will be
required to raise additional capital in the future. In particular, we do not
currently project that we will generate sufficient cash flow to repay the
mandatory redemption of the preferred stock in 2004. We continue to consider a
number of financing alternatives, including credit facilities, additional sale
leaseback transactions, the issuance of equity, debt or equity-linked
securities and joint ventures, which are necessary to provide the capital
needed to meet our financing needs. We are unable to assure that we will be
able to obtain financing on a timely basis, on acceptable terms, or at all.

As of December 31, 2002, we have available $45.8 million of net operating
loss carry-forwards, which are available to be utilized in future years to
offset taxable income. These net operating loss carry-forwards will expire
beginning in 2011 through 2022.

Certain Business Considerations

Investors are cautioned that certain statements contained in this document
as well as some of our statements in periodic press releases and some oral
statements of our officials during presentations about the company are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements
that are predictive in nature, which depend upon or refer to future events or
conditions, which include words such as believes, anticipates, estimates,
expects or similar expressions. In addition, any statements concerning
future financial performance, ongoing business strategies or prospects, and
possible future actions, which may be provided by our management, are also
forward-looking statements. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks,
uncertainties, and assumptions about our company, economic and market factors
and the industry in which we do business, among other things. These statements
are not guaranties of future performance and we have no specific intention, and
we disclaim any obligation, to update these statements.

Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause our actual performance and
future events and actions to differ materially from such forward-looking
statements, include, but are not limited to:

We
have Never Been Profitable. At December 31, 2002, we operated 77
hotels. This limited number of hotels limits our ability to attract potential
franchisees and grow our business. We have incurred losses to date and cannot
give any assurance that we will be profitable in the future. Operation of
individual hotels and a chain of multiple hotels are subject to numerous risks,
including:



| |  |  | the inability to maintain high occupancy rates or to attract guests for extended-stays;
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | the inability to achieve expected nightly rates;                                       

25



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| |  |  | the inability to operate the hotels at expected expense levels;        
| | - |  | -----------------------------------------------------------------------
|
| |  |  | the ability to attract and retain quality personnel; and               
|
| |  |  | liability for accidents and other events occurring at hotel properties.

If we are unable to efficiently and effectively operate our hotels, we may
never be profitable.

Adverse Economic Conditions May Negatively Impact Our Occupancy Rates and
Results of Operations. Since our core customers are extended-stay business
travelers, moderate or severe economic downturns or adverse economic conditions
negatively affect our operations. These economic conditions may be widespread
or isolated to one or more geographic regions. Economic downturns generally
cause a decline in the occupancy rates of our hotels as our core customers
limit their extended-stay travel. For example, the tragedy at the World Trade
Center caused significant short-term declines in our occupancy rates and room
rates. Decreases in our occupancy rates result in a decrease in our operating
revenue. In addition, as our occupancy rates decrease, we expect that
competition will increase and that the average daily room rate of our hotels
will be negatively impacted. As a result, recessions or other general economic
conditions may have a negative impact on our results of operations and
financial condition.

If Our Results of Operations Decline Materially (including RevPAR), We May
Not Have Sufficient Working Capital to Meet Our Day-to-Day Operating Cash Flow
Needs. We had cash and cash equivalents of $9.3 million at December 31, 2002.
We currently expect our cash and cash equivalents balance to decline during
the year ended December 31, 2003. If we experience a material decline in
operating performance during 2003, our cash flows will decline at a faster than
anticipated pace which would likely result in our inability to maintain
sufficient cash balances to meet day-to-day working capital needs.

We
May be Unable to Service our Debt and lease Obligations. Our ability
to make payments on, to repay or to refinance our indebtedness and to make our
scheduled lease payments and preferred stock dividends will depend upon our
ability to generate capital in the future and increase RevPAR. We cannot
predict whether current occupancy levels and room rates can be maintained or
improved upon. Future occupancy and room rates may be impacted by a number of
factors including:



| |  |  | the number and geographic location of new hotels;             
| | - |  | --------------------------------------------------------------
|
| |  |  | the season in which new hotels open;                          
|
| |  |  | competition;                                                  
|
| |  |  | market acceptance of our hotels;                              
|
| |  |  | general economic conditions;                                  
|
| |  |  | unexpected events, such as the World Trade Center attacks; and
|
| |  |  | the profitability of the businesses of our core customers.   

Accordingly, we cannot make any assurances that our business will generate
sufficient cash flow from operations to fund our debt obligations or make our
scheduled lease and preferred stock dividend payments as they become due. For
example, in February 2003, we did not make the scheduled dividend payment.
This marked the sixth successive dividend payment we have not made. We do not
currently have sufficient capital to pay all of our debts if they were due
today. We cannot provide any assurances that we will be able to refinance any
of our indebtedness on commercially reasonable terms, or at all. Our ability
to make payments on, to repay or to refinance our indebtedness and to make our
scheduled lease and preferred stock dividend payments also is, to a certain
extent, subject to general economic, competitive, legislative, regulatory and
other factors beyond our control. Our inability to make payments on, to repay,
or to refinance our debt, lease and preferred stock obligations could result in
litigation and have a material adverse effect on our business and results of
operations. We have also guaranteed approximately $45.3 million of debt on the
Boston Capital joint venture properties. Maturity dates for this debt range
from June 2003 to December 2007, with approximately $13.3 million of this debt
scheduled to mature in 2003. See Liquidity and Capital Resources.

26



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If
Our Net Worth Continues to Decline, We Will Fail to Comply With the Terms of
Our Agreements with HPT, Which Could Result In the Loss of Our Rights as a
Tenant Under the Applicable Hotels.The terms of our lease agreement with HPT
requires us to guarantee the payment of rent for the duration of the lease and,
as a guarantor, to maintain a minimum net worth of $75 million. At December 31,
2002, our net worth as defined in the agreement was $68 million. This breach
gives HPT the right to start proceedings that would result in the cancellation
of the lease agreement and we would lose our rights as a tenant. HPT has agreed
not to take action with respect to this breach through January 1, 2004 so long
as we maintain a minimum net worth of $60 million. We expect that our worth will
decline during the year ended December 31, 2003, and we cannot assure you that
it will not decline below $60 million. We also cannot assure you that we will be
able to obtain another waiver from HPT in the future or that our net worth will
increase to satisfy the $75 million minimum net worth requirement on January 1,
2004. If the lease agreement is cancelled and we lose our rights as tenants
under the applicable hotels, we may not be able to continue our operations.

We Do Not Have Sufficient Funds to Redeem our
Preferred Stock When it
Becomes Due. Pursuant to a mandatory redemption provisions in the Certificates
of Designation for our Series A and Series B Cumulative Convertible Preferred
Stock, we are required to redeem our Preferred Stock in September 2004. As of
December 31, 2002, the mandatory redemption amount was approximately $117.4
million. If we fail to redeem the Preferred Stock when due, we are required to
issue to each holder of Preferred Stock on such date, and on each three month
anniversary thereafter, warrants to purchase 25% of the number of shares of
Common Stock into which such holders outstanding shares of Preferred Stock
would be convertible on such date. The warrants would be immediately
exercisable at a purchase price of $.01 per share of Common Stock. We do not
currently have, and do not believe that our operations will generate,
sufficient capital to make the scheduled payment to redeem our Preferred Stock,
and cannot provide any assurances that we will be able to obtain the financing
necessary to do so.

Our
Growth is largely Dependant on Franchising Hotels. We intend to grow
primarily by franchising Candlewood Suites and Cambridge Suites hotels. Our
ability to franchise hotels and obtain franchisees involves substantial risks,
including:



| |  |  | there are a limited number of franchising opportunities;                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we may be unable to compete with national and regional brand
franchisors, many of whom have greater brand recognition than
Candlewood;       
|
| |  |  | unavailability of financing to potential franchisees on favorable terms, or at all;                                                          
|
| |  |  | delays in completion of construction of franchised hotels;                                                                                   
|
| |  |  | termination of signed franchise agreements;                                                                                                  
|
| |  |  | incurring substantial costs if we abandon a franchising project prior to completion;                                                         
|
| |  |  | a franchisees failure to obtain all necessary zoning and construction permits;                                                              
|
| |  |  | competition for suitable franchise sites from our
competitors, some of whom may have greater financial resources than
Candlewood franchisees;
|
| |  |  | our franchisees actual costs exceeding budgeted or contracted amounts; and                                                                   
|
| |  |  | our franchised properties not achieving desired revenue or profitability levels once opened.                                                 

Our franchise agreements provide for a variety of
conditions in regards to the
franchisees obligations to build the hotels and, accordingly, these hotels may
never be constructed or opened. If we are unable to successfully franchise
hotels on time or within budget, or at all, our business and results of
operations would suffer.

We
Depend on a Single Type of Lodging Facility. We intend to exclusively
develop, manage and franchise extended-stay hotels under our Candlewood Suites
and Cambridge Suites brands. We currently do not intend to develop any lodging
facilities other than hotels focused on extended-stay business travelers and do
not intend to develop lodging facilities with other franchisors. Accordingly,
we will be subject to risks inherent in concentrating investments in a single
type of lodging facility, such as a shift in demand or a reduction in business
following adverse publicity, which could have a material adverse effect on our
business and results of operations. In addition, we have a limited history
upon which we can gauge consumer acceptance of our hotels and, accordingly, we
cannot provide assurance that guests who are looking for conventional or
extended-stay hotel accommodations will readily accept out hotels.
Furthermore, we compete against other facilities with substantially greater
brand recognition.

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We
are Subject to Real Estate Investment Risks. Our investment in our
hotels will be subject to varying degrees of risk related to our ownership and
operation of real property. The underlying value of our real estate
investments is significantly dependent upon our ability to maintain or increase
cash provided by operating our investments. The value of our hotels and the
income from our hotels may be materially adversely affected by:



| |  |  | changes in national economic conditions;                                         
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | changes in general or local economic conditions and neighborhood characteristics;
|
| |  |  | competition from other lodging facilities;                                       
|
| |  |  | changes in the availability, cost and terms of financing;                        
|
| |  |  | the ongoing need for capital improvements;                                       
|
| |  |  | changes in operating expenses;                                                   
|
| |  |  | changes in real property tax rates;                                              
|
| |  |  | changes in governmental rules and policies;                                      
|
| |  |  | the impact of present or future environmental laws;                              
|
| |  |  | natural disasters; and                                                           
|
| |  |  | other factors which are beyond our control.                                      

In addition, our real estate investments are relatively illiquid. As a result,
we may not be able to vary our portfolio in response to changes in economic and
other conditions. Accordingly, we cannot assure that we will be able to
dispose of an investment when we find disposition advantageous or necessary, or
that the sale price of any disposition will recoup or exceed the amount of our
investment.

Our
Hotels May Experience Seasonal Fluctuations. Based upon our
experience operating extended-stay hotels, we expect that occupancy and
revenues may be lower than normal during the months of November, December and
January due to the holiday season. Because many of our expenses do not
fluctuate with occupancy, declines in occupancy may cause fluctuations or
decreases in our quarterly results.

We
Depend on Key Personnel. Our success depends to a significant extent
upon the efforts and abilities of our senior management and key employees,
particularly, Mr. Jack P. DeBoer, Chairman of the Board and Chief Executive
Officer, and Mr. Warren D. Fix, Executive Vice President and Chief Financial
Officer. The loss of the services of either of these individuals could have a
material adverse effect upon our business and results of operations.

Because Shares of our Common Stock Trade on the Over The Counter Bulletin
Board, the Liquidity of our Common Stock May Be Limited. Our Common Stock was
delisted from The Nasdaq SmallCap Market on June 19, 2002 and our Common Stock
now trades on the Over The Counter Bulletin Board. Consequently, the liquidity
of our Common Stock will likely be impaired, not only in the number of shares
which can be bought and sold, but also because of delays in the timing of
transactions and a reduction in securities analyst and the news media coverage,
if any, that we receive. As a result, holders of our Common Stock might find
it more difficult to trade their Common Stock promptly, or at all, and at
reasonable prices or to obtain accurate quotations as to its price.

Certain of these factors are discussed further elsewhere in this Annual
Report on Form 10-K, including without limitation under the captions Business
and Properties and Managements Discussion and Analysis of Financial
Condition and Results of Operations.

28



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Impact of New Accounting Standards

On June 29, 2001 the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations. SFAS No. 141 eliminates the pooling-of-interest
method of accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. The requirements of
SFAS No. 141 are effective for any business combination accounted for by the
purchase method that is completed after June 20, 2001. Additionally, SFAS No.
142, Goodwill and Other Intangibles, was issued. Under SFAS No. 142,
goodwill and other indefinite lived intangibles are no longer amortized, but
are periodically reviewed for impairment. Intangibles with definite lives are
amortized over their useful lives. SFAS No. 142 is effective for years
beginning after December 15, 2001. SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, was also issued for years
beginning after December 15, 2001. SFAS No. 144 revises the measurement and
recognition of impairment, specifically on assets held for disposal.

In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No.
45). FIN No. 45 significantly changes the current practice in the accounting
for, and disclosure of, guarantees. FIN No. 45 requires certain guarantees to
be recorded at fair value, which is different from current practice, which is
generally to record a liability only when a loss is probable and reasonably
estimable, as those terms are defined in SFAS No. 5, Accounting for
Contingencies. FIN No. 45 also requires a guarantor to make significant new
disclosures, even when the likelihood of making any payments under the
guarantee is remote, which is another change from current practice. The
disclosure requirements of FIN No. 45 are currently effective, although the
initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.

We do not believe the issuance of these statements and their
interpretation will have a material impact on our results of operations or
financial position.

In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which rescinded SFAS No. 4
requiring gains and losses from extinguishment of debt to be classified as
extraordinary. During the year ended December 31, 2002, we extinguished a
significant portion of our debt and recorded a loss of $2.1 million. We have
adopted SFAS No. 145 and have classified this loss as an operating expense.

Quantitative and Qualitative Disclosure of Market Risk

Our earnings are affected by changes in interest rates as a significant
portion of our outstanding indebtedness is at variable rates based on LIBOR or
Treasury notes. If interest rates change by .01 percent, the market value of
our mortgages and notes payable, based on the outstanding balance, effected by
the variable rates at December 31, 2002, would change by approximately $5,500.
Additionally, we have market risk on our short-term investments, which are
considered cash equivalents, due to changes in interest rates. If interest
rates increase by .01 percent, the market value of our short-term investments,
based on the outstanding balance at December 31, 2002, would change by
approximately $900.

In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities and its
amendments, Statements 137 and 138 in June of 1999 and June of 2000,
respectively. We adopted Statement No. 133, as amended, effective January 1,
2001. The Statement requires us to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The

29



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##### Table of Contents



ineffective portion of a derivatives change in fair value will be
immediately recognized in earnings. As of December 31, 2002, the Company had
one derivative financial instrument, an interest rate cap, which was recorded
at fair value of $47,000 as of December 31, 2002, with the change in fair value
since the purchase date recorded in accumulated other comprehensive loss in the
equity section of the balance sheet.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is filed as a separate part of this report on Form 10-K (see page F-1).




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

None.

30



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##### Table of Contents






PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

There is hereby incorporated herein by reference the information appearing
under the caption Proposal 1 Election of Directors and under the caption
Executive Officers of the Company in our definitive Proxy Statement for our
2003 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.




ITEM 11. EXECUTIVE COMPENSATION

There is hereby incorporated herein by reference the information appearing
under the caption Executive Compensation in our definitive Proxy Statement
for our 2003 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

There is hereby incorporated herein by reference the information appearing
under the caption Voting Securities and Principal Holders Thereof in our
definitive Proxy Statement for our 2003 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

There is hereby incorporated herein by reference the information appearing
under the caption Certain Transactions in our definitive Proxy Statement for
our 2003 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.




ITEM 14. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Companys Securities
Exchange Act of 1934 reports is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Also, the Company has investments in certain unconsolidated
entities. As the Company does not control or manage these entities, its
disclosure controls and procedures with respect to such entities are
necessarily substantially more limited than those it maintains with respect to
its consolidated subsidiaries.

Within 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures were effective.

There have been no significant changes in the Companys internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.

31



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##### Table of Contents






PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K



| |  | (a) Financial Statements
| |  | ------------------------



| |                                                                               |                                                                                                                    
| | ----------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------
| |                                                                               | 1. The financial statements contained in the accompanying Index to
Consolidated Financial Statements covered by the
| | Independent Auditors
Report are filed as part of this Report (see page F-1).
|
| |                                                                               | 2. Financial Statement Schedule. See page F-1.                                                                     
|
| |                                                                               | 3. Exhibits.                                                                                                       



| |  | The list of exhibits contained in the Index to Exhibits is filed as part
of this Report (see page E-1).
| |  | -------------------------------------------------------------------------------------------------------
|
| |  | (b) Reports on Form 8-K                                                                                

None.

