##### 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, 2004



| ̈ | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
                     to



Commission File Number 000-49748



---



APPLE HOSPITALITY TWO, INC.

(Exact name of registrant as specified in its
charter)



---



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|VIRGINIA                                                       |  | 54-2010305                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|814 E. Main Street, Richmond, Virginia                         |  | 23219                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



(804) 344-8121

(Registrants telephone number, including area code)



---



Securities registered pursuant to Section 12(b) of the act:

None



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

Units (Each Unit is equal to one common share, no par value, and one Series A preferred share)



---



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



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



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



Based upon the price at which the common equity for Apple Hospitality Two, Incs best efforts offering was last sold through June 30, 2004, the aggregate market value of the voting common equity held by non-affiliates of the registrant
on such date was a total of $379,515,519. The Company does not have any non-voting common equity.



On March 1, 2005, there were approximately 40,442,459 common shares outstanding.



Documents Incorporated by Reference



The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference to the
registrants definitive proxy statement for the 2005 annual meeting of shareholders to be held May 12, 2005.



---



---

##### Table of Contents

APPLE HOSPITALITY TWO, INC.



FORM 10-K



INDEX



|           |  |          |  |                                                                                                              |  |       
|---------- |  | -------- |  | ------------------------------------------------------------------------------------------------------------ |  | ------
|           |  |          |  |                                                                                                              |  | Page #
|Part I     |  |          |  |                                                                                                              |  |       
|           |  | Item 1.  |  | Business                                                                                                     |  | 3     
|           |  | Item 2.  |  | Properties                                                                                                   |  | 5     
|           |  | Item 3.  |  | Legal Proceedings                                                                                            |  | 8     
|           |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 8     
|           |  |          | 
|Part II    |  |          |  |                                                                                                              |  |       
|           |  |          | 
|           |  | Item 5.  |  | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 9     
|           |  | Item 6.  |  | Selected Financial Data                                                                                      |  | 11    
|           |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 12    
|           |  | Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 22    
|           |  | Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 23    
|           |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures                        |  | 42    
|           |  | Item 9A. |  | Controls and Procedures                                                                                      |  | 42    
|           |  | Item 9B. |  | Other Information                                                                                            |  | 42    
|           |  |          | 
|Part III   |  |          |  |                                                                                                              |  |       
|           |  |          | 
|           |  | Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 43    
|           |  | Item 11. |  | Executive Compensation                                                                                       |  | 43    
|           |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                                               |  | 43    
|           |  | Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 43    
|           |  | Item 14. |  | Principal Accounting Fees and Services                                                                       |  | 43    
|           |  |          | 
|Part IV    |  |          |  |                                                                                                              |  |       
|           |  |          | 
|           |  | Item 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 44    
|           | 
|Signatures |  | 47      



This Form 10-K
includes references to certain trademarks or servicemarks. Residence Inn® by Marriott trademark is the property of Marriott International, Inc. (Marriott). The Homewood Suites® trademark is the property of Hilton Hotels Corporation (Hilton). For convenience, the applicable trademark or servicemark symbol has been
omitted but will be deemed to be included wherever the above-referenced terms are used.



2



---

##### Table of Contents

PART I



This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the ability of the Company to implement its acquisition strategy and operating strategy; the Companys ability to
manage planned growth; changes in economic cycles and competition within the extended-stay hotel industry. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this Annual Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In
addition, the Companys qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the Companys financial statements
and the notes thereto, as well as the risk factors described in the Companys filings with the Securities and Exchange Commission.



Item 1. Business



Apple Hospitality Two, Inc. (the
Company), a Virginia corporation, was formed on January 17, 2001, with the first investor closing on May 1, 2001. The Company merged with Apple Suites, Inc., structured as a tax-fee merger, on January 31, 2003 and results of Apple Suites
operations are included in the Companys results from February 1, 2003. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated
upon consolidation.



The Company is a real estate investment trust that owns
extended-stay hotels. The REIT Modernization Act, effective January 1, 2001, permits real estate investment trusts (REIT) to establish taxable businesses to conduct certain previously disallowed business activities. The Company has
wholly-owned taxable REIT subsidiaries (collectively, the Lessee), which lease all of the Companys hotels from wholly-owned qualified REIT subsidiaries. The hotels are operated and managed by affiliates of either Marriott or Hilton
under hotel management agreements.



Website
Access



The address of the Companys Internet website is
www.applehospitality.com. The Company makes available through its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.



Growth Strategies



The Companys primary objective is to enhance shareholder value by increasing cash from
operations and cash available for distributions. The Companys focus is on maximizing the internal growth of the Companys portfolio by selecting properties that have strong cash flow growth potential.



The Company seeks to increase operating cash flow and enhance its value through internal
growth and renovations. The Companys internal growth strategy is to utilize its asset management expertise to improve the quality of the Companys hotels by renovating, redeveloping and thereby improving hotel revenue and operational
performance.



3



---

##### Table of Contents

The Company believes that its completed and planned renovation and redevelopment activities will increase revenue per
available room (REVPAR) at the Companys hotels. The Company is committed to fund a percentage of gross revenue per month for certain capital expenditures for periodic replacement or refurbishment of furniture, fixtures and
equipment. The Company has approximately $5.1 million held in escrow for future furniture, fixture and equipment purchases at December 31, 2004. During 2003, the Company began a major renovation program for its hotels to enhance revenue per
available room. This program concluded in the middle of 2004. Total capital expenditures in the program were approximately $56 million and included 26 hotels. The Company will continue to selectively renovate hotels as the return on investment
warrants.



The Company continuously monitors its portfolio and will, where
appropriate, selectively acquire or dispose of properties based on specific market conditions.



Financing



Substantially all of the Companys hotels are encumbered by mortgage debt. The Companys bylaws require board of director approval for debt above certain
levels. Debt levels are reviewed quarterly by the board to ensure reasonableness in relation to the Companys assets. In November 2004, the Company successfully refinanced $125 million of its secured debt, reducing the refinanced debts
fixed interest rate from 8.85% to 6.88% per year.



Industry and Competition



The Company believes that the hotel
industry is highly competitive. Each of the Companys hotels is located in a developed area that includes other hotels and competes for guests primarily with other extended-stay hotels in its immediate vicinity and secondarily with other hotels
in its geographic market. An increase in the number of competitive hotels in a particular area could have a material adverse effect on the occupancy, average daily rate (ADR) and REVPAR of the Companys hotels in that area. The
Company believes that brand recognition, location, price and quality (of both the hotel and the services provided) are the principal competitive factors affecting its hotels. Additionally, general economic conditions in a particular market or
nationally can impact the performance of the hotels.



Hotel Operating Performance



The Company owns 49 Residence Inn by
Marriott hotels, consisting of 5,947 suites, and 17 Homewood Suites by Hilton hotels, consisting of 1,922 suites. Total revenues for these hotels totaled $213.6 million, $195.8 million and $106.2 million for the years ended December 31, 2004, 2003
and 2002, respectively. For those same periods, the hotels achieved average occupancy of 76%, 74% and 78%, ADR of $95, $91 and $92 and REVPAR of $72, $67 and $71, respectively.



Franchise and Management Agreements



Residence Inn Hotels



The Companys Residence Inn hotels are subject to management agreements under which Residence Inn by Marriott, Inc. (the Manager) manages the hotels,
generally for an initial term of 15 to 20 years with renewal terms at the option of the Manager of up to an additional 50 years. The agreements generally provide for payment of base management fees, which are calculated annually as a percentage of
sales, and incentive management fees over a priority return (as defined in the management agreements). Incentive management fees (IMF) are currently payable only if and to the extent there is sufficient cash flow from the hotels after consideration
of qualifying debt service and after consideration to a priority return on investment, including property improvements. Amounts not currently payable are deferred and are payable in future years only if and to the extent there is sufficient cash
flow from future operations or upon sale or refinancing of the hotels after consideration to a priority return to the Company (as defined in the management agreements), which is generally 12%. In the event of early termination of the management
agreements, the Manager will receive additional fees based on the unexpired term and expected future base and incentive management fees. The Company has the option to terminate the management agreements if specified performance thresholds are not
satisfied.



4



---

##### Table of Contents

Homewood Suites Hotels



The Companys 17 Homewood Suites hotels are managed by Promus Hotels, Inc. (Promus), a wholly owned subsidiary of Hilton under the terms of separate
management agreements, as part of the Homewood Suites by Hilton franchise. The initial term is generally 15 years with no option to renew; however, two hotel properties in this portfolio have renewal options of two five year periods each. The
Company has the option to terminate the management agreements if specified performance thresholds are not satisfied.



Promus manages day-to-day operations of the Companys Homewood Suites hotels. Promus charges fees for this function, which are calculated as a percentage of revenue.
Incentive management fees are calculated, for certain properties, on the basis of operating profit of the hotels. Promus also charges a fee, calculated as a percentage of suite revenue, for franchise licenses to operate as a Homewood Suites by
Hilton and to participate in its reservation system.



Related Parties



The Company has significant transactions with
related parties. These transactions cannot be construed to be arms length and the results of the Companys operations could be different if these transactions were conducted with non-related parties.



The Company, through a wholly owned subsidiary, has an advisory agreement with Apple
Hospitality Five Advisors, Inc., (AFA), whereby the Company receives advisory fee revenue equal to 0.1% to 0.25% of total equity contributions received by Apple Hospitality Five, Inc., plus certain reimbursable expenses in exchange for Company
personnel performing advisory and real estate acquisition due diligence for Apple Hospitality Five, Inc. AFA is 100% owned by Glade M. Knight, the Companys Chairman and CEO.



The Company also provides support services to Apple Six Advisors, Inc. (A6A), Apple Hospitality Five Inc., and Apple REIT Six, Inc. A6A
provides day to day advisory and real estate due diligence services to Apple REIT Six, Inc. A6A is 100% owned by Mr. Knight. Each of these companies has agreed to reimburse the Company for its costs in providing these services. Mr. Knight is
Chairman and Chief Executive Officer of Apple Hospitality Five, Inc. and Apple REIT Six, Inc. Additionally, the members of the Companys Board of Directors are the same as the members of the Board of Directors for Apple Hospitality Five, Inc.
and Apple REIT Six, Inc.



Employees



During 2004, all employees involved in the day-to-day operation of the
Companys hotels were employed by the management companies engaged pursuant to the hotel management agreements. At December 31, 2004, the Company had 24 employees.



Environmental Matters



In connection with each of the Companys hotel acquisitions, the Company obtains a Phase I Environmental Report and such additional
environmental reports and surveys as are necessitated by such preliminary report. Based on such reports, the Company is not aware of any environmental situations requiring remediation at its properties, which have not been or are not currently being
remediated as necessary. No material remediation costs have or are expected to occur.



Item 2. Properties



As of December 31, 2004, the
Company owned 49 Residence Inn by Marriott hotels comprised of 5,947 suites and 17 Homewood Suites by Hilton hotels comprised of 1,922 suites for a total of 66 hotels comprised of 7,869 suites. The hotels are located in various states. The following
table includes the location of each hotel, the date of construction, the date acquired, encumbrances, initial acquisition cost, gross carrying value and the number of suites of each hotel.



5



---

##### Table of Contents

SCHEDULE III

Real Estate and Accumulated Depreciation

As of December 31, 2004

(Dollars in thousands)



|                            |  |              |        |              |   |                         |  |                  |        |                 |   |              |  |   |                     |  |              |        |                 |  |             |  |                |  |             |  |    
|--------------------------- |  | ------------ | ------ | ------------ | - | ----------------------- |  | ---------------- | ------ | --------------- | - | ------------ |  | - | ------------------- |  | ------------ | ------ | --------------- |  | ----------- |  | -------------- |  | ----------- |  | ---
|                            |  |              |        | Initial Cost |   | SubsequentlyCapitalized |  |                  |        |                 |   |              |  |   |                     |  |              |        |                
|Description                 |  | Encumbrances |        | Land         |   | Bldg./FF&E              |  | Bldg.Imp. & FF&E |        | TotalGross Cost |   | Acc. Deprec. |  |   | Date ofConstruction |  | DateAcquired |        | DepreciableLife |  | # of Suites
|Akron, Ohio                 |  | $            | 5,460  |              | $ | 597                     |  | $                | 3,665  |                 | $ | 2,347        |  | $ | 6,609               |  | $            | (699   | )               |  | 1987        |  | August 2002    |  | 3  39 yrs. |  | 112
|Arcadia, California         |  |              | 14,850 |              |   | 2,284                   |  |                  | 6,380  |                 |   | 2,121        |  |   | 10,785              |  |              | (908   | )               |  | 1989        |  | August 2002    |  | 3  39 yrs. |  | 120
|Atlanta, Georgia            |  |              | 4,291  |              |   | 1,757                   |  |                  | 10,360 |                 |   | 1,243        |  |   | 13,360              |  |              | (1,279 | )               |  | 1990        |  | September 2001 |  | 3  39 yrs. |  | 126
|Atlanta/Buckhead, Georgia   |  |              | 5,500  |              |   | 4,568                   |  |                  | 9,087  |                 |   | 186          |  |   | 13,841              |  |              | (708   | )               |  | 1997        |  | January 2003   |  | 3  39 yrs. |  | 92 
|Atlanta/Cumberland, Georgia |  |              | 4,758  |              |   | 2,202                   |  |                  | 8,618  |                 |   | 367          |  |   | 11,187              |  |              | (730   | )               |  | 1990        |  | January 2003   |  | 3  39 yrs. |  | 124
|Atlanta/Peachtree, Georgia  |  |              | 2,664  |              |   | 953                     |  |                  | 3,629  |                 |   | 352          |  |   | 4,934               |  |              | (406   | )               |  | 1990        |  | January 2003   |  | 3  39 yrs. |  | 92 
|Bakersfield, California     |  |              | 3,814  |              |   | 1,870                   |  |                  | 7,567  |                 |   | 1,340        |  |   | 10,777              |  |              | (1,035 | )               |  | 1990        |  | September 2001 |  | 3  39 yrs. |  | 114
|Baltimore, Maryland         |  |              | 8,564  |              |   | 1,601                   |  |                  | 15,553 |                 |   | 538          |  |   | 17,692              |  |              | (1,106 | )               |  | 1998        |  | January 2003   |  | 3  39 yrs. |  | 147
|Birmingham, Alabama         |  |              | 5,573  |              |   | 1,227                   |  |                  | 4,349  |                 |   | 2,250        |  |   | 7,826               |  |              | (574   | )               |  | 1986        |  | August 2002    |  | 3  39 yrs. |  | 128
|Boca Raton, Florida         |  |              | 3,750  |              |   | 1,360                   |  |                  | 3,871  |                 |   | 1            |  |   | 5,232               |  |              | (337   | )               |  | 1988        |  | August 2002    |  | 3  39 yrs. |  | 120
|Boston, Massachusetts       |  |              | 6,675  |              |   | 4,707                   |  |                  | 12,730 |                 |   | 1,731        |  |   | 19,168              |  |              | (1,589 | )               |  | 1989        |  | September 2001 |  | 3  39 yrs. |  | 130
|Boston, Massachusetts       |  |              | 4,620  |              |   | 1,193                   |  |                  | 4,774  |                 |   | 2,232        |  |   | 8,199               |  |              | (770   | )               |  | 1989        |  | August 2002    |  | 3  39 yrs. |  | 96 
|Boulder, Colorado           |  |              | 10,208 |              |   | 3,428                   |  |                  | 12,532 |                 |   | 559          |  |   | 16,519              |  |              | (904   | )               |  | 1991        |  | January 2003   |  | 3  39 yrs. |  | 112
|Boulder, Colorado           |  |              | 5,820  |              |   | 1,179                   |  |                  | 8,538  |                 |   | 3,518        |  |   | 13,235              |  |              | (1,406 | )               |  | 1986        |  | March 2002     |  | 3  39 yrs. |  | 128
|Buckhead, Georgia           |  |              | 4,947  |              |   | 3,231                   |  |                  | 4,267  |                 |   | 2,466        |  |   | 9,964               |  |              | (733   | )               |  | 1987        |  | March 2002     |  | 3  39 yrs. |  | 136
|Charlotte, North Carolina   |  |              |       |              |   | 2,397                   |  |                  | 3,910  |                 |   | 1            |  |   | 6,308               |  |              | (325   | )               |  | 1988        |  | August 2002    |  | 3  39 yrs. |  | 91 
|Chesterfield, Missouri      |  |              | 2,716  |              |   | 1,148                   |  |                  | 3,480  |                 |   | 897          |  |   | 5,525               |  |              | (476   | )               |  | 1986        |  | March 2002     |  | 3  39 yrs. |  | 104
|Cincinatti, Ohio            |  |              | 4,768  |              |   | 1,573                   |  |                  | 5,472  |                 |   | 379          |  |   | 7,424               |  |              | (740   | )               |  | 1990        |  | September 2001 |  | 3  39 yrs. |  | 118
|Clearwater, Florida         |  |              | 5,709  |              |   | 2,687                   |  |                  | 8,108  |                 |   | 434          |  |   | 11,229              |  |              | (625   | )               |  | 1998        |  | January 2003   |  | 3  39 yrs. |  | 112
|Clearwater, Florida         |  |              | 3,540  |              |   | 1,759                   |  |                  | 3,266  |                 |   | 1,960        |  |   | 6,985               |  |              | (472   | )               |  | 1986        |  | August 2002    |  | 3  39 yrs. |  | 88 
|Columbia, South Carolina    |  |              | 4,380  |              |   | 475                     |  |                  | 5,732  |                 |   | 2,265        |  |   | 8,472               |  |              | (882   | )               |  | 1988        |  | August 2002    |  | 3  39 yrs. |  | 128
|Columbus North, Ohio        |  |              | 1,698  |              |   | 641                     |  |                  | 3,527  |                 |   | 480          |  |   | 4,648               |  |              | (439   | )               |  | 1985        |  | March 2002     |  | 3  39 yrs. |  | 96 
|Concord, California         |  |              | 6,198  |              |   | 4,937                   |  |                  | 16,804 |                 |   | 1,285        |  |   | 23,026              |  |              | (1,944 | )               |  | 1989        |  | September 2001 |  | 3  39 yrs. |  | 126
|Costa Mesa, California      |  |              | 7,275  |              |   | 3,773                   |  |                  | 6,825  |                 |   | 3,110        |  |   | 13,708              |  |              | (852   | )               |  | 1986        |  | March 2002     |  | 3  39 yrs. |  | 144
|Cumberland, Georgia         |  |              | 2,910  |              |   | 1,938                   |  |                  | 3,622  |                 |   | 508          |  |   | 6,068               |  |              | (490   | )               |  | 1987        |  | March 2002     |  | 3  39 yrs. |  | 130
|Dallas, Texas               |  |              | 5,245  |              |   | 1,397                   |  |                  | 8,271  |                 |   | 446          |  |   | 10,114              |  |              | (1,055 | )               |  | 1989        |  | September 2001 |  | 3  39 yrs. |  | 120
|Dallas/Addison, Texas       |  |              | 5,234  |              |   | 2,059                   |  |                  | 8,511  |                 |   | 398          |  |   | 10,968              |  |              | (703   | )               |  | 1990        |  | January 2003   |  | 3  39 yrs. |  | 120
|Dallas/Las Colinas, Texas   |  |              | 5,424  |              |   | 2,772                   |  |                  | 9,592  |                 |   | 422          |  |   | 12,786              |  |              | (779   | )               |  | 1990        |  | January 2003   |  | 3  39 yrs. |  | 136
|Dallas/Plano, Texas         |  |              | 2,379  |              |   | 521                     |  |                  | 5,219  |                 |   | 347          |  |   | 6,087               |  |              | (521   | )               |  | 1997        |  | January 2003   |  | 3  39 yrs. |  | 99 
|Dayton North, Ohio          |  |              | 1,407  |              |   | 320                     |  |                  | 2,539  |                 |   | 193          |  |   | 3,052               |  |              | (273   | )               |  | 1987        |  | March 2002     |  | 3  39 yrs. |  | 64 
|Dayton South, Ohio          |  |              | 2,959  |              |   | 443                     |  |                  | 4,353  |                 |   | 1,983        |  |   | 6,779               |  |              | (785   | )               |  | 1985        |  | March 2002     |  | 3  39 yrs. |  | 96 
|Deerfield, Illinois         |  |              | 8,100  |              |   | 1,442                   |  |                  | 6,665  |                 |   | 2,007        |  |   | 10,114              |  |              | (922   | )               |  | 1989        |  | August 2002    |  | 3  39 yrs. |  | 128
|Detroit, Michigan           |  |              | 2,379  |              |   | 508                     |  |                  | 4,543  |                 |   | 348          |  |   | 5,399               |  |              | (450   | )               |  | 1990        |  | January 2003   |  | 3  39 yrs. |  | 76 
|Dulles, Virginia            |  |              | 7,285  |              |   | 2,419                   |  |                  | 15,104 |                 |   | 304          |  |   | 17,827              |  |              | (828   | )               |  | 1998        |  | January 2003   |  | 3  39 yrs. |  | 109
|Dunwoody, Georgia           |  |              | 2,668  |              |   | 1,988                   |  |                  | 4,725  |                 |   | 878          |  |   | 7,591               |  |              | (651   | )               |  | 1984        |  | March 2002     |  | 3  39 yrs. |  | 144