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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.

|      |  |                |  |                                |  |                                                                                  
|----- |  | -------------- |  | ------------------------------ |  | ---------------------------------------------------------------------------------
|DATE: |  | March 31, 2003 |  | CANDLEWOOD HOTEL COMPANY, INC.
|     
|      |  |                |  | By:                            |  | /s/ Jack P. DeBoer                                                               
|      |  |                |  |                                |  |                                                                                  
|      |  |                |  |                                |  | Jack P. DeBoer
Chairman and Chief Executive Officer
(Principal Executive Officer)

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 in the capacities indicated on March 31, 2003.

|                                            |  |                                                                                                                                           
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Signature                                   |  | Title                                                                                                                                     
|                                            |  |                                                                                                                                           
|                                           
|/s/ Jack P. DeBoer
Jack P. DeBoer           |  | Director, Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)                                                 
|                                            |  |                                                                                                                                           
|/s/ Warren D. Fix
Warren D. Fix             |  | Director, Executive Vice President, Chief Financial Officer and 
Secretary (Principal Financial Officer and Principal Accounting 
Officer)
|                                            |  |                                                                                                                                           
|/s/ James E. Roos
James E. Roos             |  | Director, President and Chief Operating Officer                                                                                           
|                                            |  |                                                                                                                                           
|/s/ Robert J. Cresci
Robert J. Cresci       |  | Director                                                                                                                                  
|                                            |  |                                                                                                                                           
|/s/ J. Michael Issa
J. Michael Issa         |  | Director                                                                                                                                  
|                                            |  |                                                                                                                                           
|/s/ Richard M. Kelleher
Richard M. Kelleher |  | Director                                                                                                                                  
|                                            |  |                                                                                                                                           
|/s/ Robert S. Morris
Robert S. Morris       |  | Director                                                                                                                                  
|                                            |  |                                                                                                                                           
|/s/ Thomas H. Nielsen
Thomas H. Nielsen     |  | Director                                                                                                                                  
|                                            |  |                                                                                                                                           
|/s/ Frank J. Pados, Jr.
Frank J. Pados, Jr. |  | Director                                                                                                                                  
|                                            |  |                                                                                                                                           
|/s/ Tony M. Salazar
Tony M. Salazar         |  | Director                                                                                                                                  
|                                            |  |                                                                                                                                           
|/s/ Seth E. Schofield
Seth E. Schofield     |  | Director                                                                                                                                  

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CERTIFICATIONS

I, Jack P. DeBoer, Chairman and Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Candlewood Hotel
Company, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6. The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                      |  |                                                                                  
|--------------------- |  | ---------------------------------------------------------------------------------
|Dated: March 31, 2003 |  | Jack P. DeBoer
Chairman and Chief Executive Officer
(Principal Executive Officer)

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I, Warren D. Fix, Executive Vice President and Chief Financial Officer,
certify that:

1. I have reviewed this annual report on Form 10-K of Candlewood Hotel
Company, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6. The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                      |  |                                                                                                 
|--------------------- |  | ------------------------------------------------------------------------------------------------
|Dated: March 31, 2003 |  | Warren D. Fix
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

35



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##### Table of Contents



CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE*

|                                                                                                               |  |      |     | 
|-------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                               |  | Page
|                                                                                                               |  |      |     | 
|Report of Independent Auditors                                                                                 |  |      | F-2 | 
|Consolidated Balance Sheets at December 31, 2002 and 2001                                                      |  |      | F-3 | 
|Consolidated Statements of Operations for the Years Ended December
31, 2002, 2001 and 2000                     |  |      | F-4 | 
|Consolidated Statements of Stockholders Equity (Deficit) for the
Years Ended December 31, 2002, 2001 and 2000 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the Years Ended December
31, 2002, 2001 and 2000                     |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                                     |  |      | F-7 | 
|Schedule III  Real Estate and Accumulated Depreciation                                                        |  |      | S-1 | 



|* |  | Certain schedules have been omitted as they are not applicable to the
Company or the information is contained in the consolidated financial
statements or notes thereto.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-1



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##### Table of Contents



Report of Independent Auditors

To the Board of Directors of Candlewood Hotel Company, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Candlewood
Hotel Company, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders equity (deficit),
and cash flows for each of the three years in the period ended December 31,
2002. We have also audited the related financial statement schedule listed in
the accompanying index for the year ended December 31, 2002. These financial
statements and schedule are the responsibility of the management of Candlewood
Hotel Company, Inc. and Subsidiaries. Our responsibility is to express an
opinion on these consolidated financial statements and schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Candlewood Hotel Company, Inc. and Subsidiaries as of December 31, 2002 and
2001, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.

|                     
|---------------------
|/s/ ERNST & YOUNG LLP
|Ernst & Young LLP    

Chicago, Illinois
February 14, 2003, except for Note 16
    as to which the date is February 28,
2003,
    and except for the fourth paragraph of Note 12,
    as to
which the date is March 27, 2003

F-2



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##### Table of Contents



CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In thousands, except par value, stated value, and share data)

|                                                                                                                                                                                                                           |                                                                                                       |                                           |                                                                |         |         |         |         |         |         |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ----------------------------------------- | -------------------------------------------------------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | -
|                                                                                                                                                                                                                          
|                                                                                                                                                                                                                          
|December 31,                                                                                                                                                                                                               |                                                                                                       | 2002                                      |                                                                | 2001   
|                                                                                                                                                                                                                           |                                                                                                       |                                           |                                                                |        
|Assets                                                                                                                                                                                                                     |                                                                                                       |                                           |                                                                |         |         |         |         |        
|Investment in hotels completed and under construction:                                                                                                                                                                     |                                                                                                       |                                           |                                                                |         |         |         |         |        
|                                                                                                                                                                                                                           |                                                                                                       | Hotels completed                          |                                                                | $       | 100,720 |         |         | $       | 263,160 |        
|                                                                                                                                                                                                                           |                                                                                                       | Accumulated depreciation and amortization |                                                                |         | (13,771 | )       |         |         | (24,878 | )      
|                                                                                                                                                                                                                           |                                                                                                       |                                           |                                                                |         |         |         |         |         |         |        
|                                                                                                                                                                                                                           |                                                                                                       | Net investment in hotels                  |                                                                |         | 86,949  |         |         |         | 238,282 |        
|Cash and cash equivalents (including $357 and $968 of
restricted cash, respectively)                                                                                                                                       |                                                                                                       |                                           | 9,270                                                          |         |         |         | 17,966  |        
|Deposits                                                                                                                                                                                                                   |                                                                                                       |                                           | 46,086                                                         |         |         |         | 30,086  |        
|Accounts and other receivables                                                                                                                                                                                             |                                                                                                       |                                           | 3,705                                                          |         |         |         | 4,663   |        
|Investments in joint ventures                                                                                                                                                                                              |                                                                                                       |                                           | 8,393                                                          |         |         |         | 12,994  |        
|Other assets                                                                                                                                                                                                               |                                                                                                       |                                           | 13,934                                                         |         |         |         | 17,347  |        
|                                                                                                                                                                                                                           |                                                                                                       |                                           |                                                                |         |         |         |         |         |         |        
|                                                                                                                                                                                                                           |                                                                                                       |                                           | Total assets                                                   |         | $       | 168,337 |         |         | $       | 321,338 |  
|                                                                                                                                                                                                                           |                                                                                                       |                                           |                                                                |         |         |         |         |         |         |        
|Liabilities,
Preferred Stock and Stockholders (Deficit)                                                                                                                                                                   |                                                                                                       |                                           |                                                                |         |         |         |         |        
|Mortgages and notes payable                                                                                                                                                                                                |                                                                                                       | $                                         | 58,932                                                         |         |         | $       | 191,456 |        
|Accounts payable and other accrued expenses                                                                                                                                                                                |                                                                                                       |                                           | 15,083                                                         |         |         |         | 16,364  |        
|Deferred gain on sale of hotels                                                                                                                                                                                            |                                                                                                       |                                           | 25,932                                                         |         |         |         | 16,995  |        
|Other liabilities                                                                                                                                                                                                          |                                                                                                       |                                           | 98                                                             |         |         |         | 768     |        
|                                                                                                                                                                                                                           |                                                                                                       |                                           |                                                                |         |         |         |         |         |         |        
|                                                                                                                                                                                                                           |                                                                                                       |                                           | Total liabilities                                              |         |         | 100,045 |         |         |         | 225,583 |  
|Redeemable, convertible, cumulative preferred stock (Series A),
$1,000 stated value, 65,000 shares authorized and outstanding,
net of offering costs (including $6,319 and $1,215 of dividends
In arrears, respectively) |                                                                                                       |                                           | 69,209                                                         |         |         |         | 63,047  |        
|Redeemable, convertible, cumulative preferred stock (Series B),
$1,000 stated value, 42,000 shares authorized and outstanding,
net of offering costs (including $4,083 and $785 of dividends
In arrears, respectively)   |                                                                                                       |                                           | 44,553                                                         |         |         |         | 40,491  |        
|Stockholders (deficit):                                                                                                                                                                                                   |                                                                                                       |                                           |                                                                |         |         |         |         |        
|                                                                                                                                                                                                                           | Common stock, $.01 par value, 100,000,000 shares
        authorized, 9,025,000 issued and outstanding |                                           |                                                                | 90      |         |         |         | 90      |        
|                                                                                                                                                                                                                           | Additional paid-in capital                                                                            |                                           |                                                                | 22,197  |         |         |         | 32,421  |        
|                                                                                                                                                                                                                           | Accumulated other comprehensive loss                                                                  |                                           |                                                                | (140    | )       |         |         |        |        
|                                                                                                                                                                                                                           | Accumulated deficit                                                                                   |                                           |                                                                | (67,617 | )       |         |         | (40,294 | )      
|                                                                                                                                                                                                                           |                                                                                                       |                                           |                                                                |         |         |         |         |         |         |        
|                                                                                                                                                                                                                           |                                                                                                       |                                           | Total stockholders (deficit)                                  |         |         | (45,470 | )       |         |         | (7,783  | )
|                                                                                                                                                                                                                           |                                                                                                       |                                           |                                                                |         |         |         |         |         |         |        
|                                                                                                                                                                                                                           |                                                                                                       |                                           | Total
liabilities,
preferred stock and stockholders (deficit) |         | $       | 168,337 |         |         | $       | 321,338 |  
|                                                                                                                                                                                                                           |                                                                                                       |                                           |                                                                |         |         |         |         |         |         |        

See accompanying notes.

F-3



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##### Table of Contents



CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2002, 2001 and 2000
(In thousands, except share and per share data)

|                                                                                    |  |   |         |                                                        |  |      |           |      |  |      |           |   |  |   |           |  
|----------------------------------------------------------------------------------- |  | - | ------- | ------------------------------------------------------ |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                                                                    |  |   |         |                                                        |  | 2002 |           | 2001 |  | 2000
|                                                                                    |  |   |         |                                                        |  |      |           |      |  |     
|Revenues:                                                                           |  |   |         |                                                        |  |      |           |      |  |      |           |  
|Hotel operations                                                                    |  | $ | 123,626 |                                                        |  | $    | 127,092   |      |  | $    | 127,771   |  
|Franchise and management fee income                                                 |  |   | 4,456   |                                                        |  |      | 4,126     |      |  |      | 3,282     |  
|(Loss) income from joint ventures                                                   |  |   | (6,290  | )                                                      |  |      | (1,095    | )    |  |      | 176       |  
|                                                                                    |  |   |         |                                                        |  |      |           |      |  |      |           |  
|                                                                                    |  |   |         | Total hotel operating revenues                         |  |      | 121,792   |      |  |      | 130,123   |   |  |   | 131,229   |  
|Proceeds from sales of hotels, net of deferred gain of $0,
$64 and $0, respectively |  |   | 145,000 |                                                        |  |      | 28,850    |      |  |      |          |  
|Deferred gain recognition on sales of hotels                                        |  |   | 1,450   |                                                        |  |      | 1,280     |      |  |      | 2,183     |  
|                                                                                    |  |   |         |                                                        |  |      |           |      |  |      |           |  
|                                                                                    |  |   |         | Total revenues                                         |  |      | 268,242   |      |  |      | 160,253   |   |  |   | 133,412   |  
|                                                                                    |  |   |         |                                                        |  |      |           |      |  |      |           |  
|Operating costs and expenses:                                                       |  |   |         |                                                        |  |      |           |      |  |      |           |  
|Hotel operating expenses                                                            |  |   | 79,791  |                                                        |  |      | 74,451    |      |  |      | 67,993    |  
|Corporate operating expenses                                                        |  |   | 5,978   |                                                        |  |      | 7,162     |      |  |      | 6,392     |  
|Rent expense on leased hotels                                                       |  |   | 41,008  |                                                        |  |      | 26,523    |      |  |      | 25,056    |  
|Hotel opening costs                                                                 |  |   |        |                                                        |  |      | 230       |      |  |      | 279       |  
|Depreciation and amortization                                                       |  |   | 6,123   |                                                        |  |      | 11,641    |      |  |      | 10,578    |  
|Impairment loss                                                                     |  |   | 8,604   |                                                        |  |      |          |      |  |      |          |  
|Loss on extinguishment of debt                                                      |  |   | 2,115   |                                                        |  |      |          |      |  |      |          |  
|                                                                                    |  |   |         |                                                        |  |      |           |      |  |      |           |  
|                                                                                    |  |   |         | Total operating costs and expenses                     |  |      | 143,619   |      |  |      | 120,007   |   |  |   | 110,298   |  
|Cost of hotels sold                                                                 |  |   | 145,000 |                                                        |  |      | 29,064    |      |  |      |          |  
|                                                                                    |  |   |         |                                                        |  |      |           |      |  |      |           |  
|                                                                                    |  |   | (20,377 | )                                                      |  |      | 11,182    |      |  |      | 23,114    |  
|Interest income                                                                     |  |   | 339     |                                                        |  |      | 761       |      |  |      | 1,150     |  
|Interest expense                                                                    |  |   | (7,285  | )                                                      |  |      | (17,081   | )    |  |      | (18,577   | )
|                                                                                    |  |   |         |                                                        |  |      |           |      |  |      |           |  
|                                                                                    |  |   |         | (Loss) income before preferred stock dividends         |  |      | (27,323   | )    |  |      | (5,138    | ) |  |   | 5,687     |  
|Preferred stock dividends                                                           |  |   | (8,401  | )                                                      |  |      | (8,025    | )    |  |      | (8,025    | )
|                                                                                    |  |   |         |                                                        |  |      |           |      |  |      |           |  
|                                                                                    |  |   |         | Net loss available to common stockholders              |  | $    | (35,724   | )    |  | $    | (13,163   | ) |  | $ | (2,338    | )
|                                                                                    |  |   |         |                                                        |  |      |           |      |  |      |           |  
|Per share data:                                                                     |  |   |         |                                                        |  |      |           |      |  |      |           |  
|                                                                                    |  |   |         | Net loss per share of common stock  basic and diluted |  | $    | (3.96     | )    |  | $    | (1.46     | ) |  | $ | (.26      | )
|                                                                                    |  |   |         | Average weighted shares of common stock outstanding    |  |      | 9,025,000 |      |  |      | 9,025,000 |   |  |   | 9,025,000 |  

See accompanying notes.

F-4



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##### Table of Contents



CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)

|                                             |  |        |    |         |  |               |        |             |  |                  |      |   |  |       |         |   |  |   |         |  
|-------------------------------------------- |  | ------ | -- | ------- |  | ------------- | ------ | ----------- |  | ---------------- | ---- | - |  | ----- | ------- | - |  | - | ------- | -
|                                            
|                                             |  |        |    |         |  |               |        |             |  | Accumulated      |      |   |  |       |         |   |  |  
|                                             |  |        |    |         |  | Additional    |        | Other       |  |                  |      |   |  | Total
|                                             |  | Common |    | Paid-in |  | Comprehensive |        | Accumulated |  | Stockholders   
|                                             |  | Stock  |    | Capital |  | Loss          |        | Deficit     |  | Equity (Deficit)
|                                             |  |        |    |         |  |               |        |             |  |                 
|Balance at December 31, 1999                 |  | $      | 90 |         |  | $             | 35,270 |             |  | $                |     |   |  | $     | (26,794 | ) |  | $ | 8,566   |  
|Preferred stock dividends paid               |  |        |   |         |  |               |       |             |  |                  |     |   |  |       | (8,025  | ) |  |   | (8,025  | )
|Net income before preferred stock dividends  |  |        |   |         |  |               |       |             |  |                  |     |   |  |       | 5,687   |   |  |   | 5,687   |  
|                                             |  |        |    |         |  |               |        |             |  |                  |      |   |  |       |         |   |  |   |         |  
|Balance at December 31, 2000                 |  |        | 90 |         |  |               | 35,270 |             |  |                  |     |   |  |       | (29,132 | ) |  |   | 6,228   |  
|Preferred stock dividends paid               |  |        |   |         |  |               |       |             |  |                  |     |   |  |       | (6,024  | ) |  |   | (6,024  | )
|Preferred stock dividends unpaid             |  |        |   |         |  |               | (2,001 | )           |  |                  |     |   |  |       |        |   |  |   | (2,001  | )
|Accretion of preferred stock to stated value |  |        |   |         |  |               | (848   | )           |  |                  |     |   |  |       |        |   |  |   | (848    | )
|Net loss before preferred stock dividends    |  |        |   |         |  |               |       |             |  |                  |     |   |  |       | (5,138  | ) |  |   | (5,138  | )
|                                             |  |        |    |         |  |               |        |             |  |                  |      |   |  |       |         |   |  |   |         |  
|Balance at December 31, 2001                 |  |        | 90 |         |  |               | 32,421 |             |  |                  |     |   |  |       | (40,294 | ) |  |   | (7,783  | )
|Preferred stock dividends unpaid             |  |        |   |         |  |               | (8,401 | )           |  |                  |     |   |  |       |        |   |  |   | (8,401  | )
|Accretion of preferred stock to stated value |  |        |   |         |  |               | (1,823 | )           |  |                  |     |   |  |       |        |   |  |   | (1,823  | )
|Unrealized loss on derivative instrument     |  |        |   |         |  |               |       |             |  |                  | (140 | ) |  |       |        |   |  |   | (140    | )
|Net loss before preferred stock dividends    |  |        |   |         |  |               |       |             |  |                  |     |   |  |       | (27,323 | ) |  |   | (27,323 | )
|                                             |  |        |    |         |  |               |        |             |  |                  |      |   |  |       |         |   |  |   |         |  
|Balance at December 31, 2002                 |  | $      | 90 |         |  | $             | 22,197 |             |  | $                | (140 | ) |  | $     | (67,617 | ) |  | $ | (45,470 | )
|                                             |  |        |    |         |  |               |        |             |  |                  |      |   |  |       |         |   |  |   |         |  

See accompanying notes.

F-5



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##### Table of Contents



CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)

|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |         |        |        |  
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------------------------------------------- | ------------------------------------------- | -------- | ------ | ----- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | -
|                                                                                                   |                                                     |                                              |                                             |          | 2002   |       | 2001    |         | 2000  
|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |       
|Cash flows from operating activities:                                                              |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|Net (loss) income before preferred stock dividends                                                 |                                                     | $                                            | (27,323                                     | )        |        | $     | (5,138  | )       |        | $      | 5,687   |        
|Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities: |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|                                                                                                   |                                                     | Depreciation and amortization                |                                             |          | 6,123  |       |         |         | 11,641 |        |         |         | 10,578 |       
|                                                                                                   |                                                     | Loss (income) from joint ventures            |                                             |          | 5,998  |       |         |         | 1,095  |        |         |         | (176   | )     
|                                                                                                   |                                                     | Deferred gain recognition on sales of hotels |                                             |          | (1,450 | )     |         |         | (1,280 | )      |         |         | (2,183 | )     
|                                                                                                   |                                                     | Impairment loss                              |                                             |          | 8,604  |       |         |         |       |        |         |         |       |       
|                                                                                                   |                                                     | Loss on sales of hotels                      |                                             |          |       |       |         |         | 214    |        |         |         |       |       
|                                                                                                   |                                                     | Loss on extinguishment of debt               |                                             |          | 2,115  |       |         |         |       |        |         |         |       |       
|                                                                                                   |                                                     | Change in:                                   |                                             |          |        |       |         |         |        |        |         |         |        |       
|                                                                                                   |                                                     |                                              | Accounts and other receivables              |          |        | 958   |         |         |        | 249    |         |         |        | (177   | )
|                                                                                                   |                                                     |                                              | Other assets                                |          |        | 1,317 |         |         |        | (4,639 | )       |         |        | (2,575 | )
|                                                                                                   |                                                     |                                              | Accounts payable and other accrued expenses |          |        | (748  | )       |         |        | (813   | )       |         |        | 2,821  |  
|                                                                                                   |                                                     |                                              | Other liabilities                           |          |        | (670  | )       |         |        | (124   | )       |         |        | (132   | )
|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|                                                                                                   | Net cash (used in) provided by operating activities |                                              |                                             | (5,076   | )      |       |         | 1,205   |        |        |         | 13,843  |       
|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|Cash flows from investing activities:                                                              |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|Proceeds from sales of hotels                                                                      |                                                     |                                              | 145,000                                     |          |        |       | 28,850  |         |        |        |        |        
|Refund of guaranty deposit                                                                         |                                                     |                                              | 10,387                                      |          |        |       | 3,036   |         |        |        | (9      | )      
|Cash paid for security deposits                                                                    |                                                     |                                              | (16,000                                     | )        |        |       | (3,752  | )       |        |        |        |        
|Change in hotels completed and under construction                                                  |                                                     |                                              | (8,582                                      | )        |        |       | (1,030  | )       |        |        | (22,214 | )      
|Contributions to joint ventures                                                                    |                                                     |                                              | (1,812                                      | )        |        |       | (4,357  | )       |        |        | (5,050  | )      
|Distributions from joint ventures                                                                  |                                                     |                                              | 200                                         |          |        |       | 1,750   |         |        |        | 800     |        
|Purchase of intangible assets                                                                      |                                                     |                                              | (289                                        | )        |        |       | (427    | )       |        |        | (17     | )      
|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|                                                                                                   | Net cash provided by (used in) investing activities |                                              |                                             | 128,904  |        |       |         | 24,070  |        |        |         | (26,490 | )     
|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|Cash flows from financing activities:                                                              |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|Proceeds from mortgage and notes payable                                                           |                                                     |                                              | 59,660                                      |          |        |       | 5,431   |         |        |        | 26,387  |        
|Payments on mortgages and notes payable                                                            |                                                     |                                              | (192,184                                    | )        |        |       | (28,550 | )       |        |        | (2,357  | )      
|Preferred stock dividends                                                                          |                                                     |                                              |                                            |          |        |       | (6,024  | )       |        |        | (8,025  | )      
|Other liabilities                                                                                  |                                                     |                                              |                                            |          |        |       |        |         |        |        | (148    | )      
|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|                                                                                                   | Net cash (used in) provided by financing activities |                                              |                                             | (132,524 | )      |       |         | (29,143 | )      |        |         | 15,857  |       
|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|Net (decrease) increase in cash and cash equivalents                                               |                                                     |                                              | (8,696                                      | )        |        |       | (3,868  | )       |        |        | 3,210   |        
|Cash and cash equivalents at beginning of year                                                     |                                                     |                                              | 17,966                                      |          |        |       | 21,834  |         |        |        | 18,624  |        
|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|Cash and cash equivalents at end of year                                                           |                                                     | $                                            | 9,270                                       |          |        | $     | 17,966  |         |        | $      | 21,834  |        
|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|Supplementary disclosure of cash flow information:                                                 |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        
|Cash paid during the year for interest                                                             |                                                     | $                                            | 7,954                                       |          |        | $     | 19,107  |         |        | $      | 21,289  |        
|                                                                                                   |                                                     |                                              |                                             |          |        |       |         |         |        |        |         |        

See accompanying notes.

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##### Table of Contents



CANDLEWOOD HOTEL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Organization and Basis of Presentation
|-- |  | --------------------------------------



| | a. |  | Description of Business
| | -- |  | -----------------------



| |  | Candlewood Hotel Company, Inc. (the Company) operates, franchises, owns
and manages high quality, value-oriented, business travel hotels. The
hotels offer accommodations for all guests, while catering to mid-market and
upscale business and personal travelers seeking multiple night stays.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Organization
| | -- |  | ------------



| |  | Candlewood Hotel Company, Inc. was incorporated in August 1996 to succeed to
the business of Candlewood Hotel Company, LLC, a Delaware limited liability
company (Candlewood LLC), in anticipation of an initial public offering of
3,850,000 shares of the Companys Common Stock, $.01 par value per share.
Candlewood LLC was formed in November 1995 to develop, own, operate and
franchise Candlewood extended-stay hotels designed particularly for the
business traveler.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On November 8, 1996, the Company completed an initial public offering of
3,850,000 shares of Common Stock at an initial public offering price of
$10.00 per share (the Offering). The net proceeds to the Company from the
Offering, after deducting the underwriting discounts and commissions and
expenses of the Offering, were approximately $35.0 million. These proceeds
were used to fund the national expansion of the Company through the
development of Company-owned and operated Candlewood hotels.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Prior to the Offering, the membership interests in Candlewood LLC were owned
50% by Doubletree Corporation, a wholly-owned subsidiary of Hilton Hotel
Corporation, (Doubletree), 42.5% by JPD Corporation and certain trusts
(the DeBoer Trusts) and 7.5% by the Warren D. Fix Family Partnership, L.P.
(the Fix Partnership). JPD Corporation is a Kansas corporation owned by
Mr. Jack P. DeBoer, the Companys Chairman and Chief Executive Officer.
Warren D. Fix, the Companys Executive Vice President and Chief Financial
Officer, is the general partner and majority owner of the Fix Partnership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Immediately prior to the Offering, Doubletree and the Fix Partnership
contributed to the Company all of their outstanding membership interests in
Candlewood LLC and certain minority interests which they held in the
subsidiary LLCs, which owned the initially contributed properties
(Subsidiary LLCs). At the same time, Mr. DeBoer and the DeBoer Trusts
contributed to the Company 100% of the stock of JPD Corporation, the assets
of which were substantially comprised of its membership interest in
Candlewood LLC and the Subsidiary LLCs. In consideration of such transfer,
Doubletree and the Fix Partnership were each issued shares of the Companys
Common Stock in proportion to their ownership interests in Candlewood LLC
immediately prior to such transfer. In addition, Mr. DeBoer and the DeBoer
Trusts, collectively, were issued shares of the Companys common stock in
proportion to JPD Corporations ownership interest in Candlewood LLC
immediately prior to such transfer. As a result, the ownership of the
Common Stock of the Company by Doubletree, the Fix Partnership and the
shareholders of JPD Corporation, totaling 5,175,000 shares, was in the same
proportion as their ownership of membership interests in Candlewood LLC
immediately prior to the reorganization of the Company.
|
| |  | In addition, prior to the Offering, approximately $12.4 million previously
contributed to Candlewood LLC by Doubletree, including a preferred return
amounting to approximately $392,000 on its capital contributions was
distributed by Candlewood LLC to Doubletree. Doubletree concurrently
extended to the Company a $15.0 million subordinated credit facility, of
which the amount of the distribution                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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##### Table of Contents





|   |  | to Doubletree was funded in connection with the reorganization of the
Company. The terms of the distribution to Doubletree as well as the terms
of the subsequent loan by Doubletree to the Company were determined by the
members of Candlewood LLC in the course of arms-length negotiations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In October 1997, the Company completed a $65.0 million private placement of
65,000 shares of Series A Preferred Stock at an offering price of $1,000 per
share (the Stated Value). The net proceeds to the Company were
approximately $61.3 million after deducting commissions and expenses. The
Preferred Stock accumulates dividends at a rate of 7.5% of the Stated Value,
per annum. Series A Preferred Stockholders have the right to convert, at
any time at their option into shares of Common Stock at the conversion price
of $9.50 per share. Subsequent to August 31, 1999, the Preferred Stock will
be redeemable in cash, in whole or part, at the option of the Company at
200% of the Stated Value. At September 30, 2004, the Series A Preferred
Stock will be redeemed under a mandatory redemption clause, at the Stated
Value plus unpaid dividends.                                                                                                                                                                                                                                                                                               
|  
|   |  | In August 1998, the Company completed the private placement of $42.0 million
of its Series B Preferred Stock and warrants to purchase its Common Stock.
In total, 42,000 shares of Series B Preferred Stock were issued at an
offering price of $1,000 per share (the Stated Value). Preferred
stockholders were also issued, at no additional cost, warrants to purchase
336,000 shares of Common Stock at $12.00 per share. These warrants expire
on July 13, 2005. The net proceeds to the Company were approximately $39.4
million after deducting commissions and expenses. The Preferred Stock
accumulates dividends at a rate of 7.5% of the Stated Value, per annum.
Series B Preferred Stockholders have the right to convert, at any time at
their option into shares of Common Stock at the conversion price of $9.50
per share. Subsequent to September 30, 1999, the Series B Preferred Stock
will be redeemable in cash, in whole or part, at the option of the Company
at 200% of the Stated Value. At September 30, 2004, the Series B Preferred
Stock will be redeemed under a mandatory redemption clause, at the Stated
Value plus unpaid dividends.
|  
|2. |  | Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| | a. |  | Basis of Presentation
| | -- |  | ---------------------



| |  | The accompanying consolidated financial statements include the accounts of
Candlewood Hotel Company, Inc. and its subsidiaries, including Candlewood
LLC, which was the entity through which business was conducted until
completion of the above-discussed 1996 organization, and various
wholly-owned LLCs which own certain hotels.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | All majority-owned subsidiaries have been consolidated into the consolidated
financial statements. In addition, all intercompany transactions have been
eliminated.                                                                                                                                                                   



| | b. |  | Investment in Hotels Completed and Under Construction
| | -- |  | -----------------------------------------------------



| |  | Hotels Completed                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Hotels completed are stated at cost and include the related furniture,
fixtures and equipment. Once the hotels are completed, depreciation is
computed using the straight-line method over the estimated useful lives of
the assets, ranging from three to forty years. Maintenance and repairs are
charged to operations as incurred.                                                                                                                                                                        
|
| |  | In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is effective for fiscal
years beginning after December 15, 2001. The Company evaluates hotels for
impairment when conditions indicate that it is probable that the sum of the
expected future cash flows is less than the carrying value of the hotels.
Upon determination that a hotel has been impaired,

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| |  | the carrying value of the hotel is reduced to fair value less costs to sell.
For the year ended December 31, 2002, the Company has recorded an
impairment loss of $8.6 million.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Cash Equivalents
| | -- |  | ----------------



| |  | The Company considers all highly liquid assets with a maturity of three
months or less when purchased to be cash equivalents.
| |  | -----------------------------------------------------------------------------------------------------------------------------



| | d. |  | Restricted Cash
| | -- |  | ---------------



| |  | Restricted cash represents cash that, under the terms of certain loan
agreements, has been set aside as a condition of loan financing. These
funds, which are held by the lenders, will be released to the Company upon
achievement of certain operating criteria, as defined in the loan
agreements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. |  | Fair Value of Financial Instruments
| | -- |  | -----------------------------------



| |  | SFAS No. 107, Disclosures About Fair Value of Financial Instruments, defines
the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying values of the Companys financial instruments, which
include cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses, approximate fair values due to the short maturities of
such instruments. The fair value of the Companys long-term debt, which
approximates carrying value, is estimated based on the current rates offered
to the Company for debt of the same remaining maturities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f. |  | Derivative Financial Instruments
| | -- |  | --------------------------------



| |  | In April 2002, the Company purchased an interest rate cap as part of the
refinancing of mortgage debt with GMAC to manage interest rate risk. This
is the first time the Company has purchased a derivative financial
instrument. The Company requires that hedging derivative instruments be
effective in reducing the interest rate risk exposure as they are
designated. This effectiveness is essential for qualifying for hedge
accounting available for only certain qualifying derivative instruments.
Instruments that meet these hedging criteria are formally designated as
hedges at the inception of the derivative contract. When the terms of an
underlying transaction are modified, or when the underlying hedged item
ceases to exist, all changes in the fair value of the instrument are
marked-to-market with changes in value included in net income each period
until the instrument matures, is terminated, or assigned. Any derivative
instrument used for risk management that does not meet the hedging criteria
is marked-to-market through earnings each period. Within the next twelve
months, the Company expects to reclassify to earnings approximately $12,000
of amounts held in accumulated other comprehensive income. If a derivative
instrument is terminated or the hedging transaction is no longer determined
to be effective, amounts held in accumulated other comprehensive income are
reclassified into earnings over the term of the future cash outflows on the
related debt.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | To determine the fair values of derivative instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and
risks existing at each balance sheet date. For the majority of financial
instruments including most derivatives, standard market conventions and
techniques such as discounted cash flow analysis, option pricing models,
replacement cost, and termination cost are used to determine fair value. All
methods of assessing fair value result in a general approximation of value,
and such value may never actually be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | As of December 31, 2002, the Companys interest rate cap was reported at its
fair value as other assets of $47,000 with the change in fair value since
the purchase date of $140,000 recorded in accumulated other comprehensive
loss in the equity section of the balance sheet. As a result of the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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##### Table of Contents





| |  | above, the Company incurred a total comprehensive loss of $27.5 million
($3.97 per weighted average common share) for the year ended December 31,
2002.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. |  | Intangible Assets
| | -- |  | -----------------



| |  | Intangible assets of $1.3 million include ownership rights, title and
interest in the Candlewood Hotel name, costs for patents and trademarks and
costs to obtain franchise agreements. These assets are being amortized
using the straight-line method over a period of ten to twenty years and are
included in other assets on the accompanying consolidated balance sheets.
In 2001, the Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, upon its effective date. The adoption did not have an effect on
the earnings or the financial position of the Company.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h. |  | Deferred Financing Costs
| | -- |  | ------------------------



| |  | Deferred financing costs are costs incurred to obtain construction and
permanent financing and are included in other assets on the accompanying
consolidated balance sheets. These costs are amortized over the life of the
related loan on a method, which approximates the level yield basis.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i. |  | Revenue Recognition
| | -- |  | -------------------



| |  | Room revenue and other revenues are recognized when earned. Recognition of
franchise fee revenue is deferred until all material services or conditions
relating to the respective franchise have been substantially performed or
satisfied by the Company. Such revenue, when recognized, is included in
franchise and management fee income on the accompanying consolidated statements of operations.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Companys sales of hotels have been accompanied by a leaseback of the
facilities under operating lease agreements. Such sales are recognized when
the title passes to the buyer, generally upon the receipt of proceeds. The
related profit is deferred and recognized in earnings over the remaining
lease term.                                                                                  



| | j. |  | Advertising
| | -- |  | -----------



| |  | Advertising costs are expensed as incurred.
| |  | -------------------------------------------



| | k. |  | Income Taxes
| | -- |  | ------------



| |  | The Company is taxed as a corporation as defined in subchapter C under the
Internal Revenue Code for federal and state income tax purposes and accounts
for any temporary differences under the asset and liability method.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | l. |  | Opening and Organization Costs
| | -- |  | ------------------------------



| |  | Opening costs are costs incurred prior to the opening of a hotel and include
costs related to hiring and training of hotel personnel, such as travel,
compensation and relocation. Organization costs relate to the formation of
the Company and Subsidiaries. Such costs are expensed as incurred.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10



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##### Table of Contents





| | m. |  | Investments in Joint Ventures
| | -- |  | -----------------------------



| |  | The Company has certain investments in joint ventures in which it owns 50%
or less of the voting equity that it accounts for under the equity method of
accounting.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | n. |  | Segment Reporting
| | -- |  | -----------------



| |  | The Company has two reportable segments, the operation of hotels and the
sale of hotels. Information related to the Companys reportable segments
for the years ended December 31, 2002, 2001 and 2000, respectively, is as
follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 |                                         |                    |         |               |  |       |         |       |  |   |         |         | 
|-------------------------------- | --------------------------------------- | ------------------ | ------- | ------------- |  | ----- | ------- | ----- |  | - | ------- | ------- | 
|Year ended December 31, 2002     |                                         |                    |         |               |  |       |         |       |  |   |         |        
|                                
|(In thousands)                   |                                         | Operation
ofHotels |         | Sale
ofHotels |  | Total
|                                 |                                         |                    |         |               |  |       |        
|Revenues from external customers |                                         | $                  | 121,792 |               |  | $     | 145,000 |       |  | $ | 266,792 |        
|Interest expense                 |                                         |                    | 7,285   |               |  |       |        |       |  |   | 7,285   |        
|Depreciation expense             |                                         |                    | 5,357   |               |  |       |        |       |  |   | 5,357   |        
|Impairment loss                  |                                         |                    |        |               |  |       | 8,604   |       |  |   | 8,604   |        
|Loss on extinguishment of debt   |                                         |                    | 2,115   |               |  |       |        |       |  |   | 2,115   |        
|Segment (loss) profit            |                                         |                    | (13,764 | )             |  |       | (7,154  | )     |  |   | (20,918 | )      
|Hotels assets:                   |                                         |                    |         |               |  |       |         |       |  |   |         |        
|                                 | Hotels completed and under construction |                    |         | 100,720       |  |       |         |      |  |   |         | 100,720 | 
|                                 | Accounts receivable                     |                    |         | 434           |  |       |         | 2,775 |  |   |         | 3,209   | 
|Deferred gain on sale of hotels  |                                         |                    |        |               |  |       | 25,932  |       |  |   | 25,932  |        

|                                 |                                         |                    |         |               |  |       |        |       |  |   |         |         | 
|-------------------------------- | --------------------------------------- | ------------------ | ------- | ------------- |  | ----- | ------ | ----- |  | - | ------- | ------- | 
|Year ended December 31, 2001     |                                         |                    |         |               |  |       |        |       |  |   |         |        
|                                
|(In thousands)                   |                                         | Operation
ofHotels |         | Sale
ofHotels |  | Total
|                                 |                                         |                    |         |               |  |       |       
|Revenues from external customers |                                         | $                  | 130,123 |               |  | $     | 28,850 |       |  | $ | 158,973 |        
|Interest expense                 |                                         |                    | 17,081  |               |  |       |       |       |  |   | 17,081  |        
|Depreciation expense             |                                         |                    | 10,897  |               |  |       |       |       |  |   | 10,897  |        
|Segment profit                   |                                         |                    | 1,171   |               |  |       | 1,280  |       |  |   | 2,451   |        
|Hotels assets:                   |                                         |                    |         |               |  |       |        |       |  |   |         |        
|                                 | Hotels completed and under construction |                    |         | 263,160       |  |       |        |      |  |   |         | 263,160 | 
|                                 | Accounts receivable                     |                    |         | 1,294         |  |       |        | 1,863 |  |   |         | 3,157   | 
|Deferred gain on sale of hotels  |                                         |                    |        |               |  |       | 16,995 |       |  |   | 16,995  |        