6



---

##### Table of Contents

SCHEDULE III

Real Estate and Accumulated Depreciation

As of December 31, 2004

(Dollars in thousands)



|                                   |  |              |         |              |   |                         |  |                  |         |                 |   |             |  |   |                     |  |              |         |                 |  |             |  |                |  |             |  |      
|---------------------------------- |  | ------------ | ------- | ------------ | - | ----------------------- |  | ---------------- | ------- | --------------- | - | ----------- |  | - | ------------------- |  | ------------ | ------- | --------------- |  | ----------- |  | -------------- |  | ----------- |  | -----
|                                   |  |              |         | Initial Cost |   | SubsequentlyCapitalized |  |                  |         |                 |   |             |  |   |                     |  |              |         |                
|Description                        |  | Encumbrances |         | Land         |   | Bldg./FF&E              |  | Bldg.Imp. & FF&E |         | Total GrossCost |   | Acc.Deprec. |  |   | Date ofConstruction |  | DateAcquired |         | DepreciableLife |  | # of Suites
|Galleria, Missouri                 |  |              | 6,354   |              |   | 1,970                   |  |                  | 5,554   |                 |   | 1,270       |  |   | 8,794               |  |              | (701    | )               |  | 1986        |  | March 2002     |  | 3  39 yrs. |  | 152  
|Greensboro, North Carolina         |  |              | 4,875   |              |   | 1,518                   |  |                  | 5,211   |                 |   | 3           |  |   | 6,732               |  |              | (479    | )               |  | 1987        |  | August 2002    |  | 3  39 yrs. |  | 128  
|Home OfficeRichmond, Virginia     |  |              |        |              |   | 138                     |  |                  | 766     |                 |   | 58          |  |   | 962                 |  |              | (229    | )               |  | 1950        |  | January 2003   |  | 3  39 yrs. |  |     
|Houston, Texas                     |  |              | 4,768   |              |   | 960                     |  |                  | 8,903   |                 |   | 1,411       |  |   | 11,274              |  |              | (1,166  | )               |  | 1990        |  | September 2001 |  | 3  39 yrs. |  | 110  
|Irvine, California                 |  |              | 12,750  |              |   | 2,904                   |  |                  | 6,049   |                 |   | 2,206       |  |   | 11,159              |  |              | (944    | )               |  | 1989        |  | August 2002    |  | 3  39 yrs. |  | 112  
|Jackson, Mississippi               |  |              | 2,855   |              |   | 897                     |  |                  | 8,271   |                 |   | 337         |  |   | 9,505               |  |              | (525    | )               |  | 1997        |  | January 2003   |  | 3  39 yrs. |  | 91   
|Jackson, Mississippi               |  |              | 3,360   |              |   | 786                     |  |                  | 4,125   |                 |   | 2,229       |  |   | 7,140               |  |              | (599    | )               |  | 1986        |  | August 2002    |  | 3  39 yrs. |  | 120  
|Jacksonville, Florida              |  |              | 4,875   |              |   | 566                     |  |                  | 4,001   |                 |   | 2,636       |  |   | 7,203               |  |              | (607    | )               |  | 1986        |  | August 2002    |  | 3  39 yrs. |  | 112  
|Kalamazoo, Florida                 |  |              | 3,938   |              |   | 1,313                   |  |                  | 3,896   |                 |   | 461         |  |   | 5,670               |  |              | (481    | )               |  | 1989        |  | August 2002    |  | 3  39 yrs. |  | 83   
|La Jolla, California               |  |              | 19,062  |              |   | 17,255                  |  |                  | 11,854  |                 |   | 7,101       |  |   | 36,210              |  |              | (2,379  | )               |  | 1986        |  | March 2002     |  | 3  39 yrs. |  | 288  
|Las Vegas, Nevada                  |  |              | 20,625  |              |   | 3,685                   |  |                  | 8,786   |                 |   | 828         |  |   | 13,299              |  |              | (696    | )               |  | 1989        |  | August 2002    |  | 3  39 yrs. |  | 192  
|Lombard, Illinois                  |  |              | 5,238   |              |   | 1,166                   |  |                  | 5,740   |                 |   | 529         |  |   | 7,435               |  |              | (1,006  | )               |  | 1987        |  | March 2002     |  | 3  39 yrs. |  | 144  
|Long Beach, California             |  |              | 11,253  |              |   | 7,325                   |  |                  | 11,597  |                 |   | 587         |  |   | 19,509              |  |              | (1,111  | )               |  | 1987        |  | March 2002     |  | 3  39 yrs. |  | 216  
|Lubbock, Texas                     |  |              | 2,500   |              |   | 410                     |  |                  | 2,754   |                 |   | 1,449       |  |   | 4,613               |  |              | (420    | )               |  | 1986        |  | August 2002    |  | 3  39 yrs. |  | 80   
|Memphis, Tennessee                 |  |              | 2,535   |              |   | 2,038                   |  |                  | 4,755   |                 |   | 315         |  |   | 7,108               |  |              | (395    | )               |  | 1986        |  | August 2002    |  | 3  39 yrs. |  | 105  
|Meriden, Connecticut               |  |              | 4,291   |              |   |                        |  |                  | 9,092   |                 |   | 698         |  |   | 9,790               |  |              | (1,107  | )               |  | 1989        |  | September 2001 |  | 3  39 yrs. |  | 106  
|Montgomery, Alabama                |  |              | 2,384   |              |   | 965                     |  |                  | 5,025   |                 |   | 302         |  |   | 6,292               |  |              | (666    | )               |  | 1990        |  | September 2001 |  | 3  39 yrs. |  | 94   
|Pensacola, Florida                 |  |              | 3,540   |              |   | 336                     |  |                  | 2,297   |                 |   | 1,557       |  |   | 4,190               |  |              | (741    | )               |  | 1985        |  | August 2002    |  | 3  39 yrs. |  | 64   
|Philadelphia, Pennsylvania         |  |              | 5,979   |              |   | 1,395                   |  |                  | 5,650   |                 |   | 2,201       |  |   | 9,246               |  |              | (829    | )               |  | 1988        |  | August 2002    |  | 3  39 yrs. |  | 88   
|Philadelphia/Malvern, Pennsylvania |  |              | 5,500   |              |   |                        |  |                  | 16,285  |                 |   | 210         |  |   | 16,495              |  |              | (1,075  | )               |  | 1998        |  | January 2003   |  | 3  39 yrs. |  | 123  
|Placentia, California              |  |              | 7,650   |              |   | 3,397                   |  |                  | 4,663   |                 |   | 2,103       |  |   | 10,163              |  |              | (822    | )               |  | 1988        |  | August 2002    |  | 3  39 yrs. |  | 112  
|Portland, Oregon                   |  |              | 4,575   |              |   | 3,095                   |  |                  | 7,705   |                 |   | 254         |  |   | 11,054              |  |              | (429    | )               |  | 1998        |  | January 2003   |  | 3  39 yrs. |  | 123  
|Redmond, Washington                |  |              | 19,440  |              |   | 6,777                   |  |                  | 27,736  |                 |   | 124         |  |   | 34,637              |  |              | (1,577  | )               |  | 1990        |  | January 2003   |  | 3  39 yrs. |  | 180  
|Richmond, Virginia                 |  |              | 5,130   |              |   | 790                     |  |                  | 9,035   |                 |   | 386         |  |   | 10,211              |  |              | (725    | )               |  | 1998        |  | January 2003   |  | 3  39 yrs. |  | 123  
|Salt Lake City, Utah               |  |              | 2,379   |              |   | 377                     |  |                  | 5,142   |                 |   | 295         |  |   | 5,814               |  |              | (463    | )               |  | 1996        |  | January 2003   |  | 3  39 yrs. |  | 98   
|San Ramon, California              |  |              | 5,245   |              |   | 3,448                   |  |                  | 15,542  |                 |   | 431         |  |   | 19,421              |  |              | (1,607  | )               |  | 1989        |  | September 2001 |  | 3  39 yrs. |  | 106  
|Santa Fe, New Mexico               |  |              | 8,050   |              |   | 1,411                   |  |                  | 4,840   |                 |   | 104         |  |   | 6,355               |  |              | (429    | )               |  | 1986        |  | August 2002    |  | 3  39 yrs. |  | 120  
|Sharonville, Ohio                  |  |              | 1,940   |              |   | 2,087                   |  |                  | 3,790   |                 |   | 3,751       |  |   | 9,628               |  |              | (1,037  | )               |  | 1985        |  | March 2002     |  | 3  39 yrs. |  | 144  
|Shreveport, Louisiana              |  |              | 4,050   |              |   | 298                     |  |                  | 2,503   |                 |   | 43          |  |   | 2,844               |  |              | (240    | )               |  | 1983        |  | August 2002    |  | 3  39 yrs. |  | 72   
|Southfield, Michigan               |  |              | 4,268   |              |   | 1,738                   |  |                  | 3,869   |                 |   | 1,137       |  |   | 6,744               |  |              | (637    | )               |  | 1987        |  | March 2002     |  | 3  39 yrs. |  | 144  
|Spartanburg, South Carolina        |  |              |        |              |   | 598                     |  |                  | 2,918   |                 |   | 81          |  |   | 3,597               |  |              | (282    | )               |  | 1985        |  | August 2002    |  | 3  39 yrs. |  | 88   
|St. Louis, Missouri                |  |              | 4,575   |              |   | 2,099                   |  |                  | 9,712   |                 |   | 194         |  |   | 12,005              |  |              | (531    | )               |  | 2000        |  | January 2003   |  | 3  39 yrs. |  | 145  
|                                   |  |              |         |              |   |                         |  |                  |         |                 |   |             |  |   |                     |  |              |         |                 |  |             |  |                |  |             |  |      
|                                   |  | $            | 367,752 |              | $ | 139,096                 |  | $                | 474,254 |                 | $ | 75,187      |  | $ | 688,537             |  | $            | (52,331 | )               |  |             |  |                |  |             |  | 7,869
|                                   |  |              |         |              |   |                         |  |                  |         |                 |   |             |  |   |                     |  |              |         |                 |  |             |  |                |  |             |  |      



7



---

##### Table of Contents

Investment in hotels at December 31, 2004, consisted of the following:



|                                  |  |   |             |  
|--------------------------------- |  | - | ----------- | -
|Land                              |  | $ | 139,110,760 |  
|Building and improvements         |  |   | 493,678,033 |  
|Furniture, fixtures and equipment |  |   | 55,748,667  |  
|                                  |  |   |             |  
|Total                             |  |   | 688,537,460 |  
|Less: accumulated depreciation    |  |   | (52,330,994 | )
|                                  |  |   |             |  
|Investments in hotel, net         |  | $ | 636,206,466 |  
|                                  |  |   |             |  



For additional information about the
Companys properties, refer to Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.



Item 3. Legal Proceedings



The Company is not
presently subject to any material litigation nor, to its knowledge, is any litigation threatened against the Company or any of its properties, other than routine actions arising in the ordinary course of business, some of which are expected to be
covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the Companys business or financial condition or results of operations.



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



None.



8



---

##### Table of Contents

PART II



Item 5. Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



Common Shares



There is currently no established public market in which the Companys common shares are traded. The per share estimated market value shall be deemed to be the
offering price of the shares, which is currently $10.00 per share. This valuation is supported by the fact that the Company is currently selling shares to the public at a price of $10.00 per share through its Dividend Reinvestment Plan, the Company
is repurchasing shares at $10.00 from shareholders and the Company has not realized any decrease in the value of its assets. On December 31, 2004, there were approximately 11,205 beneficial shareholders of the Companys common shares.



Distributions totaling $37,601,379, $54,243,300 and $17,330,704 were paid to
the common shareholders and Series C convertible shareholders during 2004, 2003 and 2002, respectively. Distributions were paid in an amount of $0.90, $1.50 and $1.00 per share for the years ended December 31, 2004, 2003, and 2002 respectively. The
$1.50 per share in 2003 includes a special distribution of approximately $.50 associated with the Companys merger with Apple Suites, Inc. Currently the Company pays a distribution on a quarterly basis, and for the last two quarters of 2004 the
distribution was at a rate of $0.20 per share. The timing and amounts of distributions to shareholders are within the discretion of the Companys Board of Directors. Future distributions will depend on the Companys results of operations,
cash flow from operations, economic conditions and other factors such as working capital and capital expenditure requirements, as well as requirements under federal income tax provisions for qualification as a REIT.



Non-Employee Directors Stock Option Plan and Incentive Plan



The Companys board of directors has adopted and the Companys
shareholders have approved a Non-Employee Directors Stock Option Plan and an Incentive Plan. The options issued under each plan convert to Units. Each Unit is equal to one common share and one Series A Preferred share of the Company. As of December
31, 2004, there were 155,192 options outstanding.



Dividend Reinvestment Plan



During the first quarter of 2004, the
Company instituted a dividend reinvestment plan. The purpose of the plan is to provide the Companys shareholders with a convenient and inexpensive way to increase their investment in the Company by reinvesting their dividends to purchase
additional Units. As of December 31, 2004, 680,751 Units have been issued under the dividend reinvestment plan, representing $6.8 million in proceeds to the Company.



Share Redemption Program



The Company has instituted a share redemption program to provide its shareholders who have held their Units for at least one year with the
benefit of limited interim liquidity, by presenting for redemption all or any portion of their Units at any time and in accordance with certain procedures. Once this time limitation has been met, the Company may, subject to certain conditions and
limitations, redeem the Units presented for redemption for cash, to the extent that the Company has sufficient funds available to fund the redemption. If Units are held for the required one-year period, the Units may be redeemed for a purchase price
equal to the lesser of: (1) $10.00 per unit; or (2) the purchase price per Unit that was actually paid for the Units. The board of directors reserves the right, in its sole discretion, at any time and from time to time, to waive the one-year holding
period, reject any request for redemption, change the purchase price for redemptions or otherwise amend the terms of, suspend, or terminate the share redemption program. Redemption of units, when requested, will be made quarterly on a first-come,
first-served basis. Prior to the implementation of the Dividend Reinvestment Plan in the first quarter of 2004, the redemptions were funded as part of the Companys Additional Share Option Plan. Funding for the redemption of Units will come
from the proceeds the Company receives from the sale of Units under its dividend reinvestment plan. The Companys board of directors, in its sole discretion, may choose to suspend or terminate the share redemption program or reduce the number
of Units purchased under the share redemption program if it



9



---

##### Table of Contents

determines the funds otherwise available to fund the share redemption program are needed for other purposes. During the year ended December 31, 2004, the
Company redeemed approximately $8.8 million, representing approximately 882,773 Units.



|                                      |  |                               |  |                            |      |                                                                             |           |                                                                           |    |  
|------------------------------------- |  | ----------------------------- |  | -------------------------- | ---- | --------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------- | -- | -
|Issuer Purchases of Equity Securities | 
|                                      |  |                               |  |                           
|                                      |  | (a)                           |  | (b)                        |      | (c)                                                                         |           | (d)                                                                       |   
|Period                                |  | Total Numberof UnitsPurchased |  | Average Price Paidper Unit |      | Total Number ofUnits Purchased asPart of PubliclyAnnounced Plansor Programs |           | Maximum Numberof Units that MayYet Be PurchasedUnder the Plans orPrograms |   
|October 2004                          |  | 262,834                       |  | $                          | 9.89 |                                                                             | 1,752,001 |                                                                           | (1 | )



|(1) | The maximum number of Units that may be redeemed in the current calendar year is three percent (3.0%) of the weighted average number of Units outstanding at the end of the previous
calendar year.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Preferred Shares



The Companys articles of incorporation authorize issuance of up to 15
million additional preferred shares. No preferred shares other than the Series A preferred shares and the Series B convertible preferred shares (discussed above) have been issued. The Company believes that the authorization to issue additional
preferred shares benefits the Company and its shareholders by permitting flexibility in financing additional growth, giving the Company additional financing options in corporate planning and in responding to developments in business, including
financing of additional acquisitions and other general corporate purposes. Having authorized preferred shares available for issuance in the future gives the Company the ability to respond to future developments and allows preferred shares to be
issued without the expense and delay of a special shareholders meeting. At present, the Company has no specific financing or acquisition plans involving the issuance of additional preferred shares and the Company does not propose to fix the
characteristics of any series of preferred shares in anticipation of issuing preferred shares other than the Series A preferred shares and Series C convertible preferred shares. The Company cannot now predict whether or to what extent, if any,
additional preferred shares will be used or if so used what the characteristics of a particular series may be. The voting rights and rights to distributions of the holders of common shares will be subject to the prior rights of the holders of any
subsequently-issued preferred shares. Unless otherwise required by applicable law or regulation, the preferred shares would be issuable without further authorization by holders of the common shares and on such terms and for such consideration as may
be determined by the board of directors. The preferred shares could be issued in one or more series having varying voting rights, redemption and conversion features, distribution (including liquidating distribution) rights and preferences, and other
rights, including rights of approval of specified transactions. A series of preferred shares could be given rights that are superior to rights of holders of common shares and a series having preferential distribution rights could limit common share
distributions and reduce the amount holders of common shares would otherwise receive on dissolution.



Valuation of Real Estate Assets



The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of the real estate, both operating properties and
properties under construction, in which it has an ownership interest, may not be recoverable. When indicators of potential impairment are present which indicate that the carrying amounts of real estate may not be recoverable, the Company assesses
the recoverability of these assets by determining whether the carrying value will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected
undiscounted future cash flows do not exceed the carrying value, an impairment loss is recorded. To date, the Company has not recorded any impairment losses.



Projections of expected future cash flows require estimates of future market rental income amounts subsequent to the expiration of current lease agreements, property
operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years that property is held for investment, among other factors. The use of inappropriate assumptions in the future cash flow analysis would
result in an incorrect assessment of the propertys future cash flows and fair value, and could result in the misstatement of the carrying value of real estate and net income.



10



---

##### Table of Contents

Item 6. Selected Financial Data



The following
table sets forth selected financial data for the years ended December 31, 2004, 2003, and 2002 and the period from January 17, 2001 through December 31, 2001. Certain data has been derived from the Companys audited financial statements and
notes thereto. This data should be read in conjunction with Item 7, Managements Discussion and Analysis of Financial Conditions and Results of Operations, and Item 15(a), the Consolidated Financial Statements and Notes thereto, appearing
elsewhere in this Annual Report on Form 10-K.



|                                                        |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|------------------------------------------------------- |  | ----------------------------------- | ------- | - | ----------------------------------- | - | ------- | ----------------------------------- |  | - | ----------------------------------------------------------- | - |  | - | -------- | -
|(in thousands except per share and statistical data)    |  | For the year endedDecember 31, 2004 |         |   | For the year endedDecember 31, 2003 |   |         | For the year endedDecember 31, 2002 |  |   | For the periodJanuary 17, 2001 throughDecember 31, 2001 (c) |  
|Revenues:                                               |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|Suite revenue                                           |  | $                                   | 207,735 |   |                                     | $ | 189,600 |                                     |  | $ | 102,896                                                     |   |  | $ | 10,022   |  
|Other revenue                                           |  |                                     | 5,907   |   |                                     |   | 6,206   |                                     |  |   | 3,324                                                       |   |  |   | 415      |  
|                                                        |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|Total revenue                                           |  |                                     | 213,642 |   |                                     |   | 195,806 |                                     |  |   | 106,220                                                     |   |  |   | 10,437   |  
|                                                        |  |                                     |         |  
|Expenses:                                               |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|Hotel expenses                                          |  |                                     | 128,801 |   |                                     |   | 119,715 |                                     |  |   | 59,161                                                      |   |  |   | 5,625    |  
|Taxes, insurance and other                              |  |                                     | 15,066  |   |                                     |   | 12,763  |                                     |  |   | 6,578                                                       |   |  |   | 553      |  
|General and administrative                              |  |                                     | 2,505   |   |                                     |   | 1,948   |                                     |  |   | 1,943                                                       |   |  |   | 491      |  
|Depreciation                                            |  |                                     | 24,626  |   |                                     |   | 19,264  |                                     |  |   | 7,562                                                       |   |  |   | 1,085    |  
|Merger costs                                            |  |                                     |        |   |                                     |   | 15,914  |                                     |  |   |                                                            |   |  |   |         |  
|Debt extinguishment costs                               |  |                                     | 8,803   |   |                                     |   |        |                                     |  |   |                                                            |   |  |   |         |  
|Interest and other expenses, net                        |  |                                     | 27,392  |   |                                     |   | 24,705  |                                     |  |   | 12,109                                                      |   |  |   | (634     | )
|                                                        |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|Total expenses                                          |  |                                     | 207,193 |   |                                     |   | 194,309 |                                     |  |   | 87,353                                                      |   |  |   | 7,120    |  
|                                                        |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|Net income                                              |  | $                                   | 6,449   |   |                                     | $ | 1,497   |                                     |  | $ | 18,867                                                      |   |  | $ | 3,317    |  
|                                                        |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|                                                        |  |                                     |         |  
|Per Share                                               |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|Earnings per common share                               |  | $                                   | 0.15    |   |                                     | $ | 0.04    |                                     |  | $ | 0.88                                                        |   |  | $ | 0.52     |  
|Distributions paid to common shareholders               |  | $                                   | 0.90    |   |                                     | $ | 1.50    |                                     |  | $ | 1.00                                                        |   |  | $ | 0.50     |  
|Weighted-average shares outstanding - basic and diluted |  |                                     | 41,728  |   |                                     |   | 41,421  |                                     |  |   | 21,557                                                      |   |  |   | 6,334    |  
|                                                        |  |                                     |         |  
|Balance Sheet Data                                      |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|Cash and cash equivalents                               |  | $                                   | 13,118  |   |                                     | $ | 17,296  |                                     |  | $ | 125,522                                                     |   |  | $ | 15,469   |  
|Investment in hotels, net                               |  | $                                   | 636,206 |   |                                     | $ | 638,658 |                                     |  | $ | 388,034                                                     |   |  | $ | 121,078  |  
|Total assets                                            |  | $                                   | 664,604 |   |                                     | $ | 692,113 |                                     |  | $ | 557,754                                                     |   |  | $ | 178,381  |  
|Notes payable-secured                                   |  | $                                   | 372,762 |   |                                     | $ | 362,763 |                                     |  | $ | 269,297                                                     |   |  | $ | 52,874   |  
|Shareholders equity                                    |  | $                                   | 275,738 |   |                                     | $ | 308,920 |                                     |  | $ | 262,982                                                     |   |  | $ | 120,461  |  
|Net book value per share                                |  | $                                   | 6.61    |   |                                     | $ | 7.37    |                                     |  | $ | 8.72                                                        |   |  | $ | 8.66     |  
|                                                        |  |                                     |         |  
|Other Data                                              |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|Cash flow from:                                         |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  
|Operating activities                                    |  | $                                   | 20,367  |   |                                     | $ | 35,923  |                                     |  | $ | 24,003                                                      |   |  | $ | 4,694    |  
|Investing activities                                    |  | $                                   | (2,239  | ) |                                     | $ | (71,682 | )                                   |  | $ | (28,257                                                     | ) |  | $ | (108,918 | )
|Financing activities                                    |  | $                                   | (22,306 | ) |                                     | $ | (72,467 | )                                   |  | $ | 114,307                                                     |   |  | $ | 119,693  |  
|Number of hotels owned at end of period                 |  |                                     | 66      |   |                                     |   | 66      |                                     |  |   | 48                                                          |   |  |   | 10       |  
|Average Daily Rate (ADR) (a)                            |  | $                                   | 95      |   |                                     | $ | 91      |                                     |  | $ | 92                                                          |   |  | $ | 102      |  
|Occupancy                                               |  |                                     | 76      | % |                                     |   | 74      | %                                   |  |   | 78                                                          | % |  |   | 76       | %
|Revenue Per Available Room (REVPAR) (b)                 |  | $                                   | 72      |   |                                     | $ | 67      |                                     |  | $ | 71                                                          |   |  | $ | 78       |  
|                                                        |  |                                     |         |   |                                     |   |         |                                     |  |   |                                                             |   |  |   |          |  



(a) Suite revenue divided by number
of rooms sold.

(b) ADR multiplied by occupancy.

(c) The
Company was formed on January 17, 2001 and commenced operations in September 2001.



11



---

##### Table of Contents

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



This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such Statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the ability of the Company to implement its acquisition strategy and operating strategy; the Companys ability to
manage planned growth; changes in economic cycles and competition within the extended-stay hotel industry. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this annual report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In
addition, the Companys qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the Companys financial statements
and the notes thereto, as well as the risk factors described in the Companys filings with the Securities and Exchange Commission.



Overview



The Company is a real estate investment trust (REIT) that owns upscale, extended-stay hotels. The Company was formed on January 17, 2001, with the first investor closing commencing on May 1, 2001. The
Company owns 66 hotels within different markets in the United States. The hotels were acquired in five portfolios; 10 hotels were acquired in September 2001, 15 were acquired in March 2002, 23 were acquired in August 2002, one was acquired in
January 2003, and 17 were acquired on January 31, 2003. The performance of the Companys hotels can be influenced by many factors, including local hotel competition, local and national economic conditions and the performance of the individual
managers assigned to our hotels. In evaluating financial condition and operating performance, the Company focuses on revenue measurements such as occupancy, average daily rate and revenue per available room and expenses such as hotel operating
expenses, general and administrative expenses and other expenses described below.



During the first quarter of 2004, the Company continued to experience the effects of economic weakness in some of its markets and the effects of closing rooms to complete its major renovation project for many of its hotels. As a result, the
Companys financial results were lower than the same period in 2003. During the remainder of 2004, the Company began to see improved economic conditions in some of its markets, and it substantially completed its major renovation program. As a
result, the Companys operating results for the year ended December 31, 2004 exceeded the same period in 2003. Although the Company believes operating results will continue to improve in 2005, there can be no assurance such growth will be
achieved.



|                                               |  |                                       |         |   |                      |     |   |      |   |         |                      |  |     |               |  |    |  
|---------------------------------------------- |  | ------------------------------------- | ------- | - | -------------------- | --- | - | ---- | - | ------- | -------------------- |  | --- | ------------- |  | -- | -
|                                               |  | Year ended December 31, 2004 and 2003 |        
|(in thousands, except statistical information) |  | 2004                                  |         |   | Percentageof revenue |     |   | 2003 |   |         | Percentageof revenue |  |     | Percentchange | 
|Total revenues                                 |  | $                                     | 213,642 |   |                      | 100 | % |      | $ | 195,806 |                      |  | 100 | %             |  | 9  | %
|Hotel direct expenses                          |  |                                       | 128,801 |   |                      | 60  | % |      |   | 119,715 |                      |  | 61  | %             |  | 8  | %
|Taxes, insurance and other expense             |  |                                       | 15,066  |   |                      | 7   | % |      |   | 12,763  |                      |  | 7   | %             |  | 18 | %
|General and administrative                     |  |                                       | 2,505   |   |                      | 1   | % |      |   | 1,948   |                      |  | 1   | %             |  | 29 | %
|Depreciation                                   |  |                                       | 24,626  |   |                      |     |   |      |   | 19,264  |                      |  |     |               |  | 28 | %
|Interest expense                               |  |                                       | 27,774  |   |                      |     |   |      |   | 25,546  |                      |  |     |               |  | 9  | %
|ADR                                            |  | $                                     | 95      |   |                      |     |   |      | $ | 91      |                      |  |     |               |  | 4  | %
|Occupancy                                      |  |                                       | 76      | % |                      |     |   |      |   | 74      | %                    |  |     |               |  | 3  | %
|RevPar                                         |  | $                                     | 72      |   |                      |     |   |      | $ | 67      |                      |  |     |               |  | 7  | %



12



---

##### Table of Contents

Hotels Owned



The Company owns 66 hotels, with a total of 7,869 suites. Of the Companys 66 hotels, 49 are Residence Inn by Marriott properties consisting of 5,947 suites, and 17
are Homewood Suites by Hilton consisting of 1,922 suites.



The following table
summarizes the locations, brands, acquisition dates and number of suites of the hotels owned on December 31, 2004:



|                   |  |               |  |                 |  |                |  |            
|------------------ |  | ------------- |  | --------------- |  | -------------- |  | -----------
|City               |  | State         |  | Franchise/Brand |  | DateAcquired   |  | # of Suites
|Birmingham         |  | Alabama       |  | Residence Inn   |  | August 2002    |  | 128        
|Montgomery         |  | Alabama       |  | Residence Inn   |  | September 2001 |  | 94         
|Arcadia            |  | California    |  | Residence Inn   |  | August 2002    |  | 120        
|Bakersfield        |  | California    |  | Residence Inn   |  | September 2001 |  | 114        
|Concord            |  | California    |  | Residence Inn   |  | September 2001 |  | 126        
|Costa Mesa         |  | California    |  | Residence Inn   |  | March 2002     |  | 144        
|Irvine             |  | California    |  | Residence Inn   |  | August 2002    |  | 112        
|La Jolla           |  | California    |  | Residence Inn   |  | March 2002     |  | 288        
|Long Beach         |  | California    |  | Residence Inn   |  | March 2002     |  | 216        
|Placentia          |  | California    |  | Residence Inn   |  | August 2002    |  | 112        
|San Ramon          |  | California    |  | Residence Inn   |  | September 2001 |  | 106        
|Boulder            |  | Colorado      |  | Homewood Suites |  | January 2003   |  | 112        
|Boulder            |  | Colorado      |  | Residence Inn   |  | March 2002     |  | 128        
|Meriden            |  | Connecticut   |  | Residence Inn   |  | September 2001 |  | 106        
|Clearwater         |  | Florida       |  | Homewood Suites |  | January 2003   |  | 112        
|Boca Raton         |  | Florida       |  | Residence Inn   |  | August 2002    |  | 120        
|Clearwater         |  | Florida       |  | Residence Inn   |  | August 2002    |  | 88         
|Jacksonville       |  | Florida       |  | Residence Inn   |  | August 2002    |  | 112        
|Kalamazoo          |  | Florida       |  | Residence Inn   |  | August 2002    |  | 83         
|Pensacola          |  | Florida       |  | Residence Inn   |  | August 2002    |  | 64         
|Atlanta Airport    |  | Georgia       |  | Residence Inn   |  | September 2001 |  | 126        
|Atlanta/Buckhead   |  | Georgia       |  | Residence Inn   |  | March 2002     |  | 136        
|Atlanta/Buckhead   |  | Georgia       |  | Homewood Suites |  | January 2003   |  | 92         
|Atlanta/Cumberland |  | Georgia       |  | Residence Inn   |  | March 2002     |  | 130        
|Atlanta/Cumberland |  | Georgia       |  | Homewood Suites |  | January 2003   |  | 124        
|Atlanta/Peachtree  |  | Georgia       |  | Homewood Suites |  | January 2003   |  | 92         
|Dunwoody           |  | Georgia       |  | Residence Inn   |  | March 2002     |  | 144        
|Deerfield          |  | Illinois      |  | Residence Inn   |  | August 2002    |  | 128        
|Lombard            |  | Illinois      |  | Residence Inn   |  | March 2002     |  | 144        
|Shreveport         |  | Louisiana     |  | Residence Inn   |  | August 2002    |  | 72         
|Baltimore          |  | Maryland      |  | Homewood Suites |  | January 2003   |  | 147        
|Boston             |  | Massachusetts |  | Residence Inn   |  | August 2002    |  | 96         
|Boston             |  | Massachusetts |  | Residence Inn   |  | September 2001 |  | 130        
|Detroit            |  | Michigan      |  | Homewood Suites |  | January 2003   |  | 76         



13



---

##### Table of Contents

|                     |  |                |  |                 |  |                |  |            
|-------------------- |  | -------------- |  | --------------- |  | -------------- |  | -----------
|City                 |  | State          |  | Franchise/Brand |  | DateAcquired   |  | # of Suites
|Southfield           |  | Michigan       |  | Residence Inn   |  | March 2002     |  | 144        
|Jackson              |  | Mississippi    |  | Homewood Suites |  | January 2003   |  | 91         
|Jackson              |  | Mississippi    |  | Residence Inn   |  | August 2002    |  | 120        
|St. Louis            |  | Missouri       |  | Homewood Suites |  | January 2003   |  | 145        
|Chesterfield         |  | Missouri       |  | Residence Inn   |  | March 2002     |  | 104        
|Galleria             |  | Missouri       |  | Residence Inn   |  | March 2002     |  | 152        
|Las Vegas            |  | Nevada         |  | Residence Inn   |  | August 2002    |  | 192        
|Santa Fe             |  | New Mexico     |  | Residence Inn   |  | August 2002    |  | 120        
|Charlotte            |  | North Carolina |  | Residence Inn   |  | August 2002    |  | 91         
|Greensboro           |  | North Carolina |  | Residence Inn   |  | August 2002    |  | 128        
|Akron                |  | Ohio           |  | Residence Inn   |  | August 2002    |  | 112        
|Cincinnati           |  | Ohio           |  | Residence Inn   |  | September 2001 |  | 118        
|Columbus North       |  | Ohio           |  | Residence Inn   |  | March 2002     |  | 96         
|Dayton North         |  | Ohio           |  | Residence Inn   |  | March 2002     |  | 64         
|Dayton South         |  | Ohio           |  | Residence Inn   |  | March 2002     |  | 96         
|Sharonville          |  | Ohio           |  | Residence Inn   |  | March 2002     |  | 144        
|Portland             |  | Oregon         |  | Homewood Suites |  | January 2003   |  | 123        
|Philadelphia/Malvern |  | Pennsylvania   |  | Homewood Suites |  | January 2003   |  | 123        
|Philadelphia         |  | Pennsylvania   |  | Residence Inn   |  | August 2002    |  | 88         
|Columbia             |  | South Carolina |  | Residence Inn   |  | August 2002    |  | 128        
|Spartanburg          |  | South Carolina |  | Residence Inn   |  | August 2002    |  | 88         
|Memphis              |  | Tennessee      |  | Residence Inn   |  | August 2002    |  | 105        
|Dallas/Addison       |  | Texas          |  | Homewood Suites |  | January 2003   |  | 120        
|Dallas/Las Colinas   |  | Texas          |  | Homewood Suites |  | January 2003   |  | 136        
|Dallas/Plano         |  | Texas          |  | Homewood Suites |  | January 2003   |  | 99         
|Dallas               |  | Texas          |  | Residence Inn   |  | September 2001 |  | 120        
|Houston              |  | Texas          |  | Residence Inn   |  | September 2001 |  | 110        
|Lubbock              |  | Texas          |  | Residence Inn   |  | August 2002    |  | 80         
|Salt Lake City       |  | Utah           |  | Homewood Suites |  | January 2003   |  | 98         
|Richmond             |  | Virginia       |  | Homewood Suites |  | January 2003   |  | 123        
|Herndon              |  | Virginia       |  | Homewood Suites |  | January 2003   |  | 109        
|Redmond              |  | Washington     |  | Residence Inn   |  | January 2003   |  | 180        
|                     |  |                |  |                 |  |                |  |            
|                     |  |                |  |                 |  |                |  | 7,869      
|                     |  |                |  |                 |  |                |  |            



Apple Suites, Inc.



The Company entered into a merger
agreement with Apple Suites on October 23, 2002. Effective January 31, 2003, Apple Suites merged with and into Hospitality Acquisition Company, the Companys wholly-owned subsidiary. Apple Suites owned, either directly or through its
subsidiaries, a total of 17 upper-end extended-stay hotels throughout the United States, which comprised a total of 1,922 suites, and all of which are operated as part of the Homewood Suites by Hilton franchise system. The merger did not change the
management positions Mr. Glade M. Knight, the Companys Chairman, held with the Company prior to the merger nor did the board of directors change as a result of the merger.



14



---

##### Table of Contents

Also in connection with this transaction, the Company terminated its advisory contract with Apple Suites Advisors, Inc.
(ASA) and became self-advised. To implement the termination of the advisory agreement, the Company purchased ASA. The Company acquired all of Mr. Glade M. Knights stock in ASA instead of paying a $6.48 million termination fee due
ASA under the advisory agreement. Mr. Knight received a cash payment of $2.0 million and a non-interest-bearing promissory note, due four years after the merger, in a principal amount of $4.48 million. The Company recognized an expense related to
this transaction of $5.5 million in 2003.



In addition, 1,272,000 newly created
Series C convertible preferred shares were issued in exchange for outstanding Series B convertible preferred shares. Holders of Series B convertible preferred shares would have otherwise been entitled to receive 1,272,000 Units upon conversion of
their Series B convertible preferred shares in connection with the termination of the advisory agreement with ASA and termination of the brokerage service agreement with Apple Suites Realty Group. The new Series C convertible preferred shares have a
liquidation preference comparable to the Series B convertible preferred shares, in that holders of Series C convertible preferred shares receive no payments in a liquidation for their Series C convertible preferred shares until holders of Units are
paid in full for their Series A preferred shares. The Series C convertible preferred shares have the same voting rights and rights to receive dividend distributions as if they had already been converted to common shares. The company recognized
expense related to this transaction of $10.2 million in the first quarter of 2003.



Management Agreements



Residence Inn Hotels



The Companys Residence Inn hotels are subject to management agreements under which
Residence Inn by Marriott, Inc. (the Manager) manages the hotels, generally for an initial term of 15 to 20 years with renewal terms at the option of the Manager of up to an additional 50 years. The agreements generally provide for
payment of base management fees, which are calculated annually as a percentage of sales, and incentive management fees over a priority return (as defined in the management agreements). Incentive management fees (IMF) are currently payable only if
and to the extent there is sufficient cash flow from the hotels after consideration of qualifying debt service and after consideration to a priority return on investment, including property improvements. Amounts not currently payable are deferred
and are payable in future years only if and to the extent there is sufficient cash flow from future operations or upon sale or refinancing of the hotels after consideration to a priority return to the Company (as defined in the management
agreements), which is generally 12%. In the event of early termination of the management agreements, the Manager will receive additional fees based on the unexpired term and expected future base and incentive management fees. The Company has the
option to terminate the management agreements if specified performance thresholds are not satisfied.



Incentive fees are payable on a portfolio by portfolio basis for Residence Inn properties. The Company has three portfolios of multiple hotels (Res I, Res II and Res III) with separate management agreements which are
subject to this calculation. The Company records incentive management fee exposure when it is considered probable that these fees will be paid. The Company has recorded approximately $715,000 of deferred incentive management fees on the Res III
portfolio. The Company has not recorded any deferred incentive management fees for the Res I and Res II portfolios. The Redmond hotels management agreement does not include deferred incentive management fees; however, incentive fees are
payable each year based on income in excess of a defined owners priority. For December 31, 2004 and 2003, the Company has incurred and paid approximately $308,407 and $453,861, respectively, for incentive fees related to the Redmond property.



15



---

##### Table of Contents

The following table summarizes deferred incentive management fees (DIMF) under these management agreements
(dollars in millions).



|        |  |             |      |                                |   |          |  |                          |      |           |   |                                            |  |   |      |  |   |    
|------- |  | ----------- | ---- | ------------------------------ | - | -------- |  | ------------------------ | ---- | --------- | - | ------------------------------------------ |  | - | ---- |  | - | ---
|        |  | DIMFAssumed |      | IMFAccumulatedPost-Acquisition |   | TotalIMF |  | Post-acquisitionIMF Paid |      | TotalDIMF |   | Amount accruedin ConsolidatedBalance Sheet
|Res I   |  | $           | 6.7  |                                | $ | 6.9      |  | $                        | 13.6 |           | $ | 0.0                                        |  | $ | 13.6 |  | $ | 0.0
|Res II  |  |             | 7.0  |                                |   | 4.3      |  |                          | 11.3 |           |   | 0.0                                        |  |   | 11.3 |  |   | 0.0
|Res III |  |             | 0.0  |                                |   | 1.2      |  |                          | 1.2  |           |   | 0.5                                        |  |   | 0.7  |  |   | 0.7
|Redmond |  |             | 0.0  |                                |   | 0.8      |  |                          | 0.8  |           |   | 0.8                                        |  |   | 0.0  |  |   | 0.0
|        |  |             |      |                                |   |          |  |                          |      |           |   |                                            |  |   |      |  |   |    
|Total   |  | $           | 13.7 |                                | $ | 13.2     |  | $                        | 26.9 |           | $ | 1.3                                        |  | $ | 25.6 |  | $ | 0.7
|        |  |             |      |                                |   |          |  |                          |      |           |   |                                            |  |   |      |  |   |    



No amounts of DIMF were recorded upon
the acquisition of Res I and Res II as the fair value of these amounts were not readily determinable and payment was not considered probable.



In addition to the base management and incentive management fees required by the management agreements, the Company is also required to pay certain shared services which
are generally provided on a central or regional basis to all hotels in the Marriott International hotel system. Shared services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting
services, public relations and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased
by Marriott International or its subsidiaries on a fair and equitable basis. For the year ended December 31, 2004 and 2003, respectively, total expenses incurred under the Marriott agreements were $18.4 million and $17.4 million, or 11.3% and 11.6%
of revenue provided by the Marriott managed properties.



Homewood Suites
Hotels



The Companys 17 Homewood Suites hotels are managed by Promus
Hotels, Inc. (Promus), a wholly owned subsidiary of Hilton Hotels Corporation (Hilton) under the terms of separate management agreements, as part of the Homewood Suites by Hilton franchise. The initial term is generally 15
years with no option to renew; however, two hotel properties in this portfolio have renewal options of two five year periods each. The Company has the option to terminate the management agreements if specified performance thresholds are not
satisfied. Promus charges fees for this function, which are calculated as a percentage of revenue. Incentive management fees are calculated, for certain properties, on the basis of operating profit of the hotels. No incentive management fees were
earned in 2004 or 2003. Promus also charges a fee, calculated as a percentage of suite revenue, for franchise licenses to operate as a Homewood Suites by Hilton and to participate in its reservation system. Total expenses for franchise fees,
management fees, advertising expenses and other reimbursable services were $6.0 million and $5.3 million, or 11.8% and 11.9% of revenue provided by the Hilton managed properties, respectively, for the years ended December 31, 2004 and 2003.



Related Party Transactions



The Company has significant transactions with related parties. These transactions cannot be
construed to be arms length and the results of the Companys operations could be different if these transactions were conducted with non-related parties.



The Company, through a wholly owned subsidiary, has an advisory agreement with Apple Hospitality Five Advisors, Inc., (AFA), whereby the
Company receives advisory fee revenue equal to 0.1% to 0.25% of total equity contributions received by Apple Hospitality Five, Inc., plus certain reimbursable expenses in exchange for Company personnel performing advisory and real estate acquisition
due diligence for Apple Hospitality Five, Inc. For the year ended December 31, 2004 and 2003, the Company received advisory fee revenue in the amount of $730,138 and $296,435, respectively, under this agreement. AFA is 100% owned by Mr. Knight.



16



---

##### Table of Contents

The Company also provides support services to Apple Six Advisors, Inc. (A6A), Apple Hospitality Five Inc., and Apple REIT
Six, Inc. A6A provides day to day advisory and real estate due diligence services to Apple REIT Six, Inc. A6A is 100% owned by Mr. Knight. Each of these companies have agreed to reimburse the Company for its costs in providing these services. For
the year ended December 31, 2004, the Company has received reimbursement of its costs totaling approximately $649,000. Mr. Knight is Chairman and Chief Executive Officer of Apple Hospitality Five, Inc. and Apple REIT Six, Inc. Additionally, the
members of the Companys Board of Directors are the same as the members of the Board of Directors for Apple Hospitality Five, Inc. and Apple REIT Six, Inc.



Results of Operations for Years 2004 and 2003



The Company continued to experience the effects of economic weakness in some of its markets and the effects of closing rooms to complete its major renovation project for
many of its hotels during the first quarter of 2004. As a result, the Companys financial results were lower than the same period in 2003. During the remainder of 2004, the Company began to see improved economic conditions in some of its
markets, and it substantially completed its major renovation program. As a result, the Companys results for the full year exceeded the same period in 2003.