F-11



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##### Table of Contents



|                                 |                                         |                    |         |               |  |       |        |       |  |   |         |         | 
|-------------------------------- | --------------------------------------- | ------------------ | ------- | ------------- |  | ----- | ------ | ----- |  | - | ------- | ------- | 
|Year ended December 31, 2000     |                                         |                    |         |               |  |       |        |       |  |   |         |        
|                                
|(In thousands)                   |                                         | Operation
ofHotels |         | Sale
ofHotels |  | Total
|                                 |                                         |                    |         |               |  |       |       
|Revenues from external customers |                                         | $                  | 131,229 |               |  | $     |       |       |  | $ | 131,229 |        
|Interest expense                 |                                         |                    | 18,577  |               |  |       |       |       |  |   | 18,577  |        
|Depreciation expense             |                                         |                    | 9,828   |               |  |       |       |       |  |   | 9,828   |        
|Segment profit                   |                                         |                    | 9,775   |               |  |       | 2,183  |       |  |   | 11,958  |        
|Hotels assets:                   |                                         |                    |         |               |  |       |        |       |  |   |         |        
|                                 | Hotels completed and under construction |                    |         | 297,370       |  |       |        |      |  |   |         | 297,370 | 
|                                 | Accounts receivable                     |                    |         | 1,647         |  |       |        | 2,110 |  |   |         | 3,757   | 
|Deferred gain on sale of hotels  |                                         |                    |        |               |  |       | 15,239 |       |  |   | 15,239  |        



| |  | The difference between segment profit and net income is preferred stock
dividends and corporate expenses not specific to the Companys reportable
segments.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| | o. |  | 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 at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from such estimates.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | p. |  | Reclassifications
| | -- |  | -----------------



|   |  | Certain reclassifications of prior period amounts have been made to conform
to the current period presentation. Such reclassifications have no effect
on the operations or equity as originally presented.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Investment in Hotels Completed and Under Construction                                                                                                                                                     
|  
|   |  | For the years ended December 31, 2002, 2001 and 2000, respectively,
investment in hotels consists of the following:                                                                                       

|                              |                                   |      |         |        |  |      |         |         |  |   |         |         | 
|----------------------------- | --------------------------------- | ---- | ------- | ------ |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|Year ended December 31,       |                                   | 2002 |         | 2001   |  | 2000
|                              |                                   |      |         |        |  |     
|(In thousands)                |                                   |      |         |        |  |      |         |         |  |   |         |        
|Hotels completed:             |                                   |      |         |        |  |      |         |         |  |   |         |        
|                              | Land                              |      | $       | 12,196 |  |      | $       | 42,332  |  |   | $       | 45,495  | 
|                              | Buildings and improvements        |      |         | 67,919 |  |      |         | 180,714 |  |   |         | 179,510 | 
|                              | Furniture, fixtures and equipment |      |         | 20,605 |  |      |         | 40,114  |  |   |         | 39,891  | 
|                              |                                   |      |         |        |  |      |         |         |  |   |         |         | 
|                              |                                   |      | 100,720 |        |  |      | 263,160 |         |  |   | 264,896 |        
|Hotels under construction     |                                   |      |        |        |  |      |        |         |  |   | 32,282  |        
|Other costs                   |                                   |      |        |        |  |      |        |         |  |   | 192     |        
|                              |                                   |      |         |        |  |      |         |         |  |   |         |         | 
|                              |                                   |      | 100,720 |        |  |      | 263,160 |         |  |   | 297,370 |        
|Less accumulated depreciation |                                   |      | (13,771 | )      |  |      | (24,878 | )       |  |   | (16,977 | )      
|                              |                                   |      |         |        |  |      |         |         |  |   |         |         | 
|                              |                                   | $    | 86,949  |        |  | $    | 238,282 |         |  | $ | 280,393 |        
|                              |                                   |      |         |        |  |      |         |         |  |   |         |         | 



| |  | Hotels completed and hotels under construction also include capitalized
interest costs. For the years ended December 31, 2002, 2001 and 2000, the
Company incurred interest costs of approximately $7.3 million, $17.8 million
and $21.6 million, respectively, of which $0, $733,000 and $3.0 million was
capitalized. Depreciation expense for the years ended December 31, 2002,
2001 and 2000, was approximately $5.3 million, $9.2 million and $8.4
million, respectively. As of December 31, 2002,
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents





|   |  | the Company did not have any hotels held for sale.                                                  
|-- |  | ----------------------------------------------------------------------------------------------------
|  
|   |  | Other costs at December 31, 2000 included $192,000 of acquisition costs.                            
|  
|4. |  | Mortgages and Notes Payable                                                                         
|  
|   |  | A summary of mortgages and notes payable at December 31, 2002 and 2001,
respectively, is as follows:

|                                                               |                                                                                                                    |      |        |        |  |   |         |         | 
|-------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ---- | ------ | ------ |  | - | ------- | ------- | 
|December 31,                                                   |                                                                                                                    | 2002 |        | 2001  
|                                                               |                                                                                                                    |      |        |       
|(In thousands)                                                 |                                                                                                                    |      |        |        |  |   |         |        
|Mortgage debt  GMAC:                                          |                                                                                                                    |      |        |        |  |   |         |        
|                                                               | Greater of 30 day LIBOR or 3.50% + 4.25%                                                                           |      |        |        |  |   |         |         | 
|                                                               | Secured by individual hotels                                                                                       |      |        |        |  |   |         |         | 
|                                                               | Maturity date May 2005                                                                                             |      |        |        |  |   |         |         | 
|                                                               | Interest payable monthly                                                                                           |      |        |        |  |   |         |         | 
|                                                               | Monthly principal (amortized over 25
years) payments commence May 2003                                             |      | $      | 55,000 |  |   | $       |        | 
|Mortgage debt  GMAC:                                          |                                                                                                                    |      |        |        |  |   |         |        
|                                                               | 30 day LIBOR + 3.40% to 4.25%                                                                                      |      |        |        |  |   |         |         | 
|                                                               | Secured by individual hotels                                                                                       |      |        |        |  |   |         |         | 
|                                                               | Maturity dates from February 2002 to
September 2003                                                                |      |        |        |  |   |         |         | 
|                                                               | Interest payable monthly                                                                                           |      |        |        |  |   |         |         | 
|                                                               | Monthly principal and interest payments
(amortized over 25 years) commenced
12 to 18 months following loan closing |      |        |       |  |   |         | 173,977 | 
|Mortgage debt  other financial institutions
and banks:        |                                                                                                                    |      |        |        |  |   |         |        
|                                                               | 8.30% fixed rate                                                                                                   |      |        |        |  |   |         |         | 
|                                                               | Secured by individual hotel                                                                                        |      |        |        |  |   |         |         | 
|                                                               | Maturity date June 2011                                                                                            |      |        |        |  |   |         |         | 
|                                                               | Monthly principal and interest payments
(amortized over 25 years) commenced
August 2001                            |      |        | 3,932  |  |   |         | 3,979   | 
|Subordinated notes payable  unsecured
(payable to Doubletree) |                                                                                                                    |      |        |        |  |   |         |        
|                                                               | 15.0% fixed rate, paid quarterly                                                                                   |      |        |        |  |   |         |         | 
|                                                               | Maturity dates June  July 2002                                                                                    |      |        |        |  |   |         |         | 
|                                                               | Monthly principal payments of $1.0
Million                                                                         |      |        |       |  |   |         | 13,500  | 
|                                                               |                                                                                                                    |      |        |        |  |   |         |         | 
|                                                               |                                                                                                                    | $    | 58,932 |        |  | $ | 191,456 |        
|                                                               |                                                                                                                    |      |        |        |  |   |         |         | 



| |  | The 30-day LIBOR rate was 1.383% and 1.88% at December 31, 2002 and December
31, 2001, respectively. As of December 31, 2002, the interest rate for the
GMAC debt based on LIBOR was 7.75%.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | As of December 31, 2002, one loan is in its principal amortization period.
This loan matures in June 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Prior to the April 2002 sale and leaseback transaction and the GMAC
refinancing transaction, a portion of the Companys debt was partially
guaranteed by Doubletree. The proceeds from the sale of these hotels was
used to repay a significant portion of the Companys mortgage debt with GMAC
and the Companys unsecured debt with Doubletree. In exchange for the
guarantee, Doubletree received a 5% interest in the defined cash flows of
certain hotels and a 0.25-0.50% fee on the total loan amount outstanding.
For the years ended December 31, 2002 and 2001, interest incurred related to
this guarantee was approximately $91,000 and $272,000, respectively. As of
December 31, 2002, none of the remaining debt was guaranteed by Doubletree.
|
| |  | In 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, which rescinded SFAS No. 4 requiring
gains and losses from extinguishment of debt to be classified as
extraordinary. As a result of the above debt repayments, the Company
recorded a loss of $2.1 million for the year ended December 31, 2002. The
Company adopted SFAS No. 145 effective January 1, 2002 and classified this
loss as an operating expense in the consolidated statement of operations.                                                                                                                                                             
|
| |  | Scheduled principal payments required on mortgage and other notes payable
subsequent to December 31, 2002, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                             |       |   |        |       
|---------------------------- | ----- | - | ------ | ------
|Year ended December 31, 2002 |       |   |       
|                            
|(In thousands)               |       |   |       
|2003                         |       | $ | 542   
|2004                         |       |   | 842   
|2005                         |       |   | 53,776
|2006                         |       |   | 63    
|2007                         |       |   | 68    
|Thereafter                   |       |   | 3,641 
|                             |       |   |       
|                             | Total |   | $      | 58,932
|                             |       |   |       



|   |  | The Companys lending agreements and hotel lease agreement require the
Company to make monthly contributions equal to approximately 5.0% of total
gross hotel revenues into furniture, fixture and equipment (FF&E) cash
reserve accounts. The cash reserved is for replacement and refurbishment of
hotel furniture and fixtures. As of December 31, 2002 and 2001, the Company
had $9.0 million and $10.9 million, respectively, in FF&E cash reserves.
These amounts are included in other assets on the accompanying consolidated
balance sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | Investments in Joint Ventures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | As of December 31, 2002, the Company had $8.4 million invested in joint
ventures. The difference between the amount at which the investment is
carried in the Companys accounting records and the amount of the underlying
equity in the net assets of the investee is amortized into income from joint
ventures over the contractual life of the respective joint venture entity.
As of December 31, 2002, this amount was approximately $3.0 million and is
included in investments in joint ventures on the accompanying consolidated
balance sheets. For the years ended December 31, 2002, 2001 and 2000,
equity (loss) income in joint ventures of ($4.6 million), $123,000 and
$442,000, respectively, was recorded before recognition of the carrying
value difference of $1.7 million, $1.2 million and $266,000, respectively.
These amounts are included in (loss) income from joint ventures on the accompanying consolidated
statements of operations. Additionally, during the years ended December 31,
2002,

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| |  | 2001 and 2000, the Company received distributions from its joint ventures of
$200,000, $1.8 million and $800,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has one significant joint venture that was formed in 1999 with
Boston Capital Institutional Advisors and Mass Mutual in which it has a 50%
ownership. Hotel operations for the joint venture commenced in 2000, and as
of December 31, 2002, the Company operated eight hotels pursuant to this
agreement. Under the terms of the agreement, if the Company did not have at
least 10 hotels open or under construction by August 31, 2000, it may be
required to increase its capital contributions relating to existing joint
venture hotels by up to 5% of the estimated total costs. In June 2002, the
Companys joint venture partners notified the Company that it would be
required to make this additional equity contribution on or before July 25,
2002. The Company did not make this contribution. Based upon the
contributions to date and the calculations as outlined in the agreement, as
of September 30, 2002, the amount of the additional contribution was
estimated at approximately $3.4 million. In August 2002, the Companys
non-payment of the additional equity contribution prompted a notice of
default from the joint venture partners. As a result of this default and in
accordance with the joint venture agreement, the joint venture suspended
payment of franchise royalty and management fees to the Company pending
resolution of this matter. In addition, per the agreement, the interest
rate on the joint venture debt to Boston Capital and Mass Mutual increased
from 12.0% to 21.0%. The suspension of royalty and management fees and the
increased interest rate on the debt would be lifted upon the successful cure
of the default. The Company and Boston Capital and Mass Mutual reached an
agreement with regards to the amount of the additional equity contribution
and in December 2002, the Company contributed $1.8 million to the joint
venture and Boston Capital and Mass Mutual waived contractual rights to the
$1.6 million balance. Simultaneous with the execution of this agreement,
the Company received all previously suspended royalty and management fees.
In addition, the Company and Boston Capital agreed that the Company would
bear all losses from the operation of the Chicago, Illinois  Wheeling hotel
for the period July 26, 2002 forward until the earlier to occur of March 31,
2003 or the date of sale or refinance. The losses for this hotel totaled
$292,000 for the period July 26, 2002 through December 31, 2002 and this
amount is recorded as an equity loss from joint venture hotels and included
in (loss) income from joint ventures on the Companys consolidated statements of operations. For
the year ended December 31, 2002, the joint venture recorded an impairment
loss related to the Chicago, Illinois  Wheeling hotel of $4.2 million. In
accordance with the profit and loss allocation terms of the joint venture
agreement, for the year ended December 31, 2002, the Company recorded all of
the $4.4 million net pre-tax loss of the joint venture. The Company is
otherwise in compliance with the terms of the joint venture agreement. The
following is unaudited condensed financial information for the joint venture
as of December 31, 2002, 2001 and 2000:

|                                        |  |      |        |      |  |      |        |  |  |   |        | 
|--------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|December 31,                            |  | 2002 |        | 2001 |  | 2000
|                                        |  |      |        |      |  |     
|(In thousands)                          |  |      |        |      |  |      |        |  |  |   |        | 
|Hotels completed and under construction |  | $    | 70,331 |      |  | $    | 76,417 |  |  | $ | 66,443 | 
|Other assets                            |  |      | 4,049  |      |  |      | 5,594  |  |  |   | 3,951  | 
|                                        |  |      |        |      |  |      |        |  |  |   |        | 
|Total assets                            |  | $    | 74,380 |      |  | $    | 82,011 |  |  | $ | 70,394 | 
|                                        |  |      |        |      |  |      |        |  |  |   |        | 
|Total development liabilities           |  | $    | 71,363 |      |  | $    | 75,965 |  |  | $ | 62,596 | 
|Total equity                            |  |      | 3,017  |      |  |      | 6,046  |  |  |   | 7,798  | 
|                                        |  |      |        |      |  |      |        |  |  |   |        | 
|Total liabilities and equity            |  | $    | 74,380 |      |  | $    | 82,011 |  |  | $ | 70,394 | 
|                                        |  |      |        |      |  |      |        |  |  |   |        | 

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|                                             |  |      |        |      |  |      |        |  |  |   |       | 
|-------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ----- | 
|Year ended December 31,                      |  | 2002 |        | 2001 |  | 2000
|                                             |  |      |        |      |  |     
|(In thousands)                               |  |      |        |      |  |      |        |  |  |   |       | 
|Total revenue                                |  | $    | 20,397 |      |  | $    | 20,152 |  |  | $ | 8,569 | 
|Hotel operating expenses                     |  |      | 11,423 |      |  |      | 10,423 |  |  |   | 3,886 | 
|Hotel opening costs                          |  |      |       |      |  |      | 150    |  |  |   | 624   | 
|Depreciation and amortization                |  |      | 2,954  |      |  |      | 2,825  |  |  |   | 1,342 | 
|Impairment loss Chicago, IL  Wheeling
hotel |  |      | 4,244  |      |  |      |       |  |  |   |      | 
|Interest expense, net                        |  |      | 6,218  |      |  |      | 6,095  |  |  |   | 1,660 | 
|                                             |  |      |        |      |  |      |        |  |  |   |       | 
|Net pre-tax (loss) income                    |  | $    | (4,442 | )    |  | $    | 659    |  |  | $ | 1,057 | 
|                                             |  |      |        |      |  |      |        |  |  |   |       | 



| |  | In addition, as of December 31, 2002, the Company has guaranteed
construction debt on the joint venture properties of approximately $45.3
million. This debt is solely collateralized by the individual hotels
completed in the joint venture. Maturity dates on this debt range from June
2003 to December 2007 with one note providing for an extension of one year
under specific criteria including loan to value ratios. This debt is not
included in the Companys consolidated financial statements (See Note 4) and
the Company does not receive any fees related to this guarantee. No
liability has been recorded related to this guarantee based on the estimated
values of the properties collateralizing the construction debt.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The scheduled maturity dates for the guaranteed debt as of December 31,
2002, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                             |       |   |        |       
|---------------------------- | ----- | - | ------ | ------
|Year ended December 31, 2002 |       |   |       
|                            
|(In thousands)               |       |   |       
|2003                         |       | $ | 13,323
|2004                         |       |   | 19,439
|2005                         |       |   | 4,450 
|2006                         |       |   |      
|2007                         |       |   | 8,095 
|Thereafter                   |       |   |      
|                             |       |   |       
|                             | Total |   | $      | 45,307
|                             |       |   |       



|6. |  | Redeemable, Convertible Preferred Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | General                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The Company has authorized blank check preferred stock in the amount of
5,000,000 shares at $.01 par value per share. The stock may be issued with
such voting powers and such designations, preferences, privileges and other
special rights as designated by the Board of Directors. At the date of
issuance of any of the preferred stock, the Company determines whether the
stock is redeemable and the appropriate classification of the stock on the
balance sheet. At December 31, 2002 and 2001, as more fully described
below, the Company had 65,000 and 42,000 shares, respectively, of Series A
and Series B redeemable preferred stock issued and outstanding.
|  
|   |  | Preferred Stock Offerings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | In October 1997, the Company completed a $65.0 million private placement of
65,000 shares of Series A Redeemable, Convertible, Cumulative Preferred
Stock at an offering price of $1,000 per share (Stated Value). The net
proceeds to the Company were approximately $61.3 million, after deducting
commissions and expenses of $3.7 million.                                                                                                                                                                                                                                                                                                                            
|  
|   |  | On August 3, 1998, the Company completed the private placement of $42.0
million of its Series B Redeemable, Convertible, Cumulative Preferred
Stock and warrants to purchase its common stock. In total, 42,000 shares of
Series B Preferred Stock were issued at an offering price of $1,000 per
share (Stated Value). Preferred stockholders were also issued, at no
additional cost, warrants to purchase 336,000 shares of common stock at
$12.00 per share. These warrants expire on July 13, 2005. The net proceeds
to the Company were approximately $39.4 million, after deducting commissions
and expenses of $2.6 million.                                      

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| |  | The Series A and Series B Preferred Stock accumulate dividends at a rate of
7.5% with dividend payments made quarterly, upon approval of the board of
directors, and in preference to any dividend on the Companys Common Stock.
These payments are approximately $2.0 million per quarter. If the Company
fails to make a scheduled preferred stock dividend payment, the dividends
accumulate and compound at a rate of 7.5%. The Company has not made the
last five scheduled preferred stock dividend payments. Pursuant to the
provisions of the certificate of designation for the Series A and Series B
Preferred Stock, the conversion price (i.e. the price at which the Preferred
Stock may convert into Common Stock) was reduced in August 2002 to $8.00 per
share to reflect the Companys decision to forego payment of its May 2002
and August 2002 preferred stock dividend payment and the grant of new
employee stock options. The Company intends to assess its cash position on
a quarterly basis and will likely elect to forego additional scheduled
dividend payments on the preferred stock. As of December 31, 2002, the
Company had approximately $10.4 million of accumulated unpaid dividends in
arrears, which have been accrued and recorded as an increase to the carrying
amount of the Series A and Series B preferred stock. A failure to make
future dividend payments will result in a further reduction in the
conversion price of the Preferred Stock and, in the case of the Series B
Preferred Stock, may result in a future adjustment to the dividend rate to
12%.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Pursuant to a mandatory redemption clause in the Certificates of Designation
for the Series A and Series B Cumulative Convertible Preferred Stock, the
Company is required to redeem the Series A and Series B Preferred Stock in
September 2004. The mandatory redemption amount is equal to $107 million
plus unpaid dividends. As of December 31, 2002, the mandatory redemption
amount was approximately $117.4 million. If the Company fails to redeem the
Preferred Stock when due, it will be required to issue to each holder of
Preferred Stock on such date, and on each three month anniversary
thereafter, warrants to purchase 25% of the number of shares of Common Stock
into which such holders outstanding shares of Preferred Stock would be
convertible on such date. The warrants would be immediately exercisable at
a purchase price of $.01 per share of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | In the event the Company liquidates, the holders of the Series A and Series
B Preferred Stock are entitled to receive a payment equal to the stated
value of their shares, plus any accrued but unpaid dividends (the
Liquidation Amount), prior to any distribution or payment to the holders
of the Common Stock. As of December 31, 2002, the Liquidation Amount was
$117.4 million, including $10.4 million of unpaid dividends. Alternatively,
the holders of the Series A and Series B Preferred Stock may convert any or
all of their shares into shares of Common Stock. In the event of a
corporate transaction that constitutes a change of control, the Company is
required to offer to redeem all of the outstanding shares of Series A and
Series B Preferred Stock for a price equal to the greater of the Liquidation
Amount or 175% of the stated value of the shares. As of December 31, 2002,
one hundred seventy five percent of the stated value of the shares was
$187.3 million. If the Company does not redeem the Preferred Stock upon a
change of control, the conversion price of the Preferred Stock will be
reduced to the lower of the then applicable conversion price or the market
price of the Common Stock on the redemption date divided by 1.75, provided
that the conversion price will not be reduced to an amount less than the par
value of the Common Stock.                                                                                                                                                                                                      
|
| |  | Certain of the Preferred Stockholders have voting rights related to the
nomination and election of directors as defined in a stockholders agreement.
Each Preferred Stockholder will vote together with the Common Stockholders
as a single class, on an as-converted basis, on all matters to be approved
by the Common Stockholders. For certain actions, approval of two-thirds of
the shares owned by Preferred Stockholders, as a single class, is required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The carrying amount of the redeemable preferred stock is being increased by
periodic accretions using the interest method, so that the carrying amount
will equal the mandatory redemption amount at the mandatory redemption date.
For the years ended December 31, 2002 and 2001, approximately $1.8 million
and $848,000, respectively, were recorded as an increase to the carrying
value of the preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-17



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|7. |  | Stockholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On November 8, 1996, the Company completed its initial public offering of
3,850,000 shares of common stock. The stock was offered to the public at an
initial offering price of $10.00 per share. The proceeds to the Company were
approximately $35.0 million, net of offering costs of $2.7 million.                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Immediately prior to the offering, Doubletree, JPD Corporation and the Fix
Partnership received 5,175,000 shares in exchange for their outstanding
membership interests in Candlewood LLC and certain minority interests in
subsidiary LLCs (Note 1). Total shares outstanding at December 31, 2002
and 2001 were 9,025,000.                                                                                                                                                                                                                                                                                                        
|  
|8. |  | Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The Company has one stock option plan, the 1996 Equity Participation Plan,
as amended, (the Plan), in which options may be granted to key personnel
to purchase shares of the Companys common stock at a price not less than
the current market price at the date of the grant. The options vest
annually and ratably over the four-year period from the date of grant and
expire ten years after the grant date. The number of options available for
grant under the Plan is 2,676,710. The Plan also provides for the issuance
of stock appreciation rights, restrictive stock or other awards, none of
which have been granted.

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##### Table of Contents





| |  | A summary of the Companys stock option activity and related exercise price
information for the years ended December 31, 2002, 2001 and 2000, is as
follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       |  |        |           |                |  |           |      | 
|-------------------------------------- |  | ------ | --------- | -------------- |  | --------- | ---- | 
|                                       |  |        |           |                |  | Weighted-
|                                       |  |        |           |                |  | Average  
|                                       |  | Shares |           | Exercise Price
|                                       |  |        |           |               
|Options outstanding, December 31, 1999 |  |        | 1,187,823 |                |  | $         | 6.82 | 
|Granted                                |  |        | 132,600   |                |  |           | 2.37 | 
|Exercised                              |  |        |          |                |  |           |     | 
|Forfeited                              |  |        | (96,923   | )              |  |           | 4.61 | 
|                                       |  |        |           |                |  |           |      | 
|Options outstanding, December 31, 2000 |  |        | 1,223,500 |                |  |           | 6.52 | 
|Granted                                |  |        | 563,075   |                |  |           | 2.97 | 
|Exercised                              |  |        |          |                |  |           |     | 
|Forfeited                              |  |        | (316,989  | )              |  |           | 5.35 | 
|                                       |  |        |           |                |  |           |      | 
|Options outstanding, December 31, 2001 |  |        | 1,469,586 |                |  |           | 5.35 | 
|Granted                                |  |        | 452,450   |                |  |           | 1.47 | 
|Exercised                              |  |        |          |                |  |           |     | 
|Forfeited                              |  |        | (209,451  | )              |  |           | 5.76 | 
|                                       |  |        |           |                |  |           |      | 
|Options outstanding, December 31, 2002 |  |        | 1,712,585 |                |  | $         | 4.24 | 
|                                       |  |        |           |                |  |           |      | 



| |  | At December 31, 2002, 1,712,585 options were outstanding at prices ranging
from $0.70 to $11.25. There were 823,878, 705,461 and 600,957 shares
exercisable as of December 31, 2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Companys
stock at the date of the grant over the amount an employee must pay to
acquire the stock. The effects of applying SFAS No. 123 for providing pro
forma disclosures are not likely to be representative of net income (loss)
in future years. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at the grant date as
prescribed by SFAS No. 123, net loss and net loss per share would have been
increased to the unaudited pro forma amounts indicated in the table below:

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|                                         |                                  |      |       |         |   |      |       |        |   |   |       |       |  
|---------------------------------------- | -------------------------------- | ---- | ----- | ------- | - | ---- | ----- | ------ | - | - | ----- | ----- | -
|Year ended December 31,                  |                                  | 2002 |       | 2001    |   | 2000
|                                         |                                  |      |       |         |   |     
|(In thousands except per share data):    |                                  |      |       |         |   |      |       |        |   |   |       |      
|Net (loss) income before preferred stock |                                  |      |       |         |   |      |       |        |   |   |       |      
|                                         | dividends, as reported           |      | $     | (27,323 | ) |      | $     | (5,138 | ) |   | $     | 5,687 |  
|Stock-based employee compensation costs  |                                  |      |       |         |   |      |       |        |   |   |       |      
|                                         | at fair value under SFAS No. 123 |      |       | (526    | ) |      |       | (655   | ) |   |       | (684  | )
|                                         |                                  |      |       |         |   |      |       |        |   |   |       |       |  
|Net (loss) income before preferred stock |                                  |      |       |         |   |      |       |        |   |   |       |      
|                                         | dividends, pro forma             |      | $     | (27,849 | ) |      | $     | (5,793 | ) |   | $     | 5,003 |  
|                                         |                                  |      |       |         |   |      |       |        |   |   |       |       |  
|Net (loss) income per share, as reported |                                  | $    | (3.96 | )       |   | $    | (1.46 | )      |   | $ | (0.26 | )    
|Stock-based employee compensation costs  |                                  |      |       |         |   |      |       |        |   |   |       |      
|                                         | per share                        |      |       | (0.06   | ) |      |       | (0.07  | ) |   |       | (0.07 | )
|                                         |                                  |      |       |         |   |      |       |        |   |   |       |       |  
|Net (loss) income per share, pro forma   |                                  | $    | (4.02 | )       |   | $    | (1.53 | )      |   | $ | (0.33 | )    
|                                         |                                  |      |       |         |   |      |       |        |   |   |       |       |  



| |  | The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. For the years ended December 31,
2002, 2001 and 2000, the following assumptions were used:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                |  |         |        |         |  |         |       |   |  |  |       |  
|------------------------------- |  | ------- | ------ | ------- |  | ------- | ----- | - |  |  | ----- | -
|Year ended December 31,         |  | 2002    |        | 2001    |  | 2000   
|                                |  |         |        |         |  |        
|Expected dividend yield         |  |         | 0.00   | %       |  |         | 0.00  | % |  |  | 0.00  | %
|Expected stock price volatility |  |         | 100.02 | %       |  |         | 60.14 | % |  |  | 55.50 | %
|Risk-free interest rate         |  |         | 4.24   | %       |  |         | 4.89  | % |  |  | 6.30  | %
|Expected life of options        |  | 5 years |        | 5 years |  | 5 years



| |  | The weighted-average fair value of the options granted during 2002, 2001,
and 2000 was $0.90, $1.58 and $1.28 per share, respectively. The
weighted-average exercise price and weighted-average contractual life, by
exercise price range for options outstanding as of December 31, 2002, was as
follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                |  |           |         |                |  |             |       |           |  |           |  | 
|--------------- |  | --------- | ------- | -------------- |  | ----------- | ----- | --------- |  | --------- |  | 
|                |  |           |         |                |  |             |       |           |  | Weighted-
|                |  |           |         |                |  |             |       |           |  | Average  
|                |  |           |         |                |  | Weighted-   |       | Remaining
|                |  | Number of |         | Average        |  | Contractual
|Exercise Price  |  | Options   |         | Exercise Price |  | Life       
|                |  |           |         |                |  |            
|$0.70           |  |           | 69,000  |                |  | $           | 0.70  |           |  | 9.9 years
|$1.10 to $1.60  |  |           | 81,950  |                |  |             | 1.32  |           |  | 9.4 years
|$1.69 to $2.44  |  |           | 389,074 |                |  |             | 1.82  |           |  | 8.7 years
|$2.75 to $4.00  |  |           | 528,474 |                |  |             | 3.16  |           |  | 7.8 years
|$4.25 to $4.81  |  |           | 261,837 |                |  |             | 4.77  |           |  | 6.0 years
|$7.25 to $10.50 |  |           | 352,250 |                |  |             | 8.93  |           |  | 4.7 years
|$11.25          |  |           | 30,000  |                |  |             | 11.25 |           |  | 4.7 years



|   |  | The weighted-average exercise price of the options exercisable as of
December 31, 2002, 2001 and 2000 were $6.29, $7.37 and $8.14, respectively.                                                                                                                                                                                                                                                                                                                                                       
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|9. |  | Employee Benefits Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Effective June 1, 1996, the Company established the Candlewood Hotel Company
401(k) Profit Sharing Plan (the Plan) for its employees. Generally, all
full-time employees over the age of 21 who have completed ninety days of
service, as amended, are eligible to participate in the Plan. Employees are
permitted to contribute up to 25% of their individual compensation, subject
to certain limitations established by the Internal Revenue Service for plans
of this type. The Company may, but

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|    |  | is not obligated to, make contributions on behalf of each participant.
Effective October 1, 1999, the Company match rate was increased from 25% to
50% of all participants contributions, not to exceed 6% of the employees
compensation. For the years ended December 31, 2002, 2001 and 2000
respectively, the Company matched contributions in the amount of
approximately $405,000, $456,000 and $411,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|10. |  | Related Party Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | As of December 31, 2002, the Company had two managed hotel properties in
which the Companys chairman had a controlling interest. These properties
are the Cambridge Suites and the Hotel at Old Town, both located in Wichita,
Kansas. For the years ended December 31, 2002, 2001 and 2000, respectively,
the Company received management fees from these properties in the amount of
approximately $235,000, $216,000 and $223,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | The Company purchases property and casualty insurance, workers compensation
coverage, and builders risk insurance through an insurance agency (Agency)
in which the Companys chairman previously owned a minority interest. In
June 2002, the agency was sold to an unaffiliated third party. The sale
agreement included a three-year earnout period in which annual payments,
calculated on the pre-tax profits of the agency, are paid to the former
owners in proportion to their ownership interest in the agency. The earnout
period ends on June 1, 2005. The Company awarded the insurance contracts
through a competitive bid process. Prior to March 15, 1999, the Company
also rented office space and equipment under a five-year lease from a
corporation in which the Companys chairman owns a minority interest. In
addition, certain corporate travel is purchased from a corporation owned by
the Companys chairman. A summary of these transactions and the related
payable at year-end for the years ended December 31, 2002, 2001 and 2000 is
as follows:

|                                |  |      |       |      |  |      |       |  |  |   |     | 
|------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | --- | 
|Year ended December 31,         |  | 2002 |       | 2001 |  | 2000
|                                |  |      |       |      |  |     
|(In thousands):                 |  |      |       |      |  |      |       |  |  |   |     | 
|Total insurance premiums paid   |  | $    | 2,205 |      |  | $    | 1,628 |  |  | $ | 990 | 
|Office and equipment rent       |  |      |      |      |  |      | 1     |  |  |   | 6   | 
|Corporate air travel            |  |      | 106   |      |  |      | 275   |  |  |   | 160 | 
|Amounts payable at December 31, |  |      | 40    |      |  |      | 5     |  |  |   | 89  | 



|11. |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                             
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. Significant
components of the Companys approximated deferred income tax assets and
liabilities as of December 31, 2002, 2001 and 2000 are as follows:

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|                                           |                          |                                 |                        |       |       |      |       |       |       |   |       |       |       |   | 
|------------------------------------------ | ------------------------ | ------------------------------- | ---------------------- | ----- | ----- | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | - | 
|Year ended December 31,                    |                          | 2002                            |                        | 2001  |       | 2000
|                                           |                          |                                 |                        |       |       |     
|(In thousands):                            |                          |                                 |                        |       |       |      |       |       |       |   |       |      
|Deferred Tax Assets:                       |                          |                                 |                        |       |       |      |       |       |       |   |       |      
|Taxable gain on sale-leaseback transaction |                          |                                 |                        |       |       |      |       |       |       |   |       |      
|                                           | in excess of book income |                                 | $                      | 3,769 |       |      | $     | 283   |       |   | $     | 279   |      
|Deferred franchise fee revenue             |                          |                                 | 39                     |       |       |      | 39    |       |       |   | 56    |      
|Tax benefit of net operating loss          |                          |                                 |                        |       |       |      |       |       |       |   |       |      
|                                           | carry-forwards           |                                 |                        | 4,057 |       |      |       | 9,335 |       |   |       | 8,450 |      
|                                           |                          |                                 |                        |       |       |      |       |       |       |   |       |       |      
|                                           |                          | Total gross deferred tax assets |                        |       | 7,865 |      |       |       | 9,657 |   |       |       | 8,785 |  
|Valuation allowance                        |                          |                                 | 5,241                  |       |       |      | 1,801 |       |       |   | 2,148 |      
|                                           |                          |                                 |                        |       |       |      |       |       |       |   |       |       |      
|                                           |                          | Total deferred tax assets       |                        |       | 2,624 |      |       |       | 7,856 |   |       |       | 6,637 |  
|                                           |                          |                                 |                        |       |       |      |       |       |       |   |       |       |      
|Deferred Tax Liabilities:                  |                          |                                 |                        |       |       |      |       |       |       |   |       |      
|Excess tax depreciation over book          |                          |                                 | 2,573                  |       |       |      | 7,801 |       |       |   | 6,578 |      
|Financial basis in excess of tax basis of  |                          |                                 |                        |       |       |      |       |       |       |   |       |      
|                                           | intangible assets        |                                 |                        | 51    |       |      |       | 55    |       |   |       | 59    |      
|                                           |                          |                                 |                        |       |       |      |       |       |       |   |       |       |      
|                                           |                          | Total deferred tax liabilities  |                        |       | 2,624 |      |       |       | 7,856 |   |       |       | 6,637 |  
|                                           |                          |                                 |                        |       |       |      |       |       |       |   |       |       |      
|                                           |                          |                                 | Net deferred tax asset |       | $     |     |       |       | $     |  |       |       | $     |  | 
|                                           |                          |                                 |                        |       |       |      |       |       |       |   |       |       |      



|    |  | The deferred tax liabilities reflected in the above schedule resulted from
items that are currently taxable for federal and state income tax purposes
but were not included in book net income. Timing differences that resulted
in a deferred tax asset but did not result in current taxes payable were
offset by a valuation allowance due to the uncertainty of the ultimate
realization of the asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company had a cumulative net operating loss carry-forward available to
offset future taxable income of $45.8 million and $31.9 million as of
December 31, 2002 and 2001, respectively, which expire in 2011 through 2022.
Net operating losses, available to offset future taxable income, generated
in the years ended December 31, 2002, 2001 and 2000, were approximately
$14.0 million, $7.2 million and $3.9 million, which expire in 2022, 2021,
and 2015, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|12. |  | Sale / Leaseback of Hotels                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | As of December 31, 2002, the Company had completed four separate
sale-leaseback transactions with Hospitality Properties Trust (HPT). In
April 2002, the Company sold 21 hotels for a sale price of $145 million. As
of December 31, 2002, the Company has sold 57 hotels to HPT for an aggregate
sales price of $434.8 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Terms of the HPT sales agreement were all cash at the close of escrow for
each hotel sold. Each of the hotels sold has been leased back to a wholly
owned subsidiary of Candlewood pursuant to the terms of a master operating
lease agreement executed in April 2002, which superceded the previous
operating lease (the previous lease). This lease expires in December 2018
and may be renewed in certain circumstances and at the election of the
Company for up to three 15-year periods. The lease calls for monthly lease
payments of approximately $3.8 million and requires the Company to place a
security deposit with HPT for each property equal to one years lease
payments. The security deposit will be released to the Company at the end
of the lease term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | The previous lease agreement provided for the Company to guarantee the
payment of rent until defined operating cash flows exceed the annual lease
payments by 150% for 12 consecutive months. In connection with this
obligation, the Company was required to place deposits with HPT equal to
approximately 5% of the sales price, upon the initial closing of each
transaction. These deposits were charged to cost of sales as the hotels
were sold. As part of the newly executed lease, the Company was refunded
the $10.4 million remaining balance of the guaranty deposit, which was
recorded as an additional deferred gain on sale of hotels and will be
recognized as income over the remaining lease term. In addition, the new
lease requires the Company to guarantee the payment of rent for the duration
of the lease.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | The new lease also requires that the Company, as guarantor, must maintain a
minimum net worth, as defined, of at least $75 million. At December 31, 2002,
the Companys net worth as defined in the agreement was $68.3 million. Although
there has been no payment default under the new lease, this breach of the
guarantee agreement gives HPT the right to start proceedings that would result
in the cancellation of the lease agreement and the Company would lose its rights
as a tenant. In addition, the Company would remain obligated to HPT for payment
of any potential shortfalls in net rental proceeds incurred by HPT from
releasing the hotels to another hotel operator. HPT has agreed to take no action
prior to January 1, 2004 with respect to this provision of the guaranty,
provided that the Company maintains a net worth of at least $60 million
throughout the 2003 calendar year. The Companys net worth may decline below $60 million
during 2003. In addition, the Company may also be unable to obtain
another waiver from HPT in the future or increase its net worth to satisfy the
$75 million minimum net worth requirement on January 1, 2004. The financial
statements do not reflect any adjustments related to these uncertainties.

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|    |  | In total, the Company has sold $434.8 million of hotels with a total
deferred gain of $32.7 million, which includes the return of the guaranty
deposits to the Company. Such gain has been deferred and is being
recognized in income as noted in the Companys accounting policies (Note 2).
For the years ended December 31, 2002, 2001 and 2000, respectively, the
Company recognized approximately $1.4 million, $1.3 million and $2.2 million
of deferred gain into income. As of December 31, 2002, the Company has
recognized a total of $6.8 million of deferred gain into income. Sale
proceeds, net of the deferred gain and related cost of the hotels sold are
presented on the consolidated statements of operations.                                        
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|13. |  | Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | The Company leases corporate office space and certain equipment at its
hotels and corporate offices under non-cancelable operating leases that
expire at various dates through October 2007. The total monthly payment on
these leases is approximately $108,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | In addition, the Company leases 57 hotels under a non-cancelable operating
lease with HPT. In April 2002, concurrent with the sale of 21 additional
hotels to HPT, the Company re-negotiated its operating lease. As a result,
the lease term was extended with a remaining lease term of 16 years expiring
on December 2018. The lease calls for monthly lease payments of
approximately $3.8 million, with annual base rent of approximately $45.5
million. In addition, the lease provides for contingent rent equal to 10%
of the increase in gross hotel sales, as defined in the lease, over the
amount generated in each hotels second year of operation. The monthly
lease payments for hotels sold prior to April 2002 were not affected by the
new lease terms.
|   
|    |  | Payments for all operating leases for the years ended December 31, 2002,
2001 and 2000, were approximately $42.3 million, $28.2 million and $27.8
million, respectively. Future minimum lease payments under non-cancelable
operating leases having remaining terms in excess of one year at December
31, 2002 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                             |                                     |   |         |         | 
|---------------------------- | ----------------------------------- | - | ------- | ------- | 
|Year ended December 31, 2002 |                                     |   |         |        
|                             |                                     |   |         |        
|(In thousands)               |                                     |   |         |        
|2003                         |                                     | $ | 46,671  |        
|2004                         |                                     |   | 45,895  |        
|2005                         |                                     |   | 45,591  |        
|2006                         |                                     |   | 45,521  |        
|2007                         |                                     |   | 45,513  |        
|Thereafter                   |                                     |   | 500,580 |        
|                             |                                     |   |         |        
|                             | Total future minimum lease payments |   | $       | 729,771 | 
|                             |                                     |   |         |        



|14. |  | Litigation and Legal Matters                                                                                                                                                                                                             
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. All such proceedings
individually and in aggregate are not expected to have a material adverse
impact on the Company.

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|15. |  | Earnings Per Share                                                                                                                          
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The following table sets forth the computation of basic and diluted earnings
per share for the years ended December 31, 2002, 2001 and 2000:

|                                                 |                                               |      |        |           |   |      |        |           |   |   |        |           |  
|------------------------------------------------ | --------------------------------------------- | ---- | ------ | --------- | - | ---- | ------ | --------- | - | - | ------ | --------- | -
|Year ended December 31,                          |                                               | 2002 |        | 2001      |   | 2000
|                                                 |                                               |      |        |           |   |     
|(In thousands, except share and per share data): |                                               |      |        |           |   |      |        |           |   |   |        |          
|(Loss) income available to common                |                                               |      |        |           |   |      |        |           |   |   |        |          
|                                                 | stockholders before preferred stock dividends |      | $      | (27,323   | ) |      | $      | (5,138    | ) |   | $      | 5,687     |  
|Preferred stock dividends                        |                                               |      | (8,401 | )         |   |      | (8,025 | )         |   |   | (8,025 | )        
|                                                 |                                               |      |        |           |   |      |        |           |   |   |        |           |  
|Net loss available to common stockholders        |                                               |      |        |           |   |      |        |           |   |   |        |          
|                                                 | (Numerator of basic earnings per share)       |      | $      | (35,724   | ) |      | $      | (13,163   | ) |   | $      | (2,338    | )
|Dilutive securities  preferred stock dividends  |                                               |      |       |           |   |      |       |           |   |   |       |          
|                                                 |                                               |      |        |           |   |      |        |           |   |   |        |           |  
|Loss available to common stockholders            |                                               |      |        |           |   |      |        |           |   |   |        |          
|                                                 | after assumed conversion of preferred stock   |      |        |           |   |      |        |           |   |   |        |           |  
|                                                 | (Numerator for diluted earnings per share)    |      | $      | (35,724   | ) |      | $      | (13,163   | ) |   | $      | (2,338    | )
|                                                 |                                               |      |        |           |   |      |        |           |   |   |        |           |  
|Weighted-average common shares                   |                                               |      |        |           |   |      |        |           |   |   |        |          
|                                                 | (Denominator for basic earnings per share)    |      |        | 9,025,000 |   |      |        | 9,025,000 |   |   |        | 9,025,000 |  
|Dilutive securities  employee stock options     |                                               |      |       |           |   |      |       |           |   |   |       |          
|Dilutive securities  preferred stock            |                                               |      |       |           |   |      |       |           |   |   |       |          
|                                                 |                                               |      |        |           |   |      |        |           |   |   |        |           |  
|Adjusted weighted-average common shares          |                                               |      |        |           |   |      |        |           |   |   |        |          
|                                                 | and assumed conversion of preferred stock     |      |        |           |   |      |        |           |   |   |        |           |  
|                                                 | (Denominator for diluted earnings per share)  |      |        | 9,025,000 |   |      |        | 9,025,000 |   |   |        | 9,025,000 |  
|                                                 |                                               |      |        |           |   |      |        |           |   |   |        |           |  
|Per share amounts:                               |                                               |      |        |           |   |      |        |           |   |   |        |          
|Net loss per share  basic                       |                                               | $    | (3.96  | )         |   | $    | (1.46  | )         |   | $ | (0.26  | )        
|Net loss per share  diluted                     |                                               | $    | (3.96  | )         |   | $    | (1.46  | )         |   | $ | (0.26  | )        



|    |  | For additional disclosures regarding the convertible preferred stock and the
employee stock options, see Notes 6 and 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | As of December 31, 2002, options to purchase 1,712,585 shares of common
stock at a weighted-average exercise price of $4.24 per share were
outstanding. These options were not included in the computation of diluted
earnings per share as the Company had a net loss available to common
stockholders and the inclusion of such options would be anti-dilutive.                                                                                                                                                                                                                                                                                                              
|   
|    |  | As of December 31, 2002, the Company had $65.0 million and $42.0 million,
respectively, of Series A and Series B Preferred Stock outstanding (See Note
6). The assumed conversion of these shares into approximately 13.4 million
shares of common stock would be anti-dilutive and, therefore, was not
included in the diluted earnings per share calculation as reported.                                                                                                                                                                                                                                                                                                    
|   
|16. |  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | As discussed in Note 6, the Company did not make its November 2002 preferred
stock dividend payment, and in February 2003, the Company made the decision
to forego payment of its $2.0 million February 2003 preferred stock
dividend. Series A and B Preferred Stockholders have the right to convert,
at any time at their option into shares of Common Stock. The Companys
failure to pay these dividends has resulted in an automatic adjustment to
the conversion price of the Preferred Stock from $8.00 to $7.50 and may
result in a future adjustment to the dividend rate. Preferred stock
dividends are in preference to any dividend on the Companys Common Stock.

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|17. |  | Quarterly Financial Data (unaudited)                                                                                                          
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The following is a summary of unaudited quarterly data for the years 2002,
2001 and 2000 (amounts in thousands, except for per share amounts.)

|                                               |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |        |   | 
|---------------------------------------------- | ------------------------- | - | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------ | ----- | - | - | ------- | ------ | - | 
|                                               |                           |   |         | First   |   | Second  |         | Third   |   | Fourth 
|                                               |                           |   |         | Quarter |   | Quarter |         | Quarter |   | Quarter
|                                               |                           |   |         |         |   |         |         |         |   |        
|2002                                           |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |       
|Hotel operating revenue                        |                           | $ | 29,976  |         |   | $       | 32,397  |         |   | $       | 32,493 |       |   | $ | 28,760  |       
|Total revenues                                 |                           |   | 30,715  |         |   |         | 178,639 |         |   |         | 33,677 |       |   |   | 25,211  |       
|(Loss) before preferred stock dividends        |                           |   | (11,711 | )       |   |         | (4,274  | )       |   |         | (1,511 | )     |   |   | (9,827  | )     
|Net (loss) available to common shareholders    |                           |   | (13,690 | )       |   |         | (6,274  | )       |   |         | (3,534 | )     |   |   | (12,226 | )     
|Weighted
average shares outstanding - basic    |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |       
|                                               | and diluted               |   |         | 9,025   |   |         |         | 9,025   |   |         |        | 9,025 |   |   |         | 9,025  |  
|Net (loss) per share of common stock -         |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |       
|                                               | basic and diluted         |   | $       | (1.52   | ) |         | $       | (0.69   | ) |         | $      | (0.39 | ) |   | $       | (1.36  | )
|2001                                           |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |       
|Hotel operating revenue                        |                           | $ | 31,184  |         |   | $       | 33,369  |         |   | $       | 33,493 |       |   | $ | 29,046  |       
|Total revenues                                 |                           |   | 32,207  |         |   |         | 34,783  |         |   |         | 63,797 |       |   |   | 29,466  |       
|(Loss) income before preferred stock dividends |                           |   | (741    | )       |   |         | 947     |         |   |         | (525   | )     |   |   | (4,819  | )     
|Net (loss) available to common shareholders    |                           |   | (2,720  | )       |   |         | (1,053  | )       |   |         | (2,548 | )     |   |   | (6,842  | )     
|Weighted average shares outstanding - basic    |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |       
|                                               | and diluted               |   |         | 9,025   |   |         |         | 9,025   |   |         |        | 9,025 |   |   |         | 9,025  |  
|Net (loss) per share of common stock -         |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |       
|                                               | basic and diluted         |   | $       | (0.30   | ) |         | $       | (0.12   | ) |         | $      | (0.28 | ) |   | $       | (0.76  | )
|2000                                           |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |       
|Hotel operating revenue                        |                           | $ | 30,240  |         |   | $       | 33,840  |         |   | $       | 33,624 |       |   | $ | 30,067  |       
|Total revenues                                 |                           |   | 31,213  |         |   |         | 35,101  |         |   |         | 35,265 |       |   |   | 31,833  |       
|Income (loss) before preferred stock dividends |                           |   | 256     |         |   |         | 3,014   |         |   |         | 3,082  |       |   |   | (665    | )     
|Net (loss) income available to common          |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |       
|                                               | shareholders              |   |         | (1,739  | ) |         |         | 1,018   |   |         |        | 1,065 |   |   |         | (2,682 | )
|Weighted average shares outstanding - basic    |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |       
|                                               | and diluted               |   |         | 9,025   |   |         |         | 9,025   |   |         |        | 9,025 |   |   |         | 9,025  |  
|Net (loss) income per share of common          |                           |   |         |         |   |         |         |         |   |         |        |       |   |   |         |       
|                                               | stock  basic and diluted |   | $       | (0.19   | ) |         | $       | 0.11    |   |         | $      | 0.12  |   |   | $       | (0.30  | )