Revenues



The Companys principal source of revenue is hotel suite revenue. For the years ended December 31, 2004 and 2003 the Company had suite revenue and other revenue
of $207,735 and $5,907, and $189,600 and $6,206, respectively. For the years ended December 31, 2004 and 2003, the hotels achieved average occupancy of 76% and 74%, ADR of $95 and $91 and REVPAR of $72 and $67, respectively. ADR, or average daily
rate, is calculated as room revenue divided by number of rooms sold, and REVPAR, or revenue per available room, is calculated as occupancy multiplied by ADR. The increase in REVPAR is a result of completing the renovation of 26 hotels in 2004 and
improved economic conditions. During the renovation program, suites were taken out of service. This program was completed in the middle of 2004.



Expenses



The Companys hotel operating expenses totaled $128.8 million or 60% of revenue and $119.7 million or 61% of revenue for the years ended December 31, 2004 and 2003,
respectively. The improvement as a percentage of revenue was a result of improved REVPAR.



Taxes, insurance and other expense for the years ended December 31, 2004 and 2003 was $15.1 million or 7% of revenue and $12.8 million or 7% of revenue, respectively. The increase is due substantially to increased
assessments and tax rates in various localities.



The Companys general
and administrative expenses for the years ended December 31, 2004 and 2003 were $2.5 million or 1% of revenue and $1.9 million or 1% of revenue, respectively. The increase is due substantially to increased reporting and accounting requirements under
Section 404 of the Sarbanes-Oxley Act.



Depreciation expense for the years
ended December 31, 2004 and 2003 was $24.6 million and $19.3 million, respectively. Depreciation expense represents expense of the Companys 66 hotels and related personal property, as well as renovations. The increase in depreciation is due to
the Companys major renovation project in 2003 and 2004 and the acquisition of Apple Suites, Inc. in the first quarter of 2003.



Interest expense was $27.8 million and $25.5 million for the years ended December 31, 2004 and 2003, respectively. The increase is due to a $16 million line of credit
entered into by the Company in 2004 with an interest rate of LIBOR plus 2.5% and in 2003 the Company capitalized interest of $1.6 million associated with its renovation program as compared to $496,000 in 2004.



17



---

##### Table of Contents

On November 10, 2004, the Company closed on a refinancing transaction associated with the Res II Partnership debt. In
association with this transaction, the Company incurred approximately $1.7 million in loan costs which will be amortized over 10 years and recognized a loss on early extinguishment of debt of approximately $8.8 million, which includes a credit of
$1.9 million related to the debts outstanding fair value adjustment.



The
Company incurred approximately $15.9 million in expenses in 2003 related to the Apple Suites merger. The expenses include approximately $10.2 million associated with the conversion of the series B convertible preferred shares to series C convertible
shares and $5.5 million associated with the termination of the advisory agreement with ASA.



Results of Operations for Years 2003 and 2002



Revenues



The Companys principal source of revenue is hotel suite revenue. For the years ended December 31, 2003 and 2002, the Company had suite revenue and other revenue of
$189.6 million and $6.2 million and $102.9 million and $3.3 million, respectively. The increase in revenues is attributable to the acquisition of the Redmond hotel; the Companys merger with Apple Suites, Inc; and the revenues associated with a
full year of operations for the Companys other hotel properties. For the years ended December 31, 2003 and 2002, the hotels achieved average occupancy of 74% and 78%, ADR of $91 and $92 and REVPAR of $67 and $71, respectively. ADR, or average
daily rate, is calculated as room revenue divided by number of rooms sold, and REVPAR, or revenue per available room, is calculated as occupancy multiplied by ADR. The decrease in occupancy, ADR and REVPAR for the years ended December 31, 2003 is
related to the Companys major renovation program at its hotel properties and a general industry decline due to economic conditions throughout the U.S. During the renovations program, suites are taken out of service while renovations are
completed. The Company estimates approximately 54,000 room nights were out of service in 2003.



For the year ended December 31, 2003 and 2002, the Company had interest income of $840,681 and $1.3 million, respectively. Interest income represents earnings on excess cash, invested in short term money market
instruments.



Expenses



The Companys hotel operating expenses totaled $50 million or 26% of suite revenue and
$24.8 million or 24% of suite revenue for the years ended December 31, 2003 and 2002, respectively. The reduction of REVPAR has increased hotel operating expenses on a percentage of revenue basis due primarily to lower ADR and to fixed costs
associated with operating a hotel.



The Companys general and
administrative expenses for the year ended December 31, 2003 and 2002 were $1.9 million or 1% of suite revenue and $1.9 million or 2% of suite revenue, respectively. This percentage decreased as the Companys asset base grew during 2003.



Taxes, insurance and other expense for the year ended December 31, 2003 and
2002 was $12.8 million or 7% of suite revenue and $6.6 million or 6% of suite revenue, respectively.



Depreciation expense for the year ended December 31, 2003 and 2002 was $19.3 million and $7.6 million, respectively. Depreciation expense for 2003 represents expense of the Companys 66 hotels and related
personal property, as well as a full year of renovations; and expense for 2002 represents expense of 48 hotels and related personal property owned at December 31, 2002. The Companys capital expenditures increased from $6.8 million in 2002 to
$48.6 million in 2003, as part of a major renovation program.



Interest expense
was $25.5 million and $13.4 million for the year ended December 31, 2003 and 2002 respectively. Interest expense for the year ended December 31, 2003, represents interest on the 8.08%, $53 million promissory note assumed in conjunction with the
Crestline acquisition, interest expense on the refinance



18



---

##### Table of Contents

of the Res I Partnership acquisition debt in the amount of $83 million at a fixed interest rate of 7.4%, interest expense on the 8.85%, $130 million
promissory note assumed in conjunction with the Res II Partnership acquisition, interest expense on the $20 million Redmond acquisition at 8.375% and Apple Suites debt of $76 million at and average rate of 8.4%. Interest expense also includes
approximately $2.5 million in amortization of the Companys fair value adjustment, and amortization of the premium on the Companys note payable to Glade M. Knight. Interest for the year ended December 31, 2002 represented the Crestline
mortgage, Res I mortgages, and Res II mortgages, as well as an adjustment for early extinguishment of debt related to the Res I mortgage.



The Company incurred approximately $15.9 million in expenses in 2003 related to the Apple Suites merger. The expenses include approximately $10.2 million associated with
the conversion of the series B convertible preferred shares to series C convertible shares and $5.5 million associated with the termination of the advisory agreement with ASA.



During the year ended December 31, 2003, the Company capitalized interest of $1.6 million related to suites out of service for renovations.
No interest was capitalized in 2002.



Liquidity and Capital Resources



|                                                                          |  |        |         |                                          |   |           |  |           |        |             |   |        |  |   |        
|------------------------------------------------------------------------- |  | ------ | ------- | ---------------------------------------- | - | --------- |  | --------- | ------ | ----------- | - | ------ |  | - | -------
|                                                                          |  |        |         | Amount of Commitment expiring per period
|Commercial Commitments (000s)                                            |  | Totals |         | Less than1-1 year                        |   | 2-3 years |  | 4-5 years |        | Over 5years
|Total Debt Commitments (including approximately $206 million in interest) |  | $      | 573,618 |                                          | $ | 43,028    |  | $         | 68,136 |             | $ | 68,136 |  | $ | 394,318
|Note payable-related party                                                |  |        | 4,480   |                                          |   |          |  |           | 4,480  |             |   |       |  |   |       
|                                                                          |  |        |         |                                          |   |           |  |           |        |             |   |        |  |   |        
|Total Commercial Commitments                                              |  | $      | 578,098 |                                          | $ | 43,028    |  | $         | 72,616 |             | $ | 68,136 |  | $ | 394,318
|                                                                          |  |        |         |                                          |   |           |  |           |        |             |   |        |  |   |        



Cash and cash equivalents



Cash and cash equivalents totaled
$13.1 million at December 31, 2004 and $17.3 million at December 31, 2003. The Company plans to use this cash for distributions to shareholders, debt service and to fund general corporate expenses.



Equity



Effective February 20, 2004, the Company instituted a dividend reinvestment plan to its
shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include
purchasing Units under the Companys Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring extended-stay hotels.
During the year ended December 31, 2004, approximately $680,751 Units were issued under the dividend reinvestment plan representing proceeds to the Company of approximately $6.8 million, under this plan.



During 2003, the Company instituted a Unit Redemption Program to provide limited interim
liquidity to the Companys shareholders. Redemption of Units, when requested, is made quarterly on a first-come, first-serve basis. Shareholders may request redemption of Units for a purchase price equal to the lesser of: (1) the purchase price
per unit that the shareholder actually paid for the unit (or the price that the shareholder actually paid for the Apple Suites, Inc. common shares, if the Units were acquired through the exchange of Apple Suites, Inc. common shares in the
Companys merger with Apple Suites, Inc.); or (2) $10.00 per unit. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the



19



---

##### Table of Contents

terms of, suspend, or terminate the Unit Redemption Program. During the years ended December 31, 2004 and 2003, the Company redeemed 882,773 and 875,357
Units in the amounts of $8,779,470 and $8,690,335, respectively. The Company currently intends to redeem shares to the extent of proceeds received from the dividend reinvestment plan.



Notes Payable



The aggregate amounts of principal payable under all of the Companys promissory notes, for the five years subsequent to December 31,
2004 are as follows:



|                                      |  |   |        
|------------------------------------- |  | - | -------
|2005                                  |  | $ | 15,859 
|2006                                  |  |   | 7,184  
|2007                                  |  |   | 7,769  
|2008                                  |  |   | 8,326  
|2009                                  |  |   | 9,079  
|Thereafter                            |  |   | 319,535
|                                      |  |   |        
|                                      |  |   | 367,752
|Fair Value Adjustment of Assumed Debt |  |   | 5,010  
|                                      |  |   |        
|                                      |  | $ | 372,762
|                                      |  |   |        



The Companys notes payable are
secured by 64 of the Companys hotels.



During 2004, the Company entered
into a short-term credit facility and refinanced the debt associated with its Res II portfolio. The short-term credit facility which expires in April 2005 and has an outstanding balance of $11 million at December 31, 2004 is secured by two
properties and bears interest at LIBOR plus 2.5% per year. Although there can be no assurances, the Company plans to refinance this credit facility in 2005.



On November 10, 2004, the Company closed on a refinancing transaction with Wachovia Bank, National Association, as the lender. The refinancing involved 21 separate loans
having an aggregate principal balance of $135 million. The 21 promissory notes executed in connection with the refinancing are substantially similar in that each provide a stated annual interest rate of 6.88%, each note matures on November 11, 2014
with an aggregate balloon payment of approximately $111 million, and each note provides a payment of interest only in monthly installments for the first 12 months, followed by amortized payments of principal and interest in consecutive monthly
installments thereafter.



In association with the above transaction, the
Company incurred approximately $1.7 million in loan costs which will be amortized over 10 years and recognized a loss on early extinguishment of debt of approximately $8.8 million.



Capital Requirements and Resources



The Companys distribution policy is at the discretion of the Board of Directors and depends on several factors. The distribution rate for the year ended December
31, 2003 was at a rate of $1.50 per Unit outstanding, including a one time special dividend of $0.50 per Unit in January 2003. In July and October 2004, the Company declared and paid a dividend to its shareholders of $0.20 per Unit outstanding. The
total dividends declared and paid for the year ended December 31, 2004 was $0.90, per Unit outstanding. The reduction to $0.20 per quarter in the dividend rate was a result of the Companys investment in its renovation program. The
Companys dividends have historically included a return of capital. In 2004, 45% of the dividend was characterized as return of capital and 55% ordinary income.



20



---

##### Table of Contents

The Company has ongoing capital commitments to fund its capital improvements. Through the Lessee, the Company is
required, under all management agreements with the Manager, to make available to the Lessee, for the repair, replacement, refurbishing of furniture, fixtures, and equipment, an amount of at least 5% of gross revenues provided that such amount may be
used for its capital expenditures with respect to the hotels.



As a result of
the Companys renovation program, the Company funded approximately $12.4 million in addition to the 5% requirement in 2004. During the years ended December 31, 2004 and 2003, the Company capitalized approximately $22.2 million and $48.3
million, respectively, in capital improvements to the properties. Of the amount capitalized during the years ended December 31, 2004 and 2003, approximately $16 million and $40 million, respectively, relates to the Companys major renovation
program and approximately $6 and $9 million, respectively, relates to the Companys normal furniture, fixtures and equipment expenditures. To fund its renovation projects the Company obtained a short-term credit facility. It is anticipated cash
from available credit facilities and income from operations will be used to fund the Companys ongoing debt service and capital improvement projects. Distributions to shareholders will depend on income from operations. As a result there can be
no assurance that income from operations will be sufficient to fund distributions at historic levels.



The Company believes its liquidity and capital resources are adequate to meet its cash requirements for the foreseeable future. Although there can be no assurance, the Company believes its investment in renovations
and improved economic conditions will allow the Companys cash from operations to meet its planned distributions.



Impact of Inflation



Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the operators ability to raise room rates. Currently
the Company is not experiencing any material impact from inflation.



Seasonality



The hotel industry historically has been seasonal
in nature. Seasonal variations in occupancy at the hotels may cause quarterly fluctuations in revenues. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the
Company expects to utilize cash on hand to make distributions and required debt service.



The Company believes liquidity and capital resources are adequate to meet cash requirements for the foreseeable future.



Critical Accounting Policies



The following contains a discussion of what the Company believes to be critical accounting policies. These items should be read to gain a further understanding of the
principles used to prepare the Companys financial statements. These principles include application of judgment; therefore, changes in judgments may have a significant impact on the Companys reported results of operations and financial
condition.



Capitalization Policy



The Company considers expenditures to be capital in nature based on the following criteria:
(1) for a single asset, the cost must be at least $500, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2) for group purchases of 10 or more identical assets, the unit cost for
each asset must be at least $50, with the aggregate cost of the group purchase being at least $750, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (3) for major repairs to
buildings, the repair must be at least $2,500 and the useful life of the asset must be substantially extended.



21



---

##### Table of Contents

Impairment Losses Policy



The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the sum of the undiscounted cash flows
estimated to be generated by the respective properties are less than the properties carrying amounts. Impairment losses are measured as the difference between the assets fair value less cost to sell, and its carrying value. No impairment
losses have been recorded to date.



Investment Policy



The purchase price of real estate properties acquired is allocated to the various
components, such as land, buildings and improvements, intangible assets and in-place leases as appropriate, in accordance with Statement of Financial Accounting Standards, commonly referred to as SFAS No. 141, Business Combinations. The
purchase price is allocated based on the fair value of each component at the time of acquisition. Generally the Company does not acquire real estate assets that have in-place leases as lease terms for hotel properties are very short term in nature.
The Company has not allocated any purchase price to intangible assets such as management contracts and franchise agreements as such contracts are generally at current market rates and any other value attributable to these contracts are not
considered material.



Recent Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46) and subsequently revised FIN 46 in December 2003. Effective January 1, 2004, the Company adopted the provisions of FIN 46. The Company did not identify any variable interest entities
(VIEs) as defined by FIN 46.



On December 16, 2004, the Financial Accounting
Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123 (R) is similar to the approach described in Statement 123. However, Statement 123 (R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123 (R) must be adopted no later than July 1, 2005 by the
Company. The adoption of the statement is not anticipated to have a material impact on the Companys financial results.



Item 7A. Quantitative and Qualitative Disclosures about Market Risk



The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of December 31, 2004, the Companys financial instruments were not exposed to significant
market risk due to foreign currency exchange risk, commodity price risk or equity price risk. The Company has issued fixed interest rate notes payable to lenders under permanent financing arrangements. The Company believes that the estimated fair
value of the amounts outstanding under the fixed rate notes payable approximated the outstanding principal amount of $372.8 million at December 31, 2004 which is included in the Companys financial statements. The following table summarizes the
annual maturities and average interest rates.



|                      |  |      |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |                  |         |   |  |   |         |  |   |        
|--------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - | ---------- | - | ----- | ----- |  | ---------------- | ------- | - |  | - | ------- |  | - | -------
|(000s)               |  | 2005 |        |   | 2006 |   |       | 2007 |  |   | 2008  |   |  | 2009 |       |   | Thereafter |   |       | Total |  | FairMarket Value
|Maturities            |  | $    | 15,859 |   |      | $ | 7,184 |      |  | $ | 7,769 |   |  | $    | 8,326 |   |            | $ | 9,079 |       |  | $                | 319,535 |   |  | $ | 367,752 |  | $ | 372,762
|Average Interest Rate |  |      | 7.5    | % |      |   | 7.6   | %    |  |   | 7.6   | % |  |      | 7.6   | % |            |   | 7.6   | %     |  |                  | 7.6     | % |  |   |         |  |   |        



22



---

##### Table of Contents

Item 8. Financial Statements and Supplementary Data



Report of Management on Internal Control Over Financial Reporting



March 4, 2005



To the Shareholders

Apple Hospitality Two, Inc.



Management of Apple Hospitality Two, Inc. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of the Companys principal executive and principal
financial officers and effected by the Companys Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements
in accordance with U.S. generally accepted accounting principles.



The
Companys internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Companys transactions and
dispositions of the Companys assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles,
and the receipts and expenditures of the Company are being made only in accordance with authorizations of the Companys management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect on the consolidated financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In connection with the preparation of the Companys annual consolidated financial
statements, management has undertaken an assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control  Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Managements assessment included an evaluation of the design of the Companys internal control over financial reporting and testing of the
operational effectiveness of those controls.



Based on this assessment,
management has concluded that as of December 31, 2004, the Companys internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.



Ernst & Young LLP, the independent registered public accounting firm that audited the Companys consolidated financial statements included in this report, have issued an attestation report on
managements assessment of internal control over financial reporting, a copy of which appears on the next page of this annual report.



|                                     |  |  |  |                         
|------------------------------------ |  |  |  | ------------------------
|                                     |  | 
|/s/ Glade M. Knight                  |  |  |  | /s/ Bryan Peery         
|Glade M. Knight                      |  |  |  | Bryan Peery             
|Chairman and Chief Executive Officer |  |  |  | Chief Accounting Officer



23



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

on Internal Control over Financial Reporting



The Board of Directors and Stockholders

Apple Hospitality Two, Inc.



We have audited managements assessment, included in the accompanying Report of Management on Internal Control over Financial Reporting, that Apple Hospitality Two, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Apple Hospitality Two, Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to
express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.



A companys
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that Apple Hospitality Two, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Apple Hospitality Two, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the
COSO criteria.



We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Apple Hospitality Two, Inc., as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders equity and
cash flows for the three years in the period ended December 31, 2004, and our report dated March 4, 2005, expressed an unqualified opinion thereon.



/s/ Ernst & Young LLP



Richmond, Virginia

March 4, 2005



24



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders

Apple Hospitality Two, Inc.



We have audited the accompanying consolidated balance sheets of Apple Hospitality Two, Inc. (the Company) as of December 31,
2004 and 2003, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in
the Index of Item 15. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (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 Apple Hospitality Two, Inc. at December 31, 2004 and 2003, and the consolidated results
of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Apple Hospitality Two,
Inc.s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 4, 2005 expressed an unqualified opinion thereon.



/s/ Ernst & Young LLP



Richmond, Virginia

March 4, 2005



25



---

##### Table of Contents

Apple Hospitality Two, Inc.

Consolidated Balance Sheets

(in thousands, except per share data)



|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                              |  | December 31, 2004 |         |   | December 31, 2003 |  
|ASSETS                                                                                                                                        |  |                   |         |   |                   |   |         |  
|Investment in hotels, net of accumulated depreciation of $52,331 and $27,705, respectively                                                    |  | $                 | 636,206 |   |                   | $ | 638,658 |  
|Cash and cash equivalents                                                                                                                     |  |                   | 13,118  |   |                   |   | 17,296  |  
|Restricted cash-furniture, fixtures & equipment and other escrows                                                                             |  |                   | 7,259   |   |                   |   | 33,738  |  
|Due from third party manager                                                                                                                  |  |                   | 4,647   |   |                   |   |        |  
|Other assets                                                                                                                                  |  |                   | 3,374   |   |                   |   | 2,421   |  
|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                  |  | $                 | 664,604 |   |                   | $ | 692,113 |  
|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|                                                                                                                                              |  |                  
|LIABILITIES                                                                                                                                   |  |                   |         |   |                   |   |         |  
|Notes payable-secured                                                                                                                         |  | $                 | 372,762 |   |                   | $ | 362,763 |  
|Note payable-related party                                                                                                                    |  |                   | 3,881   |   |                   |   | 3,595   |  
|Accounts payable & accrued expenses                                                                                                           |  |                   | 1,816   |   |                   |   | 3,648   |  
|Accounts payable-prior limited partners                                                                                                       |  |                   | 8,501   |   |                   |   | 8,815   |  
|Due to third party manager, net                                                                                                               |  |                   |        |   |                   |   | 2,377   |  
|Interest payable                                                                                                                              |  |                   | 1,191   |   |                   |   | 1,280   |  
|Deferred incentive management fees payable                                                                                                    |  |                   | 715     |   |                   |   | 715     |  
|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|TOTAL LIABILITIES                                                                                                                             |  |                   | 388,866 |   |                   |   | 383,193 |  
|                                                                                                                                              |  |                  
|SHAREHOLDERS EQUITY                                                                                                                          |  |                   |         |   |                   |   |         |  
|Preferred stock, no par value, 15,000,000 authorized, none issued and outstanding                                                             |  |                   |        |   |                   |   |        |  
|Series A Preferred stock, no par value, authorized 200,000,000 shares; 40,442,616 and 40,644,638 shares outstanding,
respectively             |  |                   |        |   |                   |   |        |  
|Series B convertible preferred stock, no par value, authorized 240,000 shares; issued and outstanding  and  shares,
respectively            |  |                   |        |   |                   |   |        |  
|Series C convertible preferred stock, no par value, authorized 1,272,000; issued and outstanding 1,272,000 and 1,272,000 shares,
respectively |  |                   | 10,176  |   |                   |   | 10,176  |  
|Common stock, no par value, authorized 200,000,000 shares; outstanding 40,442,616 shares, and 40,644,638 shares, respectively                 |  |                   | 347,376 |   |                   |   | 349,406 |  
|Distributions greater than net income                                                                                                         |  |                   | (81,814 | ) |                   |   | (50,662 | )
|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                    |  |                   | 275,738 |   |                   |   | 308,920 |  
|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                    |  | $                 | 664,604 |   |                   | $ | 692,113 |  
|                                                                                                                                              |  |                   |         |   |                   |   |         |  



See notes to consolidated financial
statements.



26



---

##### Table of Contents

Apple Hospitality Two, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)



|                                          |  |                             |         |   |                             |   |         |                             |  |   |         |  
|----------------------------------------- |  | --------------------------- | ------- | - | --------------------------- | - | ------- | --------------------------- |  | - | ------- | -
|                                          |  | Year endedDecember 31, 2004 |         |   | Year endedDecember 31, 2003 |   |         | Year endedDecember 31, 2002 | 
|REVENUES                                  |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Suite revenue                             |  | $                           | 207,735 |   |                             | $ | 189,600 |                             |  | $ | 102,896 |  
|Other revenue                             |  |                             | 5,907   |   |                             |   | 6,206   |                             |  |   | 3,324   |  
|                                          |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Total revenues                            |  |                             | 213,642 |   |                             |   | 195,806 |                             |  |   | 106,220 |  
|                                          |  |                             |        
|EXPENSES                                  |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Hotel operating expense                   |  |                             | 55,411  |   |                             |   | 50,000  |                             |  |   | 24,817  |  
|Hotel administrative expense              |  |                             | 19,176  |   |                             |   | 18,315  |                             |  |   | 11,865  |  
|Sales and marketing                       |  |                             | 15,036  |   |                             |   | 14,068  |                             |  |   | 5,976   |  
|Utilities                                 |  |                             | 10,207  |   |                             |   | 9,735   |                             |  |   | 4,554   |  
|Repair and maintenance                    |  |                             | 11,833  |   |                             |   | 11,539  |                             |  |   | 3,027   |  
|Franchise fees                            |  |                             | 8,319   |   |                             |   | 7,661   |                             |  |   | 4,092   |  
|Management fees                           |  |                             | 5,429   |   |                             |   | 5,070   |                             |  |   | 3,094   |  
|Chain services                            |  |                             | 3,390   |   |                             |   | 3,327   |                             |  |   | 1,736   |  
|Taxes, insurance and other                |  |                             | 15,066  |   |                             |   | 12,763  |                             |  |   | 6,578   |  
|Merger expense-related party              |  |                             |        |   |                             |   | 15,914  |                             |  |   |        |  
|General and administrative                |  |                             | 2,505   |   |                             |   | 1,948   |                             |  |   | 1,943   |  
|Depreciation of real-estate owned         |  |                             | 24,626  |   |                             |   | 19,264  |                             |  |   | 7,562   |  
|                                          |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Total expenses                            |  |                             | 170,998 |   |                             |   | 169,604 |                             |  |   | 75,244  |  
|                                          |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Operating income                          |  |                             | 42,644  |   |                             |   | 26,202  |                             |  |   | 30,976  |  
|Interest income                           |  |                             | 382     |   |                             |   | 841     |                             |  |   | 1,293   |  
|Debt extinguishment costs                 |  |                             | (8,803  | ) |                             |   |        |                             |  |   |        |  
|Interest expense                          |  |                             | (27,774 | ) |                             |   | (25,546 | )                           |  |   | (13,402 | )
|                                          |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Net income                                |  | $                           | 6,449   |   |                             | $ | 1,497   |                             |  | $ | 18,867  |  
|                                          |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Basic and diluted income per common share |  | $                           | 0.15    |   |                             | $ | 0.04    |                             |  | $ | 0.88    |  
|                                          |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Weighted average shares outstanding       |  |                             | 41,728  |   |                             |   | 41,421  |                             |  |   | 21,557  |  
|                                          |  |                             |        
|Distributions paid per common share       |  | $                           | 0.90    |   |                             | $ | 1.50    |                             |  | $ | 1.00    |  
|                                          |  |                             |         |   |                             |   |         |                             |  |   |         |  



See notes to consolidated financial
statements.



27



---

##### Table of Contents

Apple Hospitality Two, Inc.

Consolidated Statements of Shareholders Equity

(in thousands)



|                                                                                    |  |                                     |   |  |                                     |     |              |                 |       |                                     |   |                 |                           |        |        |  |   |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ----------------------------------- | - |  | ----------------------------------- | --- | ------------ | --------------- | ----- | ----------------------------------- | - | --------------- | ------------------------- | ------ | ------ |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                    |  | Series B PreferredConvertible Stock |   |  | Series C PreferredConvertible Stock |     | Common Stock |                 |       | DistributionsGreater than Netincome |   |                 | Total ShareholdersEquity |       
|                                                                                    |  | Number ofShares                     |   |  | Amount                              |     |              | Number ofShares |       | Amount                              |   | Number ofShares |                           |        | Amount |  |   |        
|Balance at December 31, 2001                                                        |  | 240                                 |   |  | $                                   | 24  |              |                 |      |                                     | $ |                |                           | 13,908 |        |  | $ | 122,889 |   |  | $ | (2,452  | ) |  | $ | 120,461 |  
|Net proceeds from the sale of common shares                                         |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           | 15,507 |        |  |   | 137,807 |   |  |   |        |   |  |   | 137,807 |  
|Common shares issued through reinvestment of distributions                          |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           | 743    |        |  |   | 7,435   |   |  |   |        |   |  |   | 7,435   |  
|Net income                                                                          |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           |       |        |  |   |        |   |  |   | 18,867  |   |  |   | 18,867  |  
|Cash distributions declared to shareholders ($1.00 per share)                       |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           |       |        |  |   |        |   |  |   | (21,588 | ) |  |   | (21,588 | )
|                                                                                    |  |                                     |   |  |                                     |     |              |                 |       |                                     |   |                 |                           |        |        |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                                        |  | 240                                 |   |  |                                     | 24  |              |                 |      |                                     |   |                |                           | 30,158 |        |  |   | 268,131 |   |  |   | (5,173  | ) |  |   | 262,982 |  
|Common shares redeemed                                                              |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           | (874   | )      |  |   | (8,832  | ) |  |   |        |   |  |   | (8,832  | )
|Common shares issued through merger with Apple Suites, Inc.                         |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           | 11,361 |        |  |   | 90,107  |   |  |   |        |   |  |   | 90,107  |  
|Series B preferred convertible shares issued through merger with Apple Suites, Inc. |  | (240                                | ) |  |                                     | (24 | )            |                 |      |                                     |   |                |                           |       |        |  |   |        |   |  |   |        |   |  |   | (24     | )
|Series C preferred convertible shares issued through merger with Apple Suites, Inc. |  |                                    |   |  |                                     |    |              |                 | 1,272 |                                     |   | 10,176          |                           |       |        |  |   |        |   |  |   |        |   |  |   | 10,176  |  
|Net income                                                                          |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           |       |        |  |   |        |   |  |   | 1,497   |   |  |   | 1,497   |  
|Cash distributions declared to shareholders ($1.25 per share)                       |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           |       |        |  |   |        |   |  |   | (46,986 | ) |  |   | (46,986 | )
|                                                                                    |  |                                     |   |  |                                     |     |              |                 |       |                                     |   |                 |                           |        |        |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                                                        |  |                                    |   |  |                                     |    |              |                 | 1,272 |                                     |   | 10,176          |                           | 40,645 |        |  |   | 349,406 |   |  |   | (50,662 | ) |  |   | 308,920 |  
|Common shares redeemed                                                              |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           | (883   | )      |  |   | (8,779  | ) |  |   |        |   |  |   | (8,779  | )
|Common shares issued through dividend reinvestment                                  |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           | 681    |        |  |   | 6,749   |   |  |   |        |   |  |   | 6,749   |  
|Net income                                                                          |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           |       |        |  |   |        |   |  |   | 6,449   |   |  |   | 6,449   |  
|Cash distributions declared to shareholders ($0.90 per share)                       |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           |       |        |  |   |        |   |  |   | (37,601 | ) |  |   | (37,601 | )
|                                                                                    |  |                                     |   |  |                                     |     |              |                 |       |                                     |   |                 |                           |        |        |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2004                                                        |  |                                    |   |  | $                                   |    |              |                 | 1,272 |                                     | $ | 10,176          |                           | 40,443 |        |  | $ | 347,376 |   |  | $ | (81,814 | ) |  | $ | 275,738 |  
|                                                                                    |  |                                     |   |  |                                     |     |              |                 |       |                                     |   |                 |                           |        |        |  |   |         |   |  |   |         |   |  |   |         |  



See notes to consolidated financial
statements.



28



---

##### Table of Contents

Apple Hospitality Two, Inc.

Consolidated Statements of Cash Flows

(in thousands)



|                                                                              |  |                             |          |   |                             |   |          |                             |  |   |         |  
|----------------------------------------------------------------------------- |  | --------------------------- | -------- | - | --------------------------- | - | -------- | --------------------------- |  | - | ------- | -
|                                                                              |  | Year endedDecember 31, 2004 |          |   | Year endedDecember 31, 2003 |   |          | Year endedDecember 31, 2002 | 
|Cash flow from operating activities:                                          |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Net income                                                                    |  | $                           | 6,449    |   |                             | $ | 1,497    |                             |  | $ | 18,867  |  
|Adjustments to reconcile to cash provided by operating activities:            |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Depreciation                                                                  |  |                             | 24,626   |   |                             |   | 19,264   |                             |  |   | 7,562   |  
|Non-cash portion of merger related expense                                    |  |                             |         |   |                             |   | 13,576   |                             |  |   |        |  
|Net amortization of fair value adjustment to mortgage notes payable           |  |                             | (3,930   | ) |                             |   | (2,506   | )                           |  |   | (722    | )
|Amortization of deferred financing costs                                      |  |                             | 143      |   |                             |   | 124      |                             |  |   | 32      |  
|Imputed interest                                                              |  |                             |         |   |                             |   |         |                             |  |   | 450     |  
|Changes in operating assets and liabilities, net of amounts acquired/assumed: |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Due from/to third party manager                                               |  |                             | (7,024   | ) |                             |   | 7,030    |                             |  |   | (2,014  | )
|Other escrows                                                                 |  |                             | 1,167    |   |                             |   | (201     | )                           |  |   | (721    | )
|Other assets                                                                  |  |                             | 885      |   |                             |   | 66       |                             |  |   | (1,268  | )
|Account payable-affiliate                                                     |  |                             | 286      |   |                             |   | (18      | )                           |  |   | (105    | )
|Interest payable                                                              |  |                             | (89      | ) |                             |   | (39      | )                           |  |   | 952     |  
|Accrued expenses                                                              |  |                             | (2,146   | ) |                             |   | (2,870   | )                           |  |   | 970     |  
|                                                                              |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Net cash provided by operating activities                                     |  |                             | 20,367   |   |                             |   | 35,923   |                             |  |   | 24,003  |  
|Cash flow from investing activities:                                          |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Decrease (increase) in cash restricted for capital improvements               |  |                             | 11,379   |   |                             |   | 2,399    |                             |  |   | (5,223  | )
|Net cash paid for hotel acquisitions                                          |  |                             |         |   |                             |   | (12,550  | )                           |  |   | (13,422 | )
|Net cash paid for acquisition of Apple Suites, Inc. and Apple Suites Advisors |  |                             |         |   |                             |   | (15,341  | )                           |  |   |        |  
|Decrease in prior shareholder escrow                                          |  |                             | 8,815    |   |                             |   |         |                             |  |   |        |  
|Capital improvements                                                          |  |                             | (22,174  | ) |                             |   | (48,326  | )                           |  |   | (6,803  | )
|(Increase) decrease in deposits on capital improvement projects               |  |                             | (259     | ) |                             |   | 2,136    |                             |  |   | (2,809  | )
|                                                                              |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Net cash used in investing activities                                         |  |                             | (2,239   | ) |                             |   | (71,682  | )                           |  |   | (28,257 | )
|Cash flow from financing activities                                           |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Proceeds from issuance of common stock                                        |  |                             | 6,749    |   |                             |   |         |                             |  |   | 145,242 |  
|Redemption of common stock                                                    |  |                             | (8,779   | ) |                             |   | (8,832   | )                           |  |   |        |  
|Proceeds from mortgage notes payable                                          |  |                             | 135,000  |   |                             |   |         |                             |  |   | 83,000  |  
|Net proceeds from secured line of credit                                      |  |                             | 11,000   |   |                             |   |         |                             |  |   |        |  
|Repayment of unsecured line of credit                                         |  |                             |         |   |                             |   | (3,000   | )                           |  |   |        |  
|Payment of financing costs                                                    |  |                             | (1,722   | ) |                             |   |         |                             |  |   | (1,224  | )
|Capital lease obligations-principal amounts                                   |  |                             |         |   |                             |   |         |                             |  |   | (368    | )
|Reduction in debt service escrow                                              |  |                             | 5,118    |   |                             |   |         |                             |  |   |        |  
|Repayment of secured notes payable                                            |  |                             | (132,071 | ) |                             |   | (6,391   | )                           |  |   | (95,012 | )
|Cash distributions paid to shareholders                                       |  |                             | (37,601  | ) |                             |   | (54,244  | )                           |  |   | (17,331 | )
|                                                                              |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Net cash provided by (used in) financing activities                           |  |                             | (22,306  | ) |                             |   | (72,467  | )                           |  |   | 114,307 |  
|Increase (decrease) in cash and cash equivalents                              |  |                             | (4,178   | ) |                             |   | (108,226 | )                           |  |   | 110,053 |  
|Cash and cash equivalents, beginning of period                                |  |                             | 17,296   |   |                             |   | 125,522  |                             |  |   | 15,469  |  
|                                                                              |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Cash and cash equivalents, end of period                                      |  | $                           | 13,118   |   |                             | $ | 17,296   |                             |  | $ | 125,522 |  
|                                                                              |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Supplemental information:                                                     |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Interest paid, net of amounts capitalized                                     |  | $                           | 27,863   |   |                             | $ | 27,146   |                             |  | $ | 13,402  |  
|Non-cash transactions:                                                        |  |                             |          |   |                             |   |          |                             |  |   |         |  
|Other assets assumed in acquisitions                                          |  | $                           |         |   |                             | $ | 1,779    |                             |  | $ |        |  
|Escrows assumed in acquisitions                                               |  | $                           |         |   |                             | $ | 1,131    |                             |  | $ | 15,934  |  
|Assumption of mortgage notes payable                                          |  | $                           |         |   |                             | $ | 102,363  |                             |  | $ | 229,156 |  
|Deposit for acquisitions used for acquisition of hotels                       |  | $                           |         |   |                             | $ |         |                             |  | $ | 35,000  |  
|Issuance of common stock                                                      |  | $                           |         |   |                             | $ | 90,107   |                             |  | $ |        |  
|Issuance of Series C shares                                                   |  | $                           |         |   |                             | $ | 10,200   |                             |  | $ |        |  
|Liabilities assumed in acquisition                                            |  | $                           |         |   |                             | $ | 4,136    |                             |  | $ | 4,137   |  



See notes to consolidated financial
statements.



29



---

##### Table of Contents

Notes to Consolidated Financial Statements



Note 1



General Information and Summary of Significant
Accounting Policies



Organization



Apple Hospitality Two, Inc. (the Company), a Virginia
corporation, was formed on January 17, 2001, with the first investor closing on May 1, 2001. The Company merged with Apple Suites, Inc. (Apple Suites) on January 31, 2003 and results of Apple Suites operations are included in Company results from
February 1, 2003. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.



The Company owns 66 extended stay hotels and is operated as and has annually elected to be
taxed as a real estate investment trust (REIT). The REIT Modernization Act, effective January 1, 2001, permits a REIT to establish taxable businesses to conduct certain previously disallowed business activities. The Company has formed
wholly-owned taxable REIT subsidiaries, and has leased all of its hotels to these subsidiaries (collectively, the Lessee).



Cash and cash equivalents



Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents
approximate their carrying value. Cash equivalents are placed with high credit quality institutions and the balances may, at times, exceed federal depository insurance limits.



Investments in hotels



The hotels are stated at cost, net of depreciation. Repair and maintenance costs are expensed as incurred while significant improvements,
renovations, and replacements are capitalized. Depreciation is computed using the straight-line method over estimated useful lives of the assets, which are 10-39 years for buildings and major improvements and three to seven years for furniture and
equipment.



The Company considers expenditures to be capital in nature based on
the following criteria: (1) for a single asset, the cost must be at least $500, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2) for group purchases of 10 or more identical
assets, the unit cost for each asset must be at least $50, with the aggregate cost of the group purchase being at least $750, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (3)
for major repairs to buildings, the repair must be at least $2,500 and the useful life of the asset must be substantially extended.



The Company records impairment losses on hotel properties used in the operations if indicators of impairment are present, and the undiscounted cash flows estimated to be
generated by the respective properties are less than their carrying amount. Impairment losses are measured as the difference between the assets fair value less cost to sell, and its carrying value. No impairment losses have been recorded to
date.



The purchase price of real estate properties acquired is allocated to
the various components, such as land, buildings and improvements, intangible assets and in-place leases as appropriate, in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. The
purchase price is allocated based on the fair value of each component at the time of acquisition. The Company generally does not acquire real estate assets that have in-place leases as lease terms for hotel properties are very short term in nature.
The Company has not allocated any purchase price to intangible assets such as management contracts and franchise agreements as such contracts are generally at current market rates and any other value attributable to these contracts is not considered
material.



30



---

##### Table of Contents

Revenue Recognition



Revenue is recognized as earned, which is generally defined as the date upon which a guest
occupies a room or utilizes the hotels services.



Stock Incentive Plans



The Company elected to follow
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options. As discussed in Note 5, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123) requires the use of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Companys stock options equals the market price of the underlying stock on the date of grant and other criteria are met, no compensation expense is recognized.



Comprehensive Income



The Company recorded no comprehensive income for the years ended December 31, 2004, 2003 or
2002.



Earnings per common share



Basic earnings per common share is computed based upon the weighted
average number of shares outstanding during the year. Diluted earnings per share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. Series C preferred convertible stock is included in
basic and diluted earnings per common share as these shares are considered common stock equivalents.



Income Taxes



As a REIT, the Company receives a deduction for its distributions to shareholders and is required to distribute 90% of its earnings and profits. Earnings and profits will
differ from income reported for financial reporting purposes primarily due to the differences for federal income tax purposes in the estimated useful lives used to compute depreciation. The Companys distributions are taxable to its
shareholders to the extent the distribution is characterized as ordinary income. The characterization of 2004 distributions of $0.90 per share for tax purposes was 55% ordinary income and 45% return of capital, 2003 distributions of $1.50 per share
for tax purposes was 84% ordinary income and 16% return of capital, and 2002 distributions of $1.00 per share for tax purposes was 61% ordinary income and 39% return of capital (unaudited).



The Lessee, as a taxable REIT subsidiary of the Company, is subject to federal and state
income taxes. The taxable REIT subsidiary incurred a financial reporting and taxable loss for the years ended December 31, 2004, 2003, and 2002, and therefore did not have any federal tax expense. No operating loss benefit has been recorded in the
consolidated balance sheet since realization is uncertain. Total net operating loss carry-forward for federal income tax purposes was approximately $22.3 million at December 31, 2004. There are no material differences between the book and tax basis
of the Companys assets.



Sales and
Marketing Costs



Sales and marketing costs are expensed when incurred.
These costs represent the expense for franchise advertising and reservation systems under the terms of the hotel management agreements and general and administrative expenses that are directly attributable to advertising and promotion.



Use of Estimates



The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires management to make certain estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.



31



---

##### Table of Contents

Reclassifications



During the third quarter of 2002, the Company recorded an extraordinary item of $273,789 related to the early extinguishment of debt. The
Company has reclassified this amount from an extraordinary item to interest expense which is included in income from continuing operations, in accordance with SFAS Statement No. 145, which became effective January 1, 2003 with retroactive
application.



Summary of Recent Accounting
Pronouncements



In January 2003, the Financial Accounting Standards Board
issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) and subsequently revised FIN 46 in December 2003. Effective January 1, 2004, the Company adopted the provisions of FIN 46. The Company did not identify
any variable interest entities (VIEs) as defined by FIN 46.



On December 16,
2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123 (R) supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123 (R) is similar to the approach described in Statement 123. However, Statement 123 (R)
requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values, Pro forma disclosure is no longer an alternative. Statement 123 (R) must be adopted no
later than July 1, 2005 by the Company. The adoption of the statement is not anticipated to have a material impact on the Companys financial results.



Note 2



Investment in Hotels



At December 31,
2004, the Company owned 66 hotels, with a total of 7,869 suites. Of the Companys 66 hotels, 49 are Residence Inn by Marriott properties consisting of 5,947 suites, and 17 are Homewood Suites by Hilton consisting of 1,922 suites.



Investment in hotels consisted of the following as of December 31:



|                                 |  |      |             |   |      |   |             |  
|-------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                 |  | 2004 |             |   | 2003 |  
|Land                             |  | $    | 139,110,760 |   |      | $ | 139,098,160 |  
|Building and improvements        |  |      | 493,678,033 |   |      |   | 475,597,441 |  
|Furniture fixtures and equipment |  |      | 55,748,667  |   |      |   | 51,667,967  |  
|                                 |  |      |             |   |      |   |             |  
|                                 |  |      | 688,537,460 |   |      |   | 666,363,568 |  
|                                 |  |      |             |   |      |   |             |  
|Less: accumulated depreciation   |  |      | (52,330,994 | ) |      |   | (27,705,484 | )
|                                 |  |      |             |   |      |   |             |  
|Investment in hotels, net        |  | $    | 636,206,466 |   |      | $ | 638,658,084 |  
|                                 |  |      |             |   |      |   |             |  



Acquisition of Apple Suites, Inc.