F-25



---



##### Table of Contents



SCHEDULE III
Candlewood Hotel Company, Inc.
Real Estate and Accumulated Depreciation
December 31, 2002
(in thousands)



|                            |  |                |  |              |  |      |   |          |  |      |   |          |  |                         |   |                           |  |             |   |   |  |                   |   |             |  |  |  | 
|--------------------------- |  | -------------- |  | ------------ |  | ---- | - | -------- |  | ---- | - | -------- |  | ----------------------- | - | ------------------------- |  | ----------- | - | - |  | ----------------- | - | ----------- |  |  |  | 
|                            |  |                |  |              |  |      |   |          |  |      |   |          |  |                         |   |                           |  |             |   |   |  | Costs Capitalized
|                            |  |                |  |              |  |      |   |          |  |      |   |          |  | Initial Cost to Company |   | Subsequent to Acquisition
|                            |  |                |  |              |  |      |   |          |  |      |   |          |  |                         |   |                          
|(1)                         |  |                |  |              |  |      |   |          |  |      |   |          |  |                         |   |                           |  | Depreciable |   |   |  |                   |   | Depreciable
|Candlewood Hotels           |  | Location       |  | Encumbrances |  | Land |   | Property |  | Land |   | Property
|                            |  |                |  |              |  |      |   |          |  |      |   |         
|Wichita                     |  | Wichita        |  | KS           |  |      | $ |         |  |      | $ |         |  |                         | $ |                          |  |             | $ |  |  |                   | $ | 367         | 
|Omaha                       |  | Omaha          |  | NE           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 272         | 
|Denver - Tech Center        |  | Denver         |  | CO           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 283         | 
|Louisville                  |  | Louisville     |  | KY           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 168         | 
|Cincinnati-Blue Ash         |  | Blue Ash       |  | OH           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 145         | 
|Birmingham                  |  | Birmingham     |  | AL           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 119         | 
|Kansas City                 |  | Overland Park  |  | KS           |  |      |   | 3,932    |  |      |   | 542      |  |                         |   | 5,366                     |  |             |   |  |  |                   |   | 118         | 
|Norfolk - Hampton           |  | Hampton        |  | VA           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 167         | 
|Wichita - Airport           |  | Wichita        |  | KS           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 94          | 
|Charlotte - Coliseum        |  | Charlotte      |  | NC           |  |      |   | 798      |  |      |   | 403      |  |                         |   | 3,801                     |  |             |   |  |  |                   |   | 74          | 
|Detroit - Southfield        |  | Southfield     |  | MI           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 107         | 
|Raleigh-Cary                |  | Raleigh        |  | NC           |  |      |   | 2,489    |  |      |   | 578      |  |                         |   | 5,232                     |  |             |   |  |  |                   |   | 86          | 
|Philadelphia - Willow Grove |  | Willow Grove   |  | PA           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 117         | 
|Houston - Clear Lake        |  | Clear Lake     |  | TX           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 108         | 
|Knoxville                   |  | Knoxville      |  | TN           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 15          | 
|Phoenix                     |  | Phoenix        |  | AZ           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 153         | 
|Salt Lake City - Airport    |  | Salt Lake City |  | UT           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 170         | 
|Salt Lake City - Ft. Union  |  | Ft. Union      |  | UT           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 123         | 
|Houston - Loop Central      |  | Houston        |  | TX           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 53          | 
|Houston - Town & Country    |  | Houston        |  | TX           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 184         | 
|Irvine East - Lake Forest   |  | Irvine East    |  | CA           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 107         | 
|Phoenix-Tempe               |  | Tempe          |  | AZ           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 134         | 
|Detroit - Auburn Hills      |  | Auburn Hills   |  | MI           |  |      |   | 4,535    |  |      |   | 1,205    |  |                         |   | 6,217                     |  |             |   |  |  |                   |   | 86          | 
|Jacksonville                |  | Jacksonville   |  | FL           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 290         | 
|Huntsville                  |  | Huntsville     |  | AL           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 106         | 
|Dallas - Fort Worth         |  | Fossil Creek   |  | TX           |  |      |   | 2,379    |  |      |   | 592      |  |                         |   | 4,645                     |  |             |   |  |  |                   |   | 152         | 
|Detroit - Troy              |  | Troy           |  | MI           |  |      |   | 8,295    |  |      |   | 1,003    |  |                         |   | 6,257                     |  |             |   |  |  |                   |   | 118         | 
|Miami - Airport             |  | Miami          |  | FL           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 24          | 
|Detroit - Warren            |  | Warren         |  | MI           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 108         | 
|Pittsburgh-Airport          |  | Pittsburgh     |  | PA           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 98          | 
|Des Moines                  |  | Des Moines     |  | IA           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 94          | 
|Irving - Las Colinas        |  | Las Colinas    |  | TX           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 111         | 
|Chicago - Libertyville      |  | Libertyville   |  | IL           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 11          | 
|Austin - Northwest          |  | Austin         |  | TX           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 142         | 
|Somerset                    |  | Somerset       |  | NJ           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 84          | 
|Charlotte-University        |  | Charlotte      |  | NC           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 105         | 
|Dallas - Arlington          |  | Arlington      |  | TX           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 46          | 
|Irvine - Spectrum           |  | Irvine         |  | CA           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 8           | 
|Albuquerque                 |  | Albuquerque    |  | NM           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 122         | 
|Nashville - Brentwood       |  | Brentwood      |  | TN           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 106         | 
|Houston - Westchase         |  | Westchase      |  | TX           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 163         | 
|Dallas - Galleria           |  | Dallas         |  | TX           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 25          | 
|Dallas - Plano              |  | Plano          |  | TX           |  |      |   | 3,697    |  |      |   | 1,518    |  |                         |   | 6,060                     |  |             |   |  |  |                   |   | 101         | 
|Denver - Lakewood           |  | Denver         |  | CO           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 107         | 
|Boston - Braintree          |  | Boston         |  | MA           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 137         | 
|Detroit - Ann Arbor         |  | Ann Arbor      |  | MI           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 20          | 
|Orlando - Altamonte Springs |  | Orlando        |  | FL           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 120         | 
|Greensboro                  |  | Greensboro     |  | NC           |  |      |   | 3,319    |  |      |   | 1,004    |  |                         |   | 5,524                     |  |             |   |  |  |                   |   | 91          | 
|Dallas - North / Richardson |  | Dallas         |  | TX           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 13          | 
|Anaheim - South             |  | Anaheim        |  | CA           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 18          | 
|Clearwater - St. Petersburg |  | St. Petersburg |  | FL           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 159         | 
|Baltimore - Airport         |  | Baltimore      |  | MD           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 92          | 
|Chicago - Schaumburg        |  | Schaumburg     |  | IL           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 21          | 
|Chicago - Naperville        |  | Naperville     |  | IL           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 23          | 
|Chicago - Waukegan          |  | Waukegan       |  | IL           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 18          | 
|St. Louis - Earth City      |  | St. Louis      |  | MO           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 24          | 
|Philadelphia - Mt. Laurel   |  | Mt. Laurel     |  | NJ           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 11          | 
|Minneapolis                 |  | Minneapolis    |  | MN           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 90          | 
|Austin - South              |  | Austin         |  | TX           |  |      |   |         |  |      |   |         |  |                         |   |                          |  |             |   |  |  |                   |   | 146         | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                            |  |                                 |       |          |  |             |       |              |  |              |       |             |  |         |        |         |  |        |  |        |  |  |  | 
|--------------------------- |  | ------------------------------- | ----- | -------- |  | ----------- | ----- | ------------ |  | ------------ | ----- | ----------- |  | ------- | ------ | ------- |  | ------ |  | ------ |  |  |  | 
|                            |  | Gross Amount Carried            |       |          |  |             |       |              |  |              |       |             |  |        
|                            |  | at Close of Period 12/31/02 (4) |       |          |  |             |       |              |  |              |       |             |  |        
|                            |  |                                 |       | (2)      |  | (3)         |       |              |  |             
|(1)                         |  |                                 |       |          |  | Depreciable |       |              |  |              |       | Accumulated |  | Date of |        | Date of
|Candlewood Hotels           |  | Land                            |       | Property |  | Total       |       | Depreciation |  | Construction |       | Acquisition
|                            |  |                                 |       |          |  |             |       |              |  |              |       |            
|Wichita                     |  | $                               |      |          |  |             | 367   |              |  | $            | 367   |             |  | $       | (58    | )       |  | May-96 |  | Apr-95
|Omaha                       |  |                                 |      |          |  |             | 272   |              |  |              | 272   |             |  |         | (37    | )       |  | Apr-97 |  | May-96
|Denver - Tech Center        |  |                                 |      |          |  |             | 283   |              |  |              | 283   |             |  |         | (35    | )       |  | Apr-97 |  | Jun-96
|Louisville                  |  |                                 |      |          |  |             | 168   |              |  |              | 168   |             |  |         | (45    | )       |  | Jun-97 |  | Sep-96
|Cincinnati-Blue Ash         |  |                                 |      |          |  |             | 145   |              |  |              | 145   |             |  |         | (34    | )       |  | Jun-97 |  | Sep-96
|Birmingham                  |  |                                 |      |          |  |             | 119   |              |  |              | 119   |             |  |         | (29    | )       |  | Oct-97 |  | Dec-96
|Kansas City                 |  |                                 | 542   |          |  |             | 5,484 |              |  |              | 6,025 |             |  |         | (1,070 | )       |  | Oct-97 |  | Dec-96
|Norfolk - Hampton           |  |                                 |      |          |  |             | 167   |              |  |              | 167   |             |  |         | (31    | )       |  | Oct-97 |  | Dec-96
|Wichita - Airport           |  |                                 |      |          |  |             | 94    |              |  |              | 94    |             |  |         | (29    | )       |  | Nov-97 |  | Feb-97
|Charlotte - Coliseum        |  |                                 | 403   |          |  |             | 3,875 |              |  |              | 4,278 |             |  |         | (763   | )       |  | Dec-97 |  | Feb-97
|Detroit - Southfield        |  |                                 |      |          |  |             | 107   |              |  |              | 107   |             |  |         | (24    | )       |  | Feb-98 |  | Feb-97
|Raleigh-Cary                |  |                                 | 578   |          |  |             | 5,318 |              |  |              | 5,895 |             |  |         | (875   | )       |  | Apr-98 |  | Feb-97
|Philadelphia - Willow Grove |  |                                 |      |          |  |             | 117   |              |  |              | 117   |             |  |         | (33    | )       |  | Nov-97 |  | Mar-97
|Houston - Clear Lake        |  |                                 |      |          |  |             | 108   |              |  |              | 108   |             |  |         | (29    | )       |  | Dec-97 |  | Mar-97
|Knoxville                   |  |                                 |      |          |  |             | 15    |              |  |              | 15    |             |  |         | (0     | )       |  | Jan-98 |  | Mar-97
|Phoenix                     |  |                                 |      |          |  |             | 153   |              |  |              | 153   |             |  |         | (41    | )       |  | Jan-98 |  | Mar-97
|Salt Lake City - Airport    |  |                                 |      |          |  |             | 170   |              |  |              | 170   |             |  |         | (41    | )       |  | Jan-98 |  | Mar-97
|Salt Lake City - Ft. Union  |  |                                 |      |          |  |             | 123   |              |  |              | 123   |             |  |         | (29    | )       |  | Jan-98 |  | Mar-97
|Houston - Loop Central      |  |                                 |      |          |  |             | 53    |              |  |              | 53    |             |  |         | (1     | )       |  | Mar-98 |  | Mar-97
|Houston - Town & Country    |  |                                 |      |          |  |             | 184   |              |  |              | 184   |             |  |         | (37    | )       |  | Apr-98 |  | Mar-97
|Irvine East - Lake Forest   |  |                                 |      |          |  |             | 107   |              |  |              | 107   |             |  |         | (32    | )       |  | Nov-97 |  | Apr-97
|Phoenix-Tempe               |  |                                 |      |          |  |             | 134   |              |  |              | 134   |             |  |         | (29    | )       |  | Mar-98 |  | May-97
|Detroit - Auburn Hills      |  |                                 | 1,205 |          |  |             | 6,303 |              |  |              | 7,508 |             |  |         | (1,005 | )       |  | May-98 |  | May-97
|Jacksonville                |  |                                 |      |          |  |             | 290   |              |  |              | 290   |             |  |         | (42    | )       |  | Feb-98 |  | Jun-97
|Huntsville                  |  |                                 |      |          |  |             | 106   |              |  |              | 106   |             |  |         | (26    | )       |  | Feb-98 |  | Jun-97
|Dallas - Fort Worth         |  |                                 | 592   |          |  |             | 4,797 |              |  |              | 5,389 |             |  |         | (884   | )       |  | Mar-98 |  | Jun-97
|Detroit - Troy              |  |                                 | 1,003 |          |  |             | 6,374 |              |  |              | 7,377 |             |  |         | (1,026 | )       |  | Jun-98 |  | Jun-97
|Miami - Airport             |  |                                 |      |          |  |             | 24    |              |  |              | 24    |             |  |         | (0     | )       |  | Aug-99 |  | Aug-97
|Detroit - Warren            |  |                                 |      |          |  |             | 108   |              |  |              | 108   |             |  |         | (29    | )       |  | Apr-98 |  | Sep-97
|Pittsburgh-Airport          |  |                                 |      |          |  |             | 98    |              |  |              | 98    |             |  |         | (25    | )       |  | Apr-98 |  | Sep-97
|Des Moines                  |  |                                 |      |          |  |             | 94    |              |  |              | 94    |             |  |         | (25    | )       |  | May-98 |  | Sep-97
|Irving - Las Colinas        |  |                                 |      |          |  |             | 111   |              |  |              | 111   |             |  |         | (26    | )       |  | Jun-98 |  | Sep-97
|Chicago - Libertyville      |  |                                 |      |          |  |             | 11    |              |  |              | 11    |             |  |         | (0     | )       |  | Jun-98 |  | Sep-97
|Austin - Northwest          |  |                                 |      |          |  |             | 142   |              |  |              | 142   |             |  |         | (34    | )       |  | Jul-98 |  | Sep-97
|Somerset                    |  |                                 |      |          |  |             | 84    |              |  |              | 84    |             |  |         | (23    | )       |  | Oct-98 |  | Sep-97
|Charlotte-University        |  |                                 |      |          |  |             | 105   |              |  |              | 105   |             |  |         | (32    | )       |  | Jul-98 |  | Oct-97
|Dallas - Arlington          |  |                                 |      |          |  |             | 46    |              |  |              | 46    |             |  |         | (2     | )       |  | Aug-98 |  | Oct-97
|Irvine - Spectrum           |  |                                 |      |          |  |             | 8     |              |  |              | 8     |             |  |         |       |         |  | Sep-98 |  | Dec-97
|Albuquerque                 |  |                                 |      |          |  |             | 122   |              |  |              | 122   |             |  |         | (28    | )       |  | Sep-98 |  | Dec-97
|Nashville - Brentwood       |  |                                 |      |          |  |             | 106   |              |  |              | 106   |             |  |         | (23    | )       |  | Oct-98 |  | Dec-97
|Houston - Westchase         |  |                                 |      |          |  |             | 163   |              |  |              | 163   |             |  |         | (31    | )       |  | Oct-98 |  | Dec-97
|Dallas - Galleria           |  |                                 |      |          |  |             | 25    |              |  |              | 25    |             |  |         | (1     | )       |  | Oct-98 |  | Dec-97
|Dallas - Plano              |  |                                 | 1,518 |          |  |             | 6,160 |              |  |              | 7,678 |             |  |         | (965   | )       |  | Oct-98 |  | Jan-98
|Denver - Lakewood           |  |                                 |      |          |  |             | 107   |              |  |              | 107   |             |  |         | (25    | )       |  | Nov-98 |  | Jan-98
|Boston - Braintree          |  |                                 |      |          |  |             | 137   |              |  |              | 137   |             |  |         | (31    | )       |  | Nov-98 |  | Jan-98
|Detroit - Ann Arbor         |  |                                 |      |          |  |             | 20    |              |  |              | 20    |             |  |         | (1     | )       |  | Nov-98 |  | Feb-98
|Orlando - Altamonte Springs |  |                                 |      |          |  |             | 120   |              |  |              | 120   |             |  |         | (1     | )       |  | Nov-98 |  | Feb-98
|Greensboro                  |  |                                 | 1,004 |          |  |             | 5,615 |              |  |              | 6,619 |             |  |         | (868   | )       |  | Dec-98 |  | Feb-98
|Dallas - North / Richardson |  |                                 |      |          |  |             | 13    |              |  |              | 13    |             |  |         | (0     | )       |  | Jan-99 |  | Feb-98
|Anaheim - South             |  |                                 |      |          |  |             | 18    |              |  |              | 18    |             |  |         | (0     | )       |  | Sep-98 |  | Mar-98
|Clearwater - St. Petersburg |  |                                 |      |          |  |             | 159   |              |  |              | 159   |             |  |         | (0     | )       |  | Dec-98 |  | Mar-98
|Baltimore - Airport         |  |                                 |      |          |  |             | 92    |              |  |              | 92    |             |  |         | (25    | )       |  | Dec-98 |  | Mar-98
|Chicago - Schaumburg        |  |                                 |      |          |  |             | 21    |              |  |              | 21    |             |  |         | (0     | )       |  | Feb-99 |  | Mar-98
|Chicago - Naperville        |  |                                 |      |          |  |             | 23    |              |  |              | 23    |             |  |         | (0     | )       |  | Feb-99 |  | Mar-98
|Chicago - Waukegan          |  |                                 |      |          |  |             | 18    |              |  |              | 18    |             |  |         | (0     | )       |  | Dec-98 |  | Apr-98
|St. Louis - Earth City      |  |                                 |      |          |  |             | 24    |              |  |              | 24    |             |  |         | (1     | )       |  | Mar-99 |  | Apr-98
|Philadelphia - Mt. Laurel   |  |                                 |      |          |  |             | 11    |              |  |              | 11    |             |  |         | (0     | )       |  | Jun-99 |  | Apr-98
|Minneapolis                 |  |                                 |      |          |  |             | 90    |              |  |              | 90    |             |  |         | (24    | )       |  | Nov-98 |  | May-98
|Austin - South              |  |                                 |      |          |  |             | 146   |              |  |              | 146   |             |  |         | (28    | )       |  | Dec-98 |  | May-98