The Company entered into a
merger agreement with Apple Suites on October 23, 2002. Effective January 31, 2003, Apple Suites merged with and into Hospitality Acquisition Company, the Companys wholly-owned subsidiary (the Merger). Apple Suites owned, either
directly or through its subsidiaries, a total of 17 upper-end extended-stay hotels throughout the United States, which comprised a total of 1,922 suites, and all of which are operated as part of the Homewood Suites by Hilton franchise system. Mr.
Glade M. Knight, Chairman and Chief Executive Officer of the Company, was also the Chairman and Chief Executive Officer of Apple Suites, Inc.



Pursuant to the Merger, each Apple Suites common share, issued and outstanding immediately prior to the effective time of the Merger, was converted into the right to
receive either: (i) one Unit of the Company, consisting of one common share of the Company and one Series A preferred share of the Company; or (ii) if the



32



---

##### Table of Contents

holder of an Apple Suites common share elected, $10.00 in cash per share, subject to a limit on the total amount of cash to be paid in the Merger. As a
result of the Merger, holders of Apple Suites common shares received a total of 11,361,000 Units (valued at $8 per share for financial statements purposes) of the Company and approximately $17.8 million in cash. The Company funded the cash portion
of the Merger consideration with available cash, and the Company assumed Apple Suites liabilities and paid certain merger costs.



In connection with the acquisition of Apple Suites, the Company paid total consideration of $185 million, including assumption of liabilities and transaction costs. Apple
Suites assets and liabilities were recorded at fair value and no goodwill or intangible assets were recorded in connection with the transaction. The fair value of assets acquired and liabilities assumed were as follows:



|                                      |  |   |            
|------------------------------------- |  | - | -----------
|Investment in hotels                  |  | $ | 182,699,187
|Cash                                  |  |   | 2,626,696  
|Restricted cash                       |  |   | 55,607     
|Other assets                          |  |   | 4,961,959  
|                                      |  |   |            
|Total assets                          |  |   | 190,343,449
|                                      |  |   |            
|Accounts payable and accrued expenses |  |   | 6,276,203  
|Notes payable                         |  |   | 77,624,712 
|                                      |  |   |            
|Total liabilities                     |  |   | 83,900,915 
|                                      |  |   |            
|Net assets acquired                   |  | $ | 106,442,534
|                                      |  |   |            



Also, in connection with this
transaction, the Company terminated its advisory contract with Apple Suites Advisors, Inc. (ASA) and became self advised with all employees of ASA becoming employees of the Company. To implement the termination of the advisory agreement,
the Company purchased ASA. The Company acquired all of Mr. Glade M. Knights stock in ASA instead of paying a $6.48 million termination fee due ASA under the advisory agreement. Mr. Knight received a cash payment of $2 million and a
non-interest-bearing promissory note, due four years after the Merger, in a principal amount of $4.48 million. The Company recognized an expense of $5.5 million related to this transaction during 2003. Also in connection with the Merger and the
termination of the advisory agreement with ASA, the Companys outstanding Series B convertible preferred shares were exchanged for 1,272,000 newly created Series C convertible preferred shares which have the same voting and distribution rights
as if they had already been converted into 1,272,000 common shares (see Note 4). In connection with this transaction, the Company recognized expense of $10,152,000 in the consolidated statement of operations for the year ended December 31, 2003.



Other Acquisition



Effective January 3, 2003, the Company acquired a Residence Inn by Marriott hotel in
Redmond, Washington, which contains 180 suites and was in operation when acquired. The hotel offers one and two room suites with the amenities generally offered by upscale extended-stay hotels. It is located in a developed area near Seattle,
Washington.



The gross purchase price for the hotel was $32,550,000. This
amount was satisfied at closing by cash payments and other adjustments in the approximate amount of $12,550,000 and the assumption of existing secured debt with an outstanding principal balance of $20,004,280.



Renovation Program



During 2003, the Company began a major renovation program at its hotel properties. This
program included 26 hotels and was completed in 2004. During this program, suites were taken out of service while renovations were completed. During the time period units were out of service, the Company capitalized interest, taxes and insurance
costs related to these units. During 2004 and 2003 the Company capitalized approximately $600,000 and $2.1 million, respectively, in costs associated with rooms out of service. Although this program included a specific group of hotels, the Company
will continue to renovate individual hotels as warranted from a cost benefit analysis.



33



---

##### Table of Contents

Note 3



Notes Payable



The aggregate amounts of principal payable under all of the Companys promissory notes, for the five years subsequent to December 31, 2004 are as follows:



|                                      |  |   |        
|------------------------------------- |  | - | -------
|2005                                  |  | $ | 15,859 
|2006                                  |  |   | 7,184  
|2007                                  |  |   | 7,769  
|2008                                  |  |   | 8,326  
|2009                                  |  |   | 9,079  
|Thereafter                            |  |   | 319,535
|                                      |  |   |        
|                                      |  |   | 367,752
|Fair Value Adjustment of Assumed Debt |  |   | 5,010  
|                                      |  |   |        
|                                      |  | $ | 372,762
|                                      |  |   |        



Notes
payable consists of the following:



The Company has a note in the original
principal amount of $82 million, secured by 15 of its hotels. The term of the note is 10 years with a 25 year amortization. The note bears interest at the fixed rate of 7.4% per annum and payments are made in monthly installments of principal and
interest. The loan matures in October 2012 with an aggregate balloon payment of approximately $67 million. The outstanding balance at December 31, 2004 and 2003 was approximately $80.5 million and $81.7 million, respectively.



Prior to November 10, 2004, the date of refinancing, the Company had a note encumbered by 23
hotel properties with an annual interest rate of 8.85%. The note was payable in monthly installments of principal and interest and had an outstanding balance on the date of refinancing of approximately $125 million. On November 10, 2004, the Company
closed on a refinancing of this note. The refinancing involved 21 separate loans having an aggregate principal balance of $135 million. The 21 promissory notes are substantially similar in that each provide a stated annual interest rate of 6.88%,
each note matures on November 11, 2014 with an aggregate balloon payment of approximately $111 million, and each note provides a payment of interest only in monthly installments for the first 12 months, followed by amortized payments of principal
and interest in consecutive monthly installments thereafter. In association with this transaction, the Company incurred approximately $1.7 million in loan costs which will be amortized over 10 years using the effective interest method and recognized
debt extinguishment costs of approximately $8.8 million, which includes a credit of $1.9 million related to the debts outstanding fair value adjustment.



The Company has a note in the amount of approximately $50 million, secured by 10 of its hotels. The note bears a fixed interest rate of 8.08% per annum. The maturity
date is January 2010, with a balloon payment of $35.4 million. The loan is payable in monthly installments including principal and interest. The outstanding balance at December 31, 2004 and 2003 was approximately $47.7 million and $49.5 million,
respectively.



The Company has a note in the amount of approximately $20
million, secured by its Redmond hotel. The note provides for an applicable interest rate of 8.375% per year. The note requires consecutive monthly payments of principal and interest in the amount of $163,348. The note matures in December 2025. The
outstanding balance at December 31, 2004 and 2003 was approximately $19.4 and $19.7 million, respectively.



In conjunction with the acquisition of Apple Suites, the Company assumed the following secured notes:



| |  |  | A secured note with an original principal amount of $9.5 million that bears interest at 8.3% per annum and is secured by two hotels. The note is amortized over 25 years and matures
in January 2012. Payments of principal and interest are made monthly. The outstanding balance at December 31, 2004 and 2003 was approximately $9.2 and $9.3 million, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34



---

##### Table of Contents

| |  |  | A secured note with an original principal amount of $7.5 million that bears interest at 8.14% per annum and is secured by one hotel. The note is amortized over 25 years and matures
in September 2011. Payments of principal and interest are made monthly. The outstanding balance at December 31, 2004 and 2003 was $7.2 and $7.3 million, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A secured note with an original principal amount of $10.7 million that bears interest at 8.15% per annum and is secured by one hotel. The note is amortized over 25 years and matures
in June 2011. Payments of principal and interest are made monthly. The outstanding balance at December 31, 2004 and 2003 was $10.2 and $10.4 million, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A secured note with an original principal amount of $50 million that bears interest at 9% per annum and is secured by 11 hotels. The note is amortized over 25 years and matures on
September 2010. Payments of principal and interest are made monthly. The outstanding balance at December 31, 2004 and 2003 was $47.6 and $48.2 million, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In 2004, the Company entered into a $16 million dollar secured line of credit. The line bears interest at LIBOR (2.09% at December 31, 2004)
plus 2.5%, matures in April 2005 and is secured by two hotels. As of December 31, 2004, the Company had $11 million outstanding under the line of credit.



The Company has an unsecured promissory note due to its Chairman and CEO. The note was part of the purchase price of ASA. The principal and interest are due on January
31, 2007. The outstanding balance at December 31, 2004 and 2003 was $3.9 million and $3.6 million, respectively.



The outstanding balance of the Companys notes payable at December 31, 2004 and 2003 approximates fair market value at those dates.



Note 4



Shareholders Equity



The Company raised equity capital through a best efforts offering of Units by David Lerner Associates, Inc. (the Managing Dealer). One Unit consists of one
common share and one Series A preferred share of the Company. Through the close of the offering on November 26, 2002, 30.1 million Units were sold netting the Company $270,000,336. An additional 11.4 million Units were issued as part of the merger
with Apple Suites.



Also in connection with the Apple Suites merger, all of the
Companys 240,000 Series B convertible preferred shares were exchanged for 1,272,000 Series C convertible preferred shares of the Company. Expense related to the issuance of the Series B convertible preferred shares was determined based on the
fair value of the Series B convertible preferred shares at conversion date in excess of amounts paid by these individuals. The fair value was determined to be $8 per share at the date of the Merger. The holders of the Series B convertible preferred
shares, including Mr. Knight, would have otherwise been entitled to receive 1,272,000 Units upon conversion of the Series B convertible preferred shares in connection with the termination of the Companys advisory agreement with ASA and the
Companys property acquisition/disposition agreement with Apple Suites Realty Group, Inc. (ASRG). The new Series C convertible preferred shares have a liquidation preference comparable to the Series B convertible preferred shares,
in that holders of Series C convertible preferred shares will receive no payments in liquidation for their Series C convertible preferred shares until holders of Units are paid in full for their Series A preferred shares. The Series C convertible
preferred shares have the same voting rights and rights to receive dividend distributions as if they had already been converted to common shares.



The Series C convertible preferred shares will be convertible into Units upon and for 180 days following the occurrence of either of the following events: (1) the Company
transfers substantially all of the Companys assets, stock or business as a going concern, whether through exchange, merger, consolidation, lease, share exchange or otherwise, other than a sale of assets in liquidation, dissolution or winding
up of the Companys business; or (2) the Company lists the Companys Units on a national securities exchange or quotation system or in any established market. Upon the occurrence of either triggering event, each Series C convertible
preferred share will be convertible into one Unit, subject to adjustment to reflect stock dividends on, or split, subdivision or combination of, the Companys common shares.



35



---

##### Table of Contents

The Companys articles of incorporation authorize issuance of up to 15 million additional preferred shares. No
preferred shares other than the Series A preferred shares and the Series B convertible preferred shares (discussed above) have been issued. The Company believes that the authorization to issue additional preferred shares benefits the Company and its
shareholders by permitting flexibility in financing additional growth, giving the Company additional financing options in corporate planning and in responding to developments in business, including financing of additional acquisitions and other
general corporate purposes. Having authorized preferred shares available for issuance in the future gives the Company the ability to respond to future developments and allows preferred shares to be issued without the expense and delay of a special
shareholders meeting. At present, the Company has no specific financing or acquisition plans involving the issuance of additional preferred shares and the Company does not propose to fix the characteristics of any series of preferred shares in
anticipation of issuing preferred shares other than the Series A preferred shares and Series C convertible preferred shares. The Company cannot now predict whether or to what extent, if any, additional preferred shares will be used or if so used
what the characteristics of a particular series may be. The voting rights and rights to distributions of the holders of common shares will be subject to the prior rights of the holders of any subsequently-issued preferred shares. Unless otherwise
required by applicable law or regulation, the preferred shares would be issuable without further authorization by holders of the common shares and on such terms and for such consideration as may be determined by the board of directors. The preferred
shares could be issued in one or more series having varying voting rights, redemption and conversion features, distribution (including liquidating distribution) rights and preferences, and other rights, including rights of approval of specified
transactions. A series of preferred shares could be given rights that are superior to rights of holders of common shares and a series having preferential distribution rights could limit common share distributions and reduce the amount holders of
common shares would otherwise receive on dissolution.



Note 5



Stock Incentive Plans



The Company elected to follow Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options. The alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation,
(FASB 123) requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Companys stock options equals the market price of the underlying
stock on the date of grant and other criteria are met, no compensation expense is recognized.



For purposes of SFAS No. 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. As the options are exercisable within six months of the date
of grant, the full impact of the pro forma adjustment to net income is disclosed below. Amounts shown in thousands, except per share data.



|                                                                                                                              |  |                             |       |                             |   |                             |  |   |       
|----------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | --------------------------- | - | --------------------------- |  | - | ------
|(000s)                                                                                                                       |  | Year endedDecember 31, 2004 |       | Year endedDecember 31, 2003 |   | Year endedDecember 31, 2002
|Net income, as reported                                                                                                       |  | $                           | 6,449 |                             | $ | 1,497                       |  | $ | 18,867
|Add: Stock-based compensation expense included in reported net income, net of related tax effects                             |  |                             |      |                             |   | 10,176                      |  |   |      
|Deduct: Stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects |  |                             | 33    |                             |   | 10,233                      |  |   | 8     
|                                                                                                                              |  |                             |       |                             |   |                             |  |   |       
|Pro forma net income as if the fair value method had been applied to all option grants                                        |  | $                           | 6,416 |                             | $ | 1,440                       |  | $ | 18,859
|                                                                                                                              |  |                             |       |                             |   |                             |  |   |       
|Earnings per common share:                                                                                                    |  |                             |       |                             |   |                             |  |   |       
|Basic and diluted-as reported                                                                                                 |  | $                           | 0.15  |                             | $ | 0.04                        |  | $ | 0.88  
|Basic and diluted-pro forma                                                                                                   |  | $                           | 0.15  |                             | $ | 0.03                        |  | $ | 0.88  



36



---

##### Table of Contents

Pro forma information regarding net income and earnings per share is required by FASB 123, under the fair value method
described in that statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2004, 2003 and 2002, respectively:
risk-free interest rates of 4.14 %, 4.06% and 5.04%; expected volatility of approximately 0.272, 0.244 and 0.244, expected dividend yields of 8%, 8% and 10% and expected lives of approximately 10 years. Fair value of options granted was $1.00, $0.72
and $0.47, respectively.



The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock
price volatility.



Stock compensation expense included in the Statement of
Operations for year ended December 31, 2003 was $10,176,000, attributable to the conversion of all 240,000 Series B convertible preferred shares to Series C convertible preferred shares. The amount of stock compensation expense that would have been
recognized had the fair value method prescribed under SFAS No. 123 been applied is also $10,176,000, as the Merger, defined in Note 2, triggered the conversion of the Class B convertible preferred shares under a known conversion ratio. No stock
compensation expense was included in the Statement of Operations for the year ended December 31, 2004.



On April 30, 2001, the Board of Directors approved a Non-Employee Directors Stock Option Plan (the Directors Plan) whereby Directors, who are not employees of the Company or affiliates, automatically
receive options to purchase stock for five years from the adoption of the plan. Under the Directors Plan, the maximum number of shares to be issued is equal to 45,000 plus 1.8% of the number of Units sold in excess of 3,157,895 Units. This plan
currently relates to the initial public offering of 20,157,895 Units and the additional offering of 10,000,036 Units; therefore, the maximum number of shares to be issued under the Directors Plan is currently 531,001. The options expire 10 years
from the date of grant.



On April 30, 2001, the Board of Directors approved an
Incentive Stock Option Plan (the Incentive Plan) whereby incentive awards may be granted to certain employees of the Company or affiliates. Under the Incentive Plan, the maximum number of Units to be issued is equal to 35,000 plus 4.625%
of the number of shares sold in the initial offering in excess of 3,157,895 plus 4.4% of the total number of Units sold in additional offerings. This plan also currently relates to the initial public offering of 20,157,895 Units and the additional
offering of 10,000,036 Units; therefore, the maximum number of Units that can be issued under the Incentive Plan is currently 1,261,252.



Both plans generally provide, among other things, that options be granted at exercise prices not lower than the market value of the Units on the date of grant. Under the
Incentive Plan, at the earliest, options become exercisable at the date of grant. The optionee has up to 10 years from the date on which the options first become exercisable to exercise the options. In 2004, the Company granted 33,372 options to
purchase shares under the Directors Plan and granted no options under the Incentive Plan. In 2003, the Company granted 33,212 options to purchase shares under the Directors Plan and granted no options under the Incentive Plan. Also, as part of the
Merger, the Company converted 45,888 options granted under the Apple Suites Directors Plan to Company options with the same terms and agreements. In 2002, the Company granted 16,128 options to purchase shares under the Directors Plan and
granted no options under the Incentive Plan. Activity in the Companys share option plan during 2004, 2003 and 2002 is summarized in the following table:



|                                     |  |         |  |         |  |       
|------------------------------------ |  | ------- |  | ------- |  | ------
|                                     |  | 2004    |  | 2003    |  | 2002  
|Outstanding, beginning of year:      |  | 121,820 |  | 42,720  |  | 26,592
|Granted                              |  | 33,372  |  | 79,100  |  | 16,128
|Exercised                            |  |        |  |        |  |      
|Expired or canceled                  |  |        |  |        |  |      
|                                     |  |         |  |         |  |       
|Outstanding, end of year:            |  | 155,192 |  | 121,820 |  | 42,720
|                                     |  |         |  |         |  |       
|Exercisable, end of year:            |  | 155,192 |  | 121,820 |  | 42,720
|                                     |  |         |  |         |  |       
|The weighted-average exercise price: |  | 9.93    |  | 9.91    |  | 9.74  



37



---

##### Table of Contents

Note 6



Management Agreements



Residence Inn Hotels



The
Companys Residence Inn hotels are subject to management agreements under which Residence Inn by Marriott, Inc. (the Manager) manages the hotels, generally for an initial term of 15 to 20 years with renewal terms at the option of
the Manager of up to an additional 50 years. The agreements generally provide for payment of base management fees, which are calculated annually as a percentage of sales, and incentive management fees over a priority return (as defined in the
management agreements). Incentive management fees (IMF) are currently payable only if and to the extent there is sufficient cash flow from the hotels after consideration of qualifying debt service and after consideration to a priority return on
investment, including property improvements. Amounts not currently payable are deferred and are payable in future years only if and to the extent there is sufficient cash flow from future operations or upon sale or refinancing of the hotels after
consideration to a priority return to the Company (as defined in the management agreements), which is generally 12%. In the event of early termination of the management agreements, the Manager will receive additional fees based on the unexpired term
and expected future base and incentive management fees. The Company has the option to terminate the management agreements if specified performance thresholds are not satisfied.



Incentive fees are payable on a portfolio by portfolio basis for Residence Inn properties. The Company has three portfolios of multiple
hotels with separate management agreements which are subject to this calculation. The Company records incentive management fee exposure when it is considered probable that these fees will be paid, which is generally when they become payable. The
Company has recorded approximately $715,000 of deferred incentive management fees on the Res III portfolio. The Company has not recorded any deferred incentive management fees for the Res I and Res II portfolios. The Redmond hotels management
agreement does not include deferred incentive management fees; however, incentive fees are payable each year based on income in excess of a defined owners priority. For the years ended December 31, 2004 and 2003, the Company has incurred and
paid approximately $308,407 and $453,861, respectively, for incentive fees related to the Redmond property.



The Company acquired its Residence Inn hotels in separate transactions; (Res I  purchased February 2002, Res II  purchased in August 2002, Res III  purchased September 2001; and Redmond
purchased January 2003). In the Res I and Res II purchases, the Company assumed the amended and restated management agreements in effect with the Manager by the prior owner and assumed deferred incentive management fees totaling $6.7 million and
$7.0 million, respectively, at the date of the respective acquisitions. Additionally, the Company assumed the cost basis of $187.0 million and $243.0 million for Res I and Res II, respectively, and the holding period of the prior owner for purposes
of calculating the priority returns upon sale of the properties. The Company paid approximately $133.0 million and $160.0 million for Res I and Res II, respectively.



The following table summarizes deferred incentive management fees (DIMF) under these management agreements (dollars in
millions).



|        |  |             |      |                                |   |          |  |                          |      |           |   |                                            |  |   |      |  |   |    
|------- |  | ----------- | ---- | ------------------------------ | - | -------- |  | ------------------------ | ---- | --------- | - | ------------------------------------------ |  | - | ---- |  | - | ---
|        |  | DIMFAssumed |      | IMFAccumulatedPost-Acquisition |   | TotalIMF |  | Post-acquisitionIMF Paid |      | TotalDIMF |   | Amount accruedin ConsolidatedBalance Sheet
|Res I   |  | $           | 6.7  |                                | $ | 6.9      |  | $                        | 13.6 |           | $ | 0.0                                        |  | $ | 13.6 |  | $ | 0.0
|Res II  |  |             | 7.0  |                                |   | 4.3      |  |                          | 11.3 |           |   | 0.0                                        |  |   | 11.3 |  |   | 0.0
|Res III |  |             | 0.0  |                                |   | 1.2      |  |                          | 1.2  |           |   | 0.5                                        |  |   | 0.7  |  |   | 0.7
|Redmond |  |             | 0.0  |                                |   | 0.8      |  |                          | 0.8  |           |   | 0.8                                        |  |   | 0.0  |  |   | 0.0
|        |  |             |      |                                |   |          |  |                          |      |           |   |                                            |  |   |      |  |   |    
|Total   |  | $           | 13.7 |                                | $ | 13.2     |  | $                        | 26.9 |           | $ | 1.3                                        |  | $ | 25.6 |  | $ | 0.7
|        |  |             |      |                                |   |          |  |                          |      |           |   |                                            |  |   |      |  |   |    



38



---

##### Table of Contents

No amounts of DIMF were recorded upon the acquisition of Res I and Res II as the fair value of these amounts were not
readily determinable and payment was not considered probable.



In addition to
the base management and incentive management fees required by the management agreements, the Company is also required to pay certain shared services which are generally provided on a central or regional basis to all hotels in the Marriott
International hotel system. Shared services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting services, public relations and such additional services as needed which may be more
efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased by Marriott International or its subsidiaries on a fair and equitable basis. For
the year ended December 31, 2004, 2003 and 2002, respectively, total expenses incurred under the Marriott agreements were $18.4 million, $17.4 million, and $11.5 million, respectively.



Homewood Suites Hotels



The Companys 17 Homewood Suites hotels are managed by Promus Hotels, Inc. (Promus), a wholly owned subsidiary of Hilton Hotels Corporation
(Hilton) under the terms of separate management agreements, as part of the Homewood Suites by Hilton franchise. The initial term is generally 15 years with no option to renew; however, two hotel properties in this portfolio have renewal
options of two five year periods each. The Company has the option to terminate the management agreements if specified performance thresholds are not satisfied. Promus charges fees for this management function, which are calculated as a percentage of
revenue. Incentive management fees are calculated, for certain properties, on the basis of operating profit of the hotels. No incentive management fees were earned in 2004 or 2003. Promus also charges a fee, calculated as a percentage of suite
revenue, for franchise licenses to operate as a Homewood Suites by Hilton and to participate in its reservation system. Total expenses for franchise fees, management fees, advertising expenses and other reimbursable services were $6.0 million and
$5.3 million, respectively, for the years ended December 31, 2004 and 2003.



Note 7



Related Parties



Prior to January 31, 2003, the Company was externally-advised and had contracted with ASA to
advise and provide day to day management services to the Company. In accordance with the contract, the Company paid ASA a fee equal to .1% to .25% of total equity contributions received by the Company in addition to certain reimbursable expenses.
Concurrent with the Companys merger with Apple Suites on January 31, 2003, the Company terminated its advisory contract with ASA and became self-advised. To implement the termination of the advisory agreement, the Company purchased ASA. The
Company acquired all of Mr. Glade M. Knights stock in ASA instead of paying a $6.48 million termination fee due ASA under the advisory agreement. Mr. Knight received a cash payment of $2 million and a non-interest-bearing promissory note, due
four years after the Merger, in a principal amount of $4.48 million. The Company recognized an expense of approximately $5.5 million related to this transaction during 2003. Also in connection with the Companys Merger and the termination of
the advisory agreement with ASA, the Companys outstanding Series B convertible preferred shares were exchanged for 1,272,000 newly created Series C convertible preferred shares which have the same voting and dividend rights as if they had
already been converted into 1,272,000 common shares (see note 2).



During 2003,
the Company entered into an advisory agreement with Apple Hospitality Five Advisors, Inc. whereby the Company receives advisory fee revenue equal to .1% to .25% of total equity contributions received by Apple Hospitality Five, Inc., plus certain
reimbursable expenses in exchange for providing day to day advisory and real estate due diligence services for Apple Hospitality Five, Inc. The Company received advisory fee revenue in the amount of $730,138 and $296,435, respectively, under this
agreement for the years ended December 31, 2004 and 2003.



As of December 31,
2002, the Company had contracted with ASRG to provide brokerage services for the acquisition and disposition of the Companys real estate assets. In accordance with the contract, ASRG was paid



39



---

##### Table of Contents

a fee of 2% of the gross purchase price of any acquisitions or gross sale price of any dispositions of real estate investments, subject to certain
conditions. For the years ended December 31, 2003 and 2002, ASRG earned $651,000 and $5,866,784, respectively, under this agreement. ASRG is owned by Mr. Glade M. Knight, the Companys Chairman. Concurrent with the Companys merger with
Apple Suites on January 31, 2003, the Companys agreement with ASRG was terminated.



The Company also provides support services to Apple Six Advisors, Inc. (A6A), Apple Hospitality Five Inc., and Apple REIT Six, Inc. A6A provides day to day advisory and real estate due diligence services to Apple REIT
Six, Inc. A6A is 100% owned by Mr. Knight. Each of these companies have agreed to reimburse the Company for its costs in providing these services. For the year ended December 31, 2004, the Company has received reimbursement of its costs totaling
approximately $649,000.



Mr. Knight is Chairman and Chief Executive Officer of
Apple Hospitality Five, Inc. and Apple REIT Six, Inc. and of Cornerstone Realty Income Trust, Inc., an apartment REIT. Additionally, the Companys Board of Directors is the same as Apple Hospitality Five, Inc. and Apple REIT Six, Inc.



Note 8



Earnings Per Share



The following table sets forth the computation of basic and diluted earnings per share in accordance with SFAS 128 (in thousands):



|                                                                                                    |  |                             |        |                             |   |                              |  |   |       
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | --------------------------- | - | ---------------------------- |  | - | ------
|                                                                                                    |  | Year endedDecember 31, 2004 |        | Year endedDecember 31, 2003 |   | Year ended December 31, 2002
|Numerator:                                                                                          |  |                             |        |                             |   |                              |  |   |       
|Net income and numerator for basic and diluted earnings                                             |  | $                           | 6,449  |                             | $ | 1,497                        |  | $ | 18,867
|Denominator:                                                                                        |  |                             |        |                             |   |                              |  |   |       
|Denominator for basic earnings per share-weighted-average shares                                    |  |                             | 41,728 |                             |   | 41,421                       |  |   | 21,557
|Effect of dilutive securities                                                                       |  |                             | 1      |                             |   | 1                            |  |   | 1     
|                                                                                                    |  |                             |        |                             |   |                              |  |   |       
|Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions |  |                             | 41,729 |                             |   | 41,422                       |  |   | 21,558
|                                                                                                    |  |                             |        |                             |   |                              |  |   |       
|Basic and Diluted earnings per common share                                                         |  | $                           | 0.15   |                             | $ | 0.04                         |  | $ | 0.88  



Note 9



Quarterly Financial Data (unaudited)



The following is a summary of quarterly results of operations for the years ended December
31, 2004 and December 31, 2003, in thousands, except per share data:



|                                            |  |               |         |   |               |   |              |  |               |        |  |   |        |  
|------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------------ |  | ------------- | ------ |  | - | ------ | -
|2004                                        |  | First Quarter |         |   | SecondQuarter |   | ThirdQuarter |  | FourthQuarter |       
|Revenues                                    |  | $             | 49,480  |   |               | $ | 54,634       |  | $             | 58,775 |  | $ | 50,753 |  
|Net income (loss)                           |  | $             | 2,086   |   |               | $ | 5,122        |  | $             | 6,751  |  | $ | (7,510 | )
|Basic and diluted earnings per common share |  | $             | 0.05    |   |               | $ | 0.12         |  | $             | 0.16   |  | $ | (0.18  | )
|Distributions paid per share                |  | $             | 0.25    |   |               | $ | 0.25         |  | $             | 0.20   |  | $ | 0.20   |  
|                                            |  |               |         |  
|2003                                        |  | First Quarter |         |   | SecondQuarter |   | ThirdQuarter |  | FourthQuarter |       
|Revenues                                    |  | $             | 43,445  |   |               | $ | 50,199       |  | $             | 52,743 |  | $ | 49,419 |  
|Net income (loss)                           |  | $             | (10,779 | ) |               | $ | 5,483        |  | $             | 5,076  |  | $ | 1,717  |  
|Basic and diluted earnings per common share |  | $             | (0.28   | ) |               | $ | 0.13         |  | $             | 0.12   |  | $ | 0.04   |  
|Distributions paid per share                |  | $             | 0.75    |   |               | $ | 0.25         |  | $             | 0.25   |  | $ | 0.25   |  



40



---

##### Table of Contents

Note 10



Pro Forma Information (unaudited)



The following pro forma information for the years ended December 31, 2003 and 2002 is presented as if the acquisition of Apple Suites, Inc. occurred on January 1, 2002.
The pro forma information does not purport to represent what the Companys results of operations would actually have been if such transactions, in fact, had occurred on January 1, 2003, nor does it purport to represent the results of operations
for future periods. Merger related costs associated with the Apple Suites merger have been excluded from the pro forma results, as they are associated with the merger and are non-recurring operating expenses. Amounts shown in thousands, except per
share data.



|                                       |  |                   |         |                   |   |        
|-------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------
|                                       |  | December 31, 2003 |         | December 31, 2002
|Hotel revenues                         |  | $                 | 199,526 |                   | $ | 214,862
|Net income                             |  | $                 | 17,402  |                   | $ | 28,921 
|Net income per share basic and diluted |  | $                 | 0.38    |                   | $ | 0.84   



Note 11



Industry Segments



The Company owns extended-stay hotel properties throughout the United States that generate rental and other property related income. The
Company separately evaluates the performance of each of its hotel properties. However, because each of the hotel properties has similar economic characteristics, facilities, and services, the properties have been aggregated into a single segment.
All segment disclosure is included in or can be derived from the Companys consolidated financial statements.



Note 12



Subsequent Events



In January 2005, the
Company declared and distributed to its shareholders dividends in the amount of $8.3 million ($0.20 per share).



In January 2005, the Company redeemed 234,559 Units in the amount of $2.3 million.



In January 2005, through the Companys Dividend Reinvestment Plan, 234,402 Units totaling $2.3 million were reinvested.



41



---

##### Table of Contents

Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure



None.



Item 9A. Controls and Procedures



Senior
management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process,
the Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures are effective and that there have been no changes in the Companys internal control over financial reporting that
occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. Since that evaluation process was completed, there have been no
significant changes in internal controls or in other factors that could significantly affect these controls.



See Item 8 for the Companys Report of Management on Internal Control Over Financial Reporting.



Item 9B. Other Information



None.



42



---

##### Table of Contents

PART III



Item 10. Directors and Executive Officers of the Registrant



For information with respect to the Companys directors and executive officers, see the information in the Companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby
incorporated herein by reference.



Item 11. Executive Compensation



For information
with respect to the Companys executive compensation, see the information in the Companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



Item 12. Security Ownership of Certain Beneficial Owners and Management



For information with respect to the Companys security ownership of certain beneficial owners and management related shareholder matters, see the information in the Companys Proxy Statement for its 2005
Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



Item 13. Certain Relationships and Related Transactions



For information with respect to the Companys certain relationships and related transactions, see the information in the Companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby
incorporated herein by reference.



Item 14. Principal Accounting Fees and Services



For information with respect to the Companys principal accountant fees and services, see the information in the Companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby incorporated
herein by reference.



For information with respect to the Companys
pre-approval policies for audit and non-audit services, see the information in the Companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



43



---

##### Table of Contents

PART IV



Item 15. Exhibits and Financial Statement Schedules



(a)



| | 1. | Financial Statements of Apple Hospitality Two, Inc.
| | -- | ---------------------------------------------------



Report of Management on Internal Control Over Financial Reporting



Report of Independent Registered Public Accounting Firm on Internal Control Over Financial ReportingErnst & Young
LLP



Report of Independent Registered Public Accounting
FirmErnst & Young LLP



Consolidated Balance Sheets
as of December 31, 2004 and 2003



Consolidated Statements of
Operations for the years ended December 31, 2004, 2003 and 2002



Consolidated Statements of Shareholders Equity for the years ended December 31, 2004, 2003 and 2002



Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002



Notes to Consolidated Financial Statements



These financial statements are set forth in Item 8 of this report and are hereby incorporated by reference.



| | 2. | Financial Statement Schedules
| | -- | -----------------------------



Schedule IIIReal Estate and Accumulated Depreciation (Included at the end of this Part IV of this report.)



| | 3. | Exhibits
| | -- | --------



Incorporated herein by reference are the exhibits listed under Exhibits Index to this Report available at www.sec.gov.



44



---

##### Table of Contents

SCHEDULE III

Real Estate and Accumulated Depreciation

As of December 31, 2004

(Dollars in thousands)



|                                |  |              |        |              |            |                         |                  |                    |        |             |   |       |                     |   |               |  |                 |        |             |  |      |  |                |  |             |  |    
|------------------------------- |  | ------------ | ------ | ------------ | ---------- | ----------------------- | ---------------- | ------------------ | ------ | ----------- | - | ----- | ------------------- | - | ------------- |  | --------------- | ------ | ----------- |  | ---- |  | -------------- |  | ----------- |  | ---
|                                |  | Encumbrances |        | Initial Cost |            | SubsequentlyCapitalized |                  | TotalGross Cost(1) |        | Acc.Deprec. |   |       | Date ofConstruction |   | Date Acquired |  | DepreciableLife |        | # of Suites
|Description                     |  |              | Land   |              | Bldg./FF&E |                         | Bldg. Imp. &FF&E |                    |        |             |   |       |                    
|Akron, Ohio                     |  | $            | 5,460  |              | $          | 597                     |                  | $                  | 3,665  |             | $ | 2,347 |                     | $ | 6,609         |  | $               | (699   | )           |  | 1987 |  | August 2002    |  | 3 - 39 yrs. |  | 112
|Arcadia, California             |  |              | 14,850 |              |            | 2,284                   |                  |                    | 6,380  |             |   | 2,121 |                     |   | 10,785        |  |                 | (908   | )           |  | 1989 |  | August 2002    |  | 3 - 39 yrs. |  | 120
|Atlanta, Georgia                |  |              | 4,291  |              |            | 1,757                   |                  |                    | 10,360 |             |   | 1,243 |                     |   | 13,360        |  |                 | (1,279 | )           |  | 1990 |  | September 2001 |  | 3 - 39 yrs. |  | 126
|Atlanta/Buckhead, Georgia       |  |              | 5,500  |              |            | 4,568                   |                  |                    | 9,087  |             |   | 186   |                     |   | 13,841        |  |                 | (708   | )           |  | 1997 |  | January 2003   |  | 3 - 39 yrs. |  | 92 
|Atlanta/Cumberland, Georgia     |  |              | 4,758  |              |            | 2,202                   |                  |                    | 8,618  |             |   | 367   |                     |   | 11,187        |  |                 | (730   | )           |  | 1990 |  | January 2003   |  | 3 - 39 yrs. |  | 124
|Atlanta/Peachtree, Georgia      |  |              | 2,664  |              |            | 953                     |                  |                    | 3,629  |             |   | 352   |                     |   | 4,934         |  |                 | (406   | )           |  | 1990 |  | January 2003   |  | 3 - 39 yrs. |  | 92 
|Bakersfield, California         |  |              | 3,814  |              |            | 1,870                   |                  |                    | 7,567  |             |   | 1,340 |                     |   | 10,777        |  |                 | (1,035 | )           |  | 1990 |  | September 2001 |  | 3 - 39 yrs. |  | 114
|Baltimore, Maryland             |  |              | 8,564  |              |            | 1,601                   |                  |                    | 15,553 |             |   | 538   |                     |   | 17,692        |  |                 | (1,106 | )           |  | 1998 |  | January 2003   |  | 3 - 39 yrs. |  | 147
|Birmingham, Alabama             |  |              | 5,573  |              |            | 1,227                   |                  |                    | 4,349  |             |   | 2,250 |                     |   | 7,826         |  |                 | (574   | )           |  | 1986 |  | August 2002    |  | 3 - 39 yrs. |  | 128
|Boca Raton, Florida             |  |              | 3,750  |              |            | 1,360                   |                  |                    | 3,871  |             |   | 1     |                     |   | 5,232         |  |                 | (337   | )           |  | 1988 |  | August 2002    |  | 3 - 39 yrs. |  | 120
|Boston, Massachusetts           |  |              | 6,675  |              |            | 4,707                   |                  |                    | 12,730 |             |   | 1,731 |                     |   | 19,168        |  |                 | (1,589 | )           |  | 1989 |  | September 2001 |  | 3 - 39 yrs. |  | 130
|Boston, Massachusetts           |  |              | 4,620  |              |            | 1,193                   |                  |                    | 4,774  |             |   | 2,232 |                     |   | 8,199         |  |                 | (770   | )           |  | 1989 |  | August 2002    |  | 3 - 39 yrs. |  | 96 
|Boulder, Colorado               |  |              | 10,208 |              |            | 3,428                   |                  |                    | 12,532 |             |   | 559   |                     |   | 16,519        |  |                 | (904   | )           |  | 1991 |  | January 2003   |  | 3 - 39 yrs. |  | 112
|Boulder, Colorado               |  |              | 5,820  |              |            | 1,179                   |                  |                    | 8,538  |             |   | 3,518 |                     |   | 13,235        |  |                 | (1,406 | )           |  | 1986 |  | March 2002     |  | 3 - 39 yrs. |  | 128
|Buckhead, Georgia               |  |              | 4,947  |              |            | 3,231                   |                  |                    | 4,267  |             |   | 2,466 |                     |   | 9,964         |  |                 | (733   | )           |  | 1987 |  | March 2002     |  | 3 - 39 yrs. |  | 136
|Charlotte, North Carolina       |  |              |       |              |            | 2,397                   |                  |                    | 3,910  |             |   | 1     |                     |   | 6,308         |  |                 | (325   | )           |  | 1988 |  | August 2002    |  | 3 - 39 yrs. |  | 91 
|Chesterfield, Missouri          |  |              | 2,716  |              |            | 1,148                   |                  |                    | 3,480  |             |   | 897   |                     |   | 5,525         |  |                 | (476   | )           |  | 1986 |  | March 2002     |  | 3 - 39 yrs. |  | 104
|Cincinatti, Ohio                |  |              | 4,768  |              |            | 1,573                   |                  |                    | 5,472  |             |   | 379   |                     |   | 7,424         |  |                 | (740   | )           |  | 1990 |  | September 2001 |  | 3 - 39 yrs. |  | 118
|Clearwater, Florida             |  |              | 5,709  |              |            | 2,687                   |                  |                    | 8,108  |             |   | 434   |                     |   | 11,229        |  |                 | (625   | )           |  | 1998 |  | January 2003   |  | 3 - 39 yrs. |  | 112
|Clearwater, Florida             |  |              | 3,540  |              |            | 1,759                   |                  |                    | 3,266  |             |   | 1,960 |                     |   | 6,985         |  |                 | (472   | )           |  | 1986 |  | August 2002    |  | 3 - 39 yrs. |  | 88 
|Columbia, South Carolina        |  |              | 4,380  |              |            | 475                     |                  |                    | 5,732  |             |   | 2,265 |                     |   | 8,472         |  |                 | (882   | )           |  | 1988 |  | August 2002    |  | 3 - 39 yrs. |  | 128
|Columbus North, Ohio            |  |              | 1,698  |              |            | 641                     |                  |                    | 3,527  |             |   | 480   |                     |   | 4,648         |  |                 | (439   | )           |  | 1985 |  | March 2002     |  | 3 - 39 yrs. |  | 96 
|Concord, California             |  |              | 6,198  |              |            | 4,937                   |                  |                    | 16,804 |             |   | 1,285 |                     |   | 23,026        |  |                 | (1,944 | )           |  | 1989 |  | September 2001 |  | 3 - 39 yrs. |  | 126
|Costa Mesa, California          |  |              | 7,275  |              |            | 3,773                   |                  |                    | 6,825  |             |   | 3,110 |                     |   | 13,708        |  |                 | (852   | )           |  | 1986 |  | March 2002     |  | 3 - 39 yrs. |  | 144
|Cumberland, Georgia             |  |              | 2,910  |              |            | 1,938                   |                  |                    | 3,622  |             |   | 508   |                     |   | 6,068         |  |                 | (490   | )           |  | 1987 |  | March 2002     |  | 3 - 39 yrs. |  | 130
|Dallas, Texas                   |  |              | 5,245  |              |            | 1,397                   |                  |                    | 8,271  |             |   | 446   |                     |   | 10,114        |  |                 | (1,055 | )           |  | 1989 |  | September 2001 |  | 3 - 39 yrs. |  | 120
|Dallas/Addison, Texas           |  |              | 5,234  |              |            | 2,059                   |                  |                    | 8,511  |             |   | 398   |                     |   | 10,968        |  |                 | (703   | )           |  | 1990 |  | January 2003   |  | 3 - 39 yrs. |  | 120
|Dallas/Las Colinas, Texas       |  |              | 5,424  |              |            | 2,772                   |                  |                    | 9,592  |             |   | 422   |                     |   | 12,786        |  |                 | (779   | )           |  | 1990 |  | January 2003   |  | 3 - 39 yrs. |  | 136
|Dallas/Plano, Texas             |  |              | 2,379  |              |            | 521                     |                  |                    | 5,219  |             |   | 347   |                     |   | 6,087         |  |                 | (521   | )           |  | 1997 |  | January 2003   |  | 3 - 39 yrs. |  | 99 
|Dayton North, Ohio              |  |              | 1,407  |              |            | 320                     |                  |                    | 2,539  |             |   | 193   |                     |   | 3,052         |  |                 | (273   | )           |  | 1987 |  | March 2002     |  | 3 - 39 yrs. |  | 64 
|Dayton South, Ohio              |  |              | 2,959  |              |            | 443                     |                  |                    | 4,353  |             |   | 1,983 |                     |   | 6,779         |  |                 | (785   | )           |  | 1985 |  | March 2002     |  | 3 - 39 yrs. |  | 96 
|Deerfield, Illinois             |  |              | 8,100  |              |            | 1,442                   |                  |                    | 6,665  |             |   | 2,007 |                     |   | 10,114        |  |                 | (922   | )           |  | 1989 |  | August 2002    |  | 3 - 39 yrs. |  | 128
|Detroit, Michigan               |  |              | 2,379  |              |            | 508                     |                  |                    | 4,543  |             |   | 348   |                     |   | 5,399         |  |                 | (450   | )           |  | 1990 |  | January 2003   |  | 3 - 39 yrs. |  | 76 
|Dulles, Virginia                |  |              | 7,285  |              |            | 2,419                   |                  |                    | 15,104 |             |   | 304   |                     |   | 17,827        |  |                 | (828   | )           |  | 1998 |  | January 2003   |  | 3 - 39 yrs. |  | 109
|Dunwoody, Georgia               |  |              | 2,668  |              |            | 1,988                   |                  |                    | 4,725  |             |   | 878   |                     |   | 7,591         |  |                 | (651   | )           |  | 1984 |  | March 2002     |  | 3 - 39 yrs. |  | 144
|Galleria, Missouri              |  |              | 6,354  |              |            | 1,970                   |                  |                    | 5,554  |             |   | 1,270 |                     |   | 8,794         |  |                 | (701   | )           |  | 1986 |  | March 2002     |  | 3 - 39 yrs. |  | 152
|Greensboro, North Carolina      |  |              | 4,875  |              |            | 1,518                   |                  |                    | 5,211  |             |   | 3     |                     |   | 6,732         |  |                 | (479   | )           |  | 1987 |  | August 2002    |  | 3 - 39 yrs. |  | 128
|Home Office Richmond, Virginia |  |              |       |              |            | 138                     |                  |                    | 766    |             |   | 58    |                     |   | 962           |  |                 | (229   | )           |  | 1950 |  | January 2003   |  | 3 - 39 yrs. |  |   
|Houston, Texas                  |  |              | 4,768  |              |            | 960                     |                  |                    | 8,903  |             |   | 1,411 |                     |   | 11,274        |  |                 | (1,166 | )           |  | 1990 |  | September 2001 |  | 3 - 39 yrs. |  | 110



45



---

##### Table of Contents

SCHEDULE III

Real Estate and Accumulated Depreciation

As of December 31, 2004

(Dollars in thousands)



|                                   |  |              |         |              |            |                         |                  |                    |         |             |   |        |                     |   |               |  |                 |         |             |  |      |  |                |  |             |  |      
|---------------------------------- |  | ------------ | ------- | ------------ | ---------- | ----------------------- | ---------------- | ------------------ | ------- | ----------- | - | ------ | ------------------- | - | ------------- |  | --------------- | ------- | ----------- |  | ---- |  | -------------- |  | ----------- |  | -----
|                                   |  | Encumbrances |         | Initial Cost |            | SubsequentlyCapitalized |                  | TotalGross Cost(1) |         | Acc.Deprec. |   |        | Date ofConstruction |   | Date Acquired |  | DepreciableLife |         | # of Suites
|Description                        |  |              | Land    |              | Bldg./FF&E |                         | Bldg. Imp. &FF&E |                    |         |             |   |        |                    
|Irvine, California                 |  |              | 12,750  |              |            | 2,904                   |                  |                    | 6,049   |             |   | 2,206  |                     |   | 11,159        |  |                 | (944    | )           |  | 1989 |  | August 2002    |  | 3 - 39 yrs. |  | 112  
|Jackson, Mississippi               |  |              | 2,855   |              |            | 897                     |                  |                    | 8,271   |             |   | 337    |                     |   | 9,505         |  |                 | (525    | )           |  | 1997 |  | January 2003   |  | 3 - 39 yrs. |  | 91   
|Jackson, Mississippi               |  |              | 3,360   |              |            | 786                     |                  |                    | 4,125   |             |   | 2,229  |                     |   | 7,140         |  |                 | (599    | )           |  | 1986 |  | August 2002    |  | 3 - 39 yrs. |  | 120  
|Jacksonville, Florida              |  |              | 4,875   |              |            | 566                     |                  |                    | 4,001   |             |   | 2,636  |                     |   | 7,203         |  |                 | (607    | )           |  | 1986 |  | August 2002    |  | 3 - 39 yrs. |  | 112  
|Kalamazoo, Florida                 |  |              | 3,938   |              |            | 1,313                   |                  |                    | 3,896   |             |   | 461    |                     |   | 5,670         |  |                 | (481    | )           |  | 1989 |  | August 2002    |  | 3 - 39 yrs. |  | 83   
|La Jolla, California               |  |              | 19,062  |              |            | 17,255                  |                  |                    | 11,854  |             |   | 7,101  |                     |   | 36,210        |  |                 | (2,379  | )           |  | 1986 |  | March 2002     |  | 3 - 39 yrs. |  | 288  
|Las Vegas, Nevada                  |  |              | 20,625  |              |            | 3,685                   |                  |                    | 8,786   |             |   | 828    |                     |   | 13,299        |  |                 | (696    | )           |  | 1989 |  | August 2002    |  | 3 - 39 yrs. |  | 192  
|Lombard, Illinois                  |  |              | 5,238   |              |            | 1,166                   |                  |                    | 5,740   |             |   | 529    |                     |   | 7,435         |  |                 | (1,006  | )           |  | 1987 |  | March 2002     |  | 3 - 39 yrs. |  | 144  
|Long Beach, California             |  |              | 11,253  |              |            | 7,325                   |                  |                    | 11,597  |             |   | 587    |                     |   | 19,509        |  |                 | (1,111  | )           |  | 1987 |  | March 2002     |  | 3 - 39 yrs. |  | 216  
|Lubbock, Texas                     |  |              | 2,500   |              |            | 410                     |                  |                    | 2,754   |             |   | 1,449  |                     |   | 4,613         |  |                 | (420    | )           |  | 1986 |  | August 2002    |  | 3 - 39 yrs. |  | 80   
|Memphis, Tennessee                 |  |              | 2,535   |              |            | 2,038                   |                  |                    | 4,755   |             |   | 315    |                     |   | 7,108         |  |                 | (395    | )           |  | 1986 |  | August 2002    |  | 3 - 39 yrs. |  | 105  
|Meriden, Connecticut               |  |              | 4,291   |              |            |                        |                  |                    | 9,092   |             |   | 698    |                     |   | 9,790         |  |                 | (1,107  | )           |  | 1989 |  | September 2001 |  | 3 - 39 yrs. |  | 106  
|Montgomery, Alabama                |  |              | 2,384   |              |            | 965                     |                  |                    | 5,025   |             |   | 302    |                     |   | 6,292         |  |                 | (666    | )           |  | 1990 |  | September 2001 |  | 3 - 39 yrs. |  | 94   
|Pensacola, Florida                 |  |              | 3,540   |              |            | 336                     |                  |                    | 2,297   |             |   | 1,557  |                     |   | 4,190         |  |                 | (741    | )           |  | 1985 |  | August 2002    |  | 3 - 39 yrs. |  | 64   
|Philadelphia, Pennsylvania         |  |              | 5,979   |              |            | 1,395                   |                  |                    | 5,650   |             |   | 2,201  |                     |   | 9,246         |  |                 | (829    | )           |  | 1988 |  | August 2002    |  | 3 - 39 yrs. |  | 88   
|Philadelphia/Malvern, Pennsylvania |  |              | 5,500   |              |            |                        |                  |                    | 16,285  |             |   | 210    |                     |   | 16,495        |  |                 | (1,075  | )           |  | 1998 |  | January 2003   |  | 3 - 39 yrs. |  | 123  
|Placentia, California              |  |              | 7,650   |              |            | 3,397                   |                  |                    | 4,663   |             |   | 2,103  |                     |   | 10,163        |  |                 | (822    | )           |  | 1988 |  | August 2002    |  | 3 - 39 yrs. |  | 112  
|Portland, Oregon                   |  |              | 4,575   |              |            | 3,095                   |                  |                    | 7,705   |             |   | 254    |                     |   | 11,054        |  |                 | (429    | )           |  | 1998 |  | January 2003   |  | 3 - 39 yrs. |  | 123  
|Redmond, Washington                |  |              | 19,440  |              |            | 6,777                   |                  |                    | 27,736  |             |   | 124    |                     |   | 34,637        |  |                 | (1,577  | )           |  | 1990 |  | January 2003   |  | 3 - 39 yrs. |  | 180  
|Richmond, Virginia                 |  |              | 5,130   |              |            | 790                     |                  |                    | 9,035   |             |   | 386    |                     |   | 10,211        |  |                 | (725    | )           |  | 1998 |  | January 2003   |  | 3 - 39 yrs. |  | 123  
|Salt Lake City, Utah               |  |              | 2,379   |              |            | 377                     |                  |                    | 5,142   |             |   | 295    |                     |   | 5,814         |  |                 | (463    | )           |  | 1996 |  | January 2003   |  | 3 - 39 yrs. |  | 98   
|San Ramon, California              |  |              | 5,245   |              |            | 3,448                   |                  |                    | 15,542  |             |   | 431    |                     |   | 19,421        |  |                 | (1,607  | )           |  | 1989 |  | September 2001 |  | 3 - 39 yrs. |  | 106  
|Santa Fe, New Mexico               |  |              | 8,050   |              |            | 1,411                   |                  |                    | 4,840   |             |   | 104    |                     |   | 6,355         |  |                 | (429    | )           |  | 1986 |  | August 2002    |  | 3 - 39 yrs. |  | 120  
|Sharonville, Ohio                  |  |              | 1,940   |              |            | 2,087                   |                  |                    | 3,790   |             |   | 3,751  |                     |   | 9,628         |  |                 | (1,037  | )           |  | 1985 |  | March 2002     |  | 3 - 39 yrs. |  | 144  
|Shreveport, Louisiana              |  |              | 4,050   |              |            | 298                     |                  |                    | 2,503   |             |   | 43     |                     |   | 2,844         |  |                 | (240    | )           |  | 1983 |  | August 2002    |  | 3 - 39 yrs. |  | 72   
|Southfield, Michigan               |  |              | 4,268   |              |            | 1,738                   |                  |                    | 3,869   |             |   | 1,137  |                     |   | 6,744         |  |                 | (637    | )           |  | 1987 |  | March 2002     |  | 3 - 39 yrs. |  | 144  
|Spartanburg, South Carolina        |  |              |        |              |            | 598                     |                  |                    | 2,918   |             |   | 81     |                     |   | 3,597         |  |                 | (282    | )           |  | 1985 |  | August 2002    |  | 3 - 39 yrs. |  | 88   
|St. Louis, Missouri                |  |              | 4,575   |              |            | 2,099                   |                  |                    | 9,712   |             |   | 194    |                     |   | 12,005        |  |                 | (531    | )           |  | 2000 |  | January 2003   |  | 3 - 39 yrs. |  | 145  
|                                   |  |              |         |              |            |                         |                  |                    |         |             |   |        |                     |   |               |  |                 |         |             |  |      |  |                |  |             |  |      
|                                   |  | $            | 367,752 |              | $          | 139,096                 |                  | $                  | 474,254 |             | $ | 75,187 |                     | $ | 688,537       |  | $               | (52,331 | )           |  |      |  |                |  |             |  | 7,869
|                                   |  |              |         |              |            |                         |                  |                    |         |             |   |        |                     |   |               |  |                 |         |             |  |      |  |                |  |             |  |      



|                        |  |      |         |  |                           |      |   |        
|----------------------- |  | ---- | ------- |  | ------------------------- | ---- | - | -------
|                        |  | 2004 |         |  |                           | 2004
|Real estate owned:      |  |      |         |  | Accumulated depreciation: |      |   |        
|Balance as of January 1 |  | $    | 666,363 |  | Balance as of January 1   |      | $ | 27,705 
|Improvements            |  |      | 22,174  |  | Depreciation expense      |      |   | 24,626 
|                        |  |      |         |  |                           |      |   |        
|Balance at December 31  |  | $    | 688,537 |  | Balance at December 31    |      |   | $52,331
|                        |  |      |         |  |                           |      |   |        



|(1) | The cost basis for Federal Income Tax purposes approximates the basis used in this schedule.
|--- | --------------------------------------------------------------------------------------------



46



---

##### Table of Contents

SIGNATURES



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



|                            |  |                                               |  |  |  |                     |  | 
|--------------------------- |  | --------------------------------------------- |  |  |  | ------------------- |  | 
|APPLE HOSPITALITY TWO, INC. |  |                                               |  |  |  |                    
|                            |  |                                               | 
|By:                         |  | /s/ GLADE M. KNIGHT                           |  |  |  | Date: March 9, 2005
|                            |  | Glade M. Knight,                              |  |  |  |                     |  | 
|                            |  | Chairman of the Board, ChiefExecutive Officer |  |  |  |                     |  | 
|                            |  |                                               | 
|By:                         |  | /s/ Bryan Peery                               |  |  |  | Date: March 9, 2005
|                            |  | Bryan Peery,                                  |  |  |  |                     |  | 
|                            |  | Chief Accounting Officer                      |  |  |  |                     |  | 



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



|    |  |                             |  |  |  |                     |  | 
|--- |  | --------------------------- |  |  |  | ------------------- |  | 
|    |  |                             | 
|By: |  | /s/ Glade M. Knight         |  |  |  | Date: March 9, 2005
|    |  | Glade M. Knight, Director   |  |  |  |                     |  | 
|    |  |                             | 
|By: |  | /s/ Lisa B. Kern            |  |  |  | Date: March 9, 2005
|    |  | Lisa B. Kern, Director      |  |  |  |                     |  | 
|    |  |                             | 
|By: |  | /s/ Bruce H. Matson         |  |  |  | Date: March 9, 2005
|    |  | Bruce H. Matson, Director   |  |  |  |                     |  | 
|    |  |                             | 
|By: |  | /s/ Michael S. Waters       |  |  |  | Date: March 9, 2005
|    |  | Michael S. Waters, Director |  |  |  |                     |  | 
|    |  |                             | 
|By: |  | /s/ Robert M. Wily          |  |  |  | Date: March 9, 2005
|    |  | Robert M. Wily, Director    |  |  |  |                     |  | 



47



---

##### Table of Contents

Exhibit Index



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 
|2.1 |  | Agreement and Plan of Merger dated as of October 24, 2002 by and between Apple Hospitality Two, Inc., Hospitality Acquisition Company and Apple Suites, Inc. (Incorporated by reference to
Exhibit 2.1 to Current Report on Form 8-K filed October 25, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                                                 
|    | 
|2.2 |  | Agreement and Plan of Merger dated as of November 28, 2001 by and between Apple Hospitality Two, Inc., Marriott Residence Inn Limited Partnership, AHT Res Acquisition, L.P. and RIBM One LLC.
(Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on April 15, 2002; SEC File No. 333-53984).                                                                                                                                                                                                              
|    | 
|2.3 |  | Certificate of Merger dated March 28, 2002 (with effective date of March 29, 2002) for merger of AHT Res Acquisition, L.P. with and into Marriott Residence Inn Limited Partnership.
(Incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K filed on April 15, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                        
|    | 
|2.4 |  | Agreement and Plan of Merger dated as of April 30, 2002 by and among Apple Hospitality Two, Inc., AHT Res II Acquisition, L.P., RIBM Two LLC and Marriott Residence Inn II Limited Partnership.
(Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).                                                                                                                                                                                                         
|    | 
|2.5 |  | Certificate of Merger dated August 28, 2002 for merger of AHT Res II Acquisition, L.P. with and into Marriott Residence Inn II Limited Partnership (as surviving entity). (Incorporated by
reference to Exhibit 2.2 to Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                               
|    | 
|3.1 |  | Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to Registration Statement on Form S-4 filed on December 19, 2002;
SEC File No. 333-101194)                                                                                                                                                                                                                                                                                                              
|    | 
|3.2 |  | Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to Registration Statement on Form S-11 filed on May 22, 2002; SEC File No. 333-84098)                                                                                                                                                                                                                                                                                                                                                           
|    | 
|4.1 |  | Acknowledgment, Waiver, Consent and Amendment dated as of August 28, 2002 by and between Marriott Residence Inn II Limited Partnership (Borrower), LaSalle Bank National Association (f/k/a
LaSalle National Bank), as Trustee for Nomura Asset Securities Corporation Commercial Mortgage Pass-Through Certificates, Series 1996-MD V (Lender). (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed on September 12, 2002;
SEC File No. 333-53984).                                                        
|    | 
|4.2 |  | Facility Mortgagee Agreement dated as of August 28, 2002 by and between Marriott Residence Inn II Limited Partnership (Borrower), AHM Res II Limited Partnership (Tenant), Apple Hospitality
Two, Inc. and LaSalle Bank National Association (f/k/a LaSalle National Bank), as Trustee for Nomura Asset Securities Corporation Commercial Mortgage Pass-Through Certificates, Series 1996-MD V (Lender). (Incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).
|    | 
|4.3 |  | Supplemental Assignment of Leases and Rents dated as of August 28, 2002 by and between Marriott Residence Inn II Limited Partnership (Borrower) and LaSalle Bank National Association (f/k/a
LaSalle National Bank), as Trustee for Nomura Asset Securities Corporation Commercial Mortgage Pass-Through Certificates, Series 1996-MD V (Lender). (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed on September 12, 2002;
SEC File No. 333-53984).                                                       
|    | 
|4.4 |  | Supplemental Security Agreement dated as of August 28, 2002 by and between Marriott Residence Inn II Limited Partnership (Debtor) and LaSalle Bank National Association (f/k/a LaSalle National
Bank), as Trustee for Nomura Asset Securities Corporation Commercial Mortgage Pass-Through Certificates, Series 1996-MD V (Secured Party). (Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed on September 12, 2002; SEC File
No. 333-53984).                                                              





---

##### Table of Contents

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|4.5  |  | Tenant Security Agreement dated as of August 28, 2002 by and between Marriott Residence Inn II Limited Partnership (Secured Party) and AHM Res II Limited Partnership (Debtor). (Incorporated
by reference to Exhibit 4.5 to Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).                                                                                                      
|     | 
|4.6  |  | Deed of Trust, Assignment of Leases and Profits, Security Agreement and Fixture Filing, dated as of November 28, 2000 from RedInn Hotel, L.P. to TransNation Title Insurance Company for the
benefit of GMAC Commercial Mortgage Corporation. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed on September 12; 2002; SEC File No. 333-53984).                                        
|     | 
|4.7  |  | Deed Of Trust Note, dated November 28, 2000, in the original principal amount of $20,500,000 and made payable to the order of GMAC Commercial Mortgage Corporation. (Incorporated by reference
to Exhibit 4.1 to Current Report on Form 8-K filed on February 3, 2003; SEC File No. 000-49748).                                                                                                                    
|     | 
|4.8  |  | Deed of Trust, Assignment of Leases and Profits, Security Agreement and Fixture Filing, dated as of November 28, 2000 from RedInn Hotel, L.P. to TransNation Title Insurance Company for the
benefit of GMAC Commercial Mortgage Corporation. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed on February 3, 2003; SEC File No. 000-49748).                                          
|     | 
|4.9  |  | Assumption and Modification Agreement, dated January 17, 2003, by and among Wells Fargo Bank Minnesota, N.A., GMAC Commercial Mortgage Securities, Inc., RedInn Hotel, L.P., AHT Redmond, Inc.,
W.I. Realty, L.C., W.I. Realty I, L.P., Apple Hospitality Two, Inc. and AHM-SPE I, Inc. (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed on February 3, 2003; SEC File No. 000-49748).
|     | 
|4.10 |  | Promissory Note dated November 10, 2004 made by Marriott Residence Inn II Limited Partnership in favor of Wachovia Bank, National Association in principal sum of $4,875,000.00 (FILED
HEREWITH).                                                                                                                                                                                                                  
|     | 
|4.11 |  | Schedule setting forth information on twenty additional and substantially identical Promissory Notes (substantially identical to Exhibit 4.10 in this filing). (FILED
HEREWITH).                                                                                                                                                                                                                                   
|     | 
|4.12 |  | Mortgage and Security Agreement, made as of November 10, 2004 by Marriott Residence Inn II Limited Partnership to Wachovia Bank, National Association regarding property located in
Jacksonville, Florida. (FILED HEREWITH).                                                                                                                                                                                       
|     | 
|4.13 |  | Schedule setting forth information on ten additional and substantially identical mortgages (substantially identical to Exhibit 4.12 in this filing). (FILED HEREWITH).                                                                                                                                                                                                                                             
|     | 
|4.14 |  | Open-End Mortgage and Security Agreement, made as of November 10, 2004 by AHT Residence Inn II Limited Partnership to Wachovia Bank, National Association regarding property located in
Akron/Copley, Ohio. (FILED HEREWITH).                                                                                                                                                                                      
|     | 
|4.15 |  | Schedule setting forth information on nine additional and substantially identical mortgages (substantially identical to Exhibit 4.14 in this filing). (FILED HEREWITH).                                                                                                                                                                                                                                            
|     | 
|4.16 |  | Assignment of Leases, Rents and Profits, made as of November 10, 2004 by Marriott Residence Inn II Limited Partnership in favor of Wachovia Bank, National Association regarding property
located in Jacksonville, Florida. (FILED HEREWITH).                                                                                                                                                                      
|     | 
|4.17 |  | Schedule setting forth information on twenty additional and substantially identical Assignments of Leases, Rents and Profits (substantially identical to Exhibit 4.16 in this filing).
(FILED HEREWITH).                                                                                                                                                                                                           
|     | 
|10.1 |  | Advisory Agreement between the Registrant and Apple Suites Advisors (incorporated by reference to Exhibit 10.1 to Amended Registration Statement on Form S-11 (File No. 333-53984) filed on May
22, 2002)                                                                                                                                                                                                          





---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.2  |  | First Amendment to Advisory Agreement between the Registrant and Apple Suites Advisors (incorporated by reference to Exhibit 10.2 to Amended Registration Statement on Form S-11 (File No.
333-53984) filed on May 22, 2002)                                                                                                                                                                                                                                                        
|      | 
|10.3  |  | Property Acquisition/Disposition Agreement between the Registrant and Apple Suites Realty (incorporated by reference to Exhibit 10.3 to Amended Registration Statement on Form S-11 (File No.
333-53984) filed on May 22, 2002)                                                                                                                                                                                                                                                     
|      | 
|10.4  |  | Apple