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##### Table of Contents



SCHEDULE III
Candlewood Hotel Company, Inc.
Real Estate and Accumulated Depreciation
December 31, 2002
(in thousands)

|                          |  |                 |  |              |  |      |  |          |  |      |        |          |  |                         |        |                           |  |             |        |   |  |                   |   |             |  |   |       | 
|------------------------- |  | --------------- |  | ------------ |  | ---- |  | -------- |  | ---- | ------ | -------- |  | ----------------------- | ------ | ------------------------- |  | ----------- | ------ | - |  | ----------------- | - | ----------- |  | - | ----- | 
|                          |  |                 |  |              |  |      |  |          |  |      |        |          |  |                         |        |                           |  |             |        |   |  | Costs Capitalized
|                          |  |                 |  |              |  |      |  |          |  |      |        |          |  | Initial Cost to Company |        | Subsequent to Acquisition
|                          |  |                 |  |              |  |      |  |          |  |      |        |          |  |                         |        |                          
|(1)                       |  |                 |  |              |  |      |  |          |  |      |        |          |  |                         |        |                           |  | Depreciable |        |   |  |                   |   | Depreciable
|Candlewood Hotels         |  | Location        |  | Encumbrances |  | Land |  | Property |  | Land |        | Property
|                          |  |                 |  |              |  |      |  |          |  |      |        |         
|Atlanta - Gwinnett Place  |  | Atlanta         |  | GA           |  |      |  |         |  |      |        |         |  |                         |        |                          |  |             |        |  |  |                   |   | 8           | 
|Columbus - East           |  | Columbus        |  | OH           |  |      |  |         |  |      |        |         |  |                         |        |                          |  |             |        |  |  |                   |   | 19          | 
|Chicago - Hoffman Estates |  | Hoffman Estates |  | IL           |  |      |  | 2,996    |  |      |        | 1,413    |  |                         |        | 7,276                     |  |             |        |  |  |                   |   | 63          | 
|Cleveland - North Olmsted |  | Cleveland       |  | OH           |  |      |  |         |  |      |        |         |  |                         |        |                          |  |             |        |  |  |                   |   | 19          | 
|Oklahoma City             |  | Oklahoma City   |  | OK           |  |      |  |         |  |      |        |         |  |                         |        |                          |  |             |        |  |  |                   |   | 8           | 
|Chicago - OHare Airport  |  | Schiller Park   |  | IL           |  |      |  |         |  |      |        |         |  |                         |        |                          |  |             |        |  |  |                   |   | 89          | 
|Jersey City               |  | Jersey City     |  | NJ           |  |      |  | 22,000   |  |      |        | 3,407    |  |                         |        | 23,130                    |  |             |        |  |  |                   |   | 15          | 
|Las Vegas                 |  | Las Vegas       |  | NV           |  |      |  |         |  |      |        |         |  |                         |        |                          |  |             |        |  |  |                   |   | 40          | 
|San Antonio               |  | San Antonio     |  | TX           |  |      |  | 4,490    |  |      |        | 531      |  |                         |        | 4,081                     |  |             |        |  |  |                   |   | 34          | 
|Corporate                 |  |                 |  |              |  |      |  |          |  |      |       |          |  |                         |       |                           |  |             | 1,793  |   |  |                   |  |             |  |   | 2,492 | 
|                          |  |                 |  |              |  |      |  |          |  |      |        |          |  |                         |        |                           |  |             |        |   |  |                   |   |             |  |   |       | 
|                          |  |                 |  |              |  |      |  |          |  | $    | 58,932 |          |  | $                       | 12,196 |                           |  | $           | 79,381 |   |  | $                 |  |             |  | $ | 9,143 | 
|                          |  |                 |  |              |  |      |  |          |  |      |        |          |  |                         |        |                           |  |             |        |   |  |                   |   |             |  |   |       | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                          |  |                                 |        |          |  |             |        |              |  |              |         |             |  |         |         |         |  |        |  |        |  |  |  | 
|------------------------- |  | ------------------------------- | ------ | -------- |  | ----------- | ------ | ------------ |  | ------------ | ------- | ----------- |  | ------- | ------- | ------- |  | ------ |  | ------ |  |  |  | 
|                          |  | Gross Amount Carried            |        |          |  |             |        |              |  |              |         |             |  |        
|                          |  | at Close of Period 12/31/02 (4) |        |          |  |             |        |              |  |              |         |             |  |        
|                          |  |                                 |        | (2)      |  | (3)         |        |              |  |             
|(1)                       |  |                                 |        |          |  | Depreciable |        |              |  |              |         | Accumulated |  | Date of |         | Date of
|Candlewood Hotels         |  | Land                            |        | Property |  | Total       |        | Depreciation |  | Construction |         | Acquisition
|                          |  |                                 |        |          |  |             |        |              |  |              |         |            
|Atlanta - Gwinnett Place  |  |                                 |       |          |  |             | 8      |              |  |              | 8       |             |  |         |        |         |  | Feb-99 |  | May-98
|Columbus - East           |  |                                 |       |          |  |             | 19     |              |  |              | 19      |             |  |         | (0      | )       |  | May-99 |  | May-98
|Chicago - Hoffman Estates |  |                                 | 1,413  |          |  |             | 7,339  |              |  |              | 8,752   |             |  |         | (990    | )       |  | Apr-99 |  | Jul-98
|Cleveland - North Olmsted |  |                                 |       |          |  |             | 19     |              |  |              | 19      |             |  |         | (0      | )       |  | Apr-99 |  | Jul-98
|Oklahoma City             |  |                                 |       |          |  |             | 8      |              |  |              | 8       |             |  |         |        |         |  | Jun-99 |  | Jul-98
|Chicago - OHare Airport  |  |                                 |       |          |  |             | 89     |              |  |              | 89      |             |  |         | (2      | )       |  | Nov-99 |  | Jul-98
|Jersey City               |  |                                 | 3,407  |          |  |             | 23,145 |              |  |              | 26,552  |             |  |         | (1,189  | )       |  | Apr-01 |  | Sep-98
|Las Vegas                 |  |                                 |       |          |  |             | 40     |              |  |              | 40      |             |  |         | (2      | )       |  | Apr-00 |  | Jan-99
|San Antonio               |  |                                 | 531    |          |  |             | 4,115  |              |  |              | 4,646   |             |  |         | (163    | )       |  | Apr-00 |  | Jan-99
|Corporate                 |  |                                 |       |          |  |             | 4,285  |              |  |              | 4,285   |             |  |         | (2,891  | )       |  |        |  |        |  |  |  | 
|                          |  |                                 |        |          |  |             |        |              |  |              |         |             |  |         |         |         |  |        |  |        |  |  |  | 
|                          |  | $                               | 12,196 |          |  | $           | 88,524 |              |  | $            | 100,720 |             |  | $       | (13,771 | )       |  |        |  |        |  |  |  | 
|                          |  |                                 |        |          |  |             |        |              |  |              |         |             |  |         |         |         |  |        |  |        |  |  |  | 

NOTES:

NA - Not applicable




|(1) |  | This schedule includes all hotels operated at December 31, 2002, including company-owned and leased hotels.                                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | For depreciable property, the Company uses a 40-year estimated life for buildings and components, ten years for furniture and fixtures, and three to five years on computer equipment and software.
|   
|(3) |  | Dates of construction represents the date the hotel became fully operational. This date is based on the completed project construction date.                                                       
|   
|(4) |  | There are no significant differences in the aggregate costs for federal income tax purposes.                                                                                                       

The changes in total real estate and depreciable property for the years ended December 31, 2002, 2001 and 2000 were as follows:

|                           |  |      |          |      |  |      |         |   |  |   |         | 
|-------------------------- |  | ---- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | 
|                           |  | 2002 |          | 2001 |  | 2000
|                           |  |      |          |      |  |     
|Balance, beginning of year |  | $    | 263,160  |      |  | $    | 297,370 |   |  | $ | 279,729 | 
|Acquisitions               |  |      | 6,342    |      |  |      | 5,102   |   |  |   | 17,641  | 
|Cost of hotels sold        |  |      | (168,782 | )    |  |      | (39,312 | ) |  |   |        | 
|                           |  |      |          |      |  |      |         |   |  |   |         | 
|Balance, end of year       |  | $    | 100,720  |      |  | $    | 263,160 |   |  | $ | 297,370 | 
|                           |  |      |          |      |  |      |         |   |  |   |         | 

The changes in accumulated depreciation for the years ended December 31, 2002, 2001 and 2000 were as follows:

|                           |  |      |         |      |  |      |        |   |  |   |        |  
|-------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                           |  | 2002 |         | 2001 |  | 2000
|                           |  |      |         |      |  |     
|Balance, beginning of year |  | $    | 24,878  |      |  | $    | 16,977 |   |  | $ | 8,582  |  
|Depreciation expense       |  |      | 5,303   |      |  |      | 9,189  |   |  |   | 8,418  |  
|Dispositions and other     |  |      | (16,410 | )    |  |      | (1,288 | ) |  |   | (23    | )
|                           |  |      |         |      |  |      |        |   |  |   |        |  
|Balance, end of year       |  | $    | 13,771  |      |  | $    | 24,878 |   |  | $ | 16,977 |  
|                           |  |      |         |      |  |      |        |   |  |   |        |  





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##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                         
|No.     |  | Description                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                         
|3.1     |  | Restated Certificate of Incorporation of Candlewood Hotel Company, Inc. (1)                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                         
|3.2     |  | Amended and Restated Bylaws of Candlewood Hotel Company, Inc. (11)                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                         
|3.3     |  | Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of Series A Cumulative Convertible Preferred Stock of Candlewood Hotel Company,
Inc. (5)                                            
|        |  |                                                                                                                                                                                                                                                                                                                         
|3.4     |  | Certificate of Amendment of Certificate of Designations of Series A Preferred Stock. (9)                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                         
|3.5     |  | Certificate of Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of Series B Cumulative Convertible Preferred Stock of Candlewood Hotel Company,
Inc. (9)                                            
|        |  |                                                                                                                                                                                                                                                                                                                         
|4.1     |  | Specimen Certificate of Common Stock. (2)                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                         
|4.2     |  | Form of Warrant. (9)                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                         
|4.3     |  | Amended and Restated Stockholders Agreement dated as of July 10, 1998. (9)                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.1    |  | Form of Indemnification Agreement for Executive Officers and Directors. (1)                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.2    |  | Indemnification Agreement Schedule. (10)                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.3    |  | 1996 Equity Participation Plan and Form of Stock Option Agreements. (3)                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.4    |  | First Amendment to the 1996 Equity Participation Plan effective as of May 18, 1998. (10)                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.5    |  | Employment Agreement between Candlewood Hotel Company, Inc. and Jack P. DeBoer dated as
of September 1, 1996. (1)                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.6    |  | Credit Facility Agreement between Candlewood Hotel Company, Inc. and Doubletree
Corporation dated as of November 11, 1996. (4)                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.7    |  | Subordinated Promissory Note from Candlewood Hotel Company, Inc. to Doubletree
Corporation dated as of November 11, 1996. (4)                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.8    |  | Series A Cumulative Convertible Preferred Stock Purchase Agreement dated as of August
27, 1997. (5)                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.9    |  | Amended and Restated Registration Rights Agreement dated as of July 10, 1998. (9)                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.10   |  | Purchase and Sale Agreement, dated as of November 19, 1997, by and among Candlewood
Hotel Company, Inc. and certain of its affiliates, as sellers, and HPT, as purchaser.
(6)                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.11   |  | First Amendment to Purchase and Sale Agreement and Agreement to Lease and Fourth
Amendment to Lease Agreement and Incidental Documents, dated as of January 7, 1999, by
and among Candlewood Hotel Company, Inc., Candlewood Leasing No. 1, Inc., HPT and HPT
CW, and seventeen entities which are parties thereto. (10)
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.12   |  | Agreement to Lease, dated as of November 19, 1997, by and between Candlewood Hotel
Company, Inc. and HPT. (6)                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.13   |  | Purchase and Sale Agreement, dated as of May 14, 1998, by and among Candlewood Hotel
Company, Inc. and certain of its affiliates, as sellers, and HPT, as purchaser. (7)                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.14   |  | First Amendment to Purchase and Sale Agreement, Agreement to Lease, Lease Agreement and
Incidental Documents, dated as of June 18, 1998, by and among Candlewood Hotel Company,
Inc., Candlewood Leasing No. 2, Inc., HPT and HPT CW II. (10)                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.15   |  | Second Amendment to Purchase and Sale Agreement, Agreement to Lease, Lease Agreement and
Incidental Documents, dated as of July 31, 1998, by and among Candlewood Hotel Company,
Inc., Candlewood Leasing No. 2, Inc., HPT and HPT CW II. (8)                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.16   |  | Third Amendment to Purchase and Sale Agreement and Agreement to Lease and Sixth
Amendment to Lease Agreement and Incidental Documents, dated as of December 23, 1998, by
and among Candlewood Hotel Company, Inc., Candlewood Leasing No. 2, Inc., HPT, HPT CW II
and seventeen entities which are parties thereto. (10)
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.17   |  | Agreement to Lease, dated as of May 14, 1998, by and between Candlewood Hotel Company,
Inc. and HPT. (7)                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.18   |  | Securities Purchase Agreement dated as of September 30, 1998. (9)                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                         
|10.19   |  | Lease Agreement dated April 30, 1998 by and between Candlewood Hotel Company, Inc. and
Vantage Point Properties, Inc. (10)                                                                                                                                                                                              

E-1



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##### Table of Contents



|        |  |                                                                                                                                                                                                               
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                               
|No.     |  | Description                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                               
|10.20   |  | Third Amendment to Agreement to Lease by and between Candlewood Hotel Company, Inc. and
HPT. (10)                                                                                                             
|        |  |                                                                                                                                                                                                               
|10.21   |  | Purchase and Sale Agreement by and among Candlewood Hotel Company, Inc., Candlewood
Philadelphia-Mt. Laurel, NJ, LLC, Candlewood Las Vegas, NV, LLC and HPT. (11)                                             
|        |  |                                                                                                                                                                                                               
|10.22   |  | Purchase and Sale Agreement, dated as of April 11, 2002, by and among Candlewood Hotel
Company, Inc. and certain of its affiliates, as sellers, and Hospitality Properties
Trust, as purchaser. (12)          
|        |  |                                                                                                                                                                                                               
|10.23   |  | Second Amended and Restated Lease Agreement, dated as of April 11, 2002, by and between
HPT CW Properties Trust, as landlord, and Candlewood Leasing No. 1, Inc., as tenant.
(12)                             
|        |  |                                                                                                                                                                                                               
|10.24   |  | Second Amended and Restated Assignment and Security Agreement, dated as of April 11,
2002, by and between Candlewood Leasing No. 1, Inc., assignor, and HPT CW Properties
Trust, assignee. (12)               
|        |  |                                                                                                                                                                                                               
|10.25   |  | Fourth Amendment to Agreement to Lease, dated as of April 11, 2002, by and between
Hospitality Properties Trust and Candlewood Hotel Company, Inc. (12)                                                       
|        |  |                                                                                                                                                                                                               
|10.26   |  | Second Amended and Restated Guaranty Agreement, dated as of April 11, 2002, by
Candlewood Hotel Company, Inc., as guarantor, for the benefit of HPT CW Properties Trust
and Hospitality Properties Trust. (12)
|        |  |                                                                                                                                                                                                               
|10.27   |  | Second Amended and Restated Security Agreement, dated as of April 11, 2002, by and
between Candlewood Leasing No. 1, Inc., as tenant, and HPT CW Properties Trust, as
secured party. (12)                     
|        |  |                                                                                                                                                                                                               
|10.28   |  | Second Amended and Restated Stock Pledge Agreement, dated as of April 11, 2002, by
Candlewood Hotel Company, Inc., as pledgor, for the benefit of HPT CW Properties Trust ,
as secured party. (12)            
|        |  |                                                                                                                                                                                                               
|10.29   |  | Form of Letter Agreement between Candlewood Hotel Company, Inc. and certain executive
officers and schedule related thereto. (13)                                                                             
|        |  |                                                                                                                                                                                                               
|10.30   |  | Limited Liability Company Agreement of Candlewood Hotel Company Fund I, LLC, dated as of
June 1, 1999, between Candlewood Ventures I, LLC and BCIA CW Member, LLC.(14)                                        
|        |  |                                                                                                                                                                                                               
|10.31   |  | Guaranty of Candlewood Hotel Company, Inc., dated as of June 1, 1999, in favor of
Candlewood Hotel Company Fund I, LLC.(14)                                                                                   
|        |  |                                                                                                                                                                                                               
|10.32   |  | Loan Agreement, dated as of June 1, 1999, between Candlewood Hotel Company Fund I, LLC
and Boston Capital Institutional Advisors LLC.(14)                                                                     
|        |  |                                                                                                                                                                                                               
|10.33   |  | Promissory Note of Candlewood Hotel Company Fund I, LLC, dated as of June 1, 1999, in
favor of Boston Capital Institutional Advisors LLC.(14)                                                                 
|        |  |                                                                                                                                                                                                               
|10.34   |  | Key Principal Recourse Agreement, dated as of June 1, 1999, by Candlewood Hotel Company,
Inc. for the benefit of Boston Capital Institutional Advisors LLC.(14)                                               
|        |  |                                                                                                                                                                                                               
|*10.35  |  | Senior Executive Transaction Bonus Plan.                                                                                                                                                                      
|        |  |                                                                                                                                                                                                               
|10.36   |  | Waiver Letter dated as of March 27, 2003 by and between
Hospitality Properties Trust, Candlewood Hotel Company, Inc. and
Candlewood Leasing No. 1, Inc.                                                       
|        |  |                                                                                                                                                                                                               
|10.37   |  | Loan Agreement dated April 12, 2002 by and among Candlewood
Portfolio 1, LLC, certain other Candlewood entities and GMAC Commercial Mortgage Corporation.                                                     
|        |  |                                                                                                                                                                                                               
|10.38   |  | Promissory Note from Candlewood Portfolio 1, LLC and certain
other Candlewood entities to GMAC Commercial Mortgage Corporation
dated as of April 12, 2002.                                                    
|        |  |                                                                                                                                                                                                               
|11.1    |  | Statement re Computation of Per Share Earnings - not applicable.                                                                                                                                              
|        |  |                                                                                                                                                                                                               
|12.1    |  | Statement re Computation of Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends.                                                                                                        
|        |  |                                                                                                                                                                                                               
|23.1    |  | Consent of Independent Auditors.                                                                                                                                                                              



---

|*   |  | Compensation Plan or Agreement                                                                                                                                                   
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | Incorporated by reference pursuant to Rule 12b-32 from Candlewood Hotel
Company, Inc.s Registration Statement on Form S-1 (Registration No.
333-12021) filed September 13, 1996.
|   
|(2) |  | Incorporated by reference pursuant to Rule 12b-32 from Candlewood
Hotel Company, Inc.s Registration Statement on Form S-1/A
(Registration No. 333-12021) filed October 17, 1996.
|   
|(3) |  | Incorporated by reference pursuant to Rule 12b-32 from Candlewood
Hotel Company, Inc.s Registration Statement on Form S-1/A
(Registration No. 333-12021) filed October 30, 1996.
|   
|(4) |  | Incorporated by reference from Candlewood Hotel Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.                                                
|   
|(5) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K filed on October 8, 1997.                                                             

E-2



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##### Table of Contents



|     |  |                                                                                                                                        
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|    
|(6)  |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K filed on January 7, 1998.                   
|    
|(7)  |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K filed on June 9, 1998.                      
|    
|(8)  |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K/A filed August 6, 1998.                     
|    
|(9)  |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Current
Report on Form 8-K/A filed August 10, 1998.                    
|    
|(10) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
|    
|(11) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Quarterly
Report on Form 10-Q for the period ended September 30, 2001. 
|    
|(12) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s
Current Report on Form 8-K filed on April 26, 2002.                    
|    
|(13) |  | Incorporated by reference from Candlewood Hotel Company, Inc.s Quarterly
Report on Form 10-Q for the period ended June 30, 2002.      
|    
|(14) |  | Incorporated by reference from
Candlewood Hotel Company, Inc.'s Quarterly Report on Form 10-Q
for the period ended September 30, 2002. 

E-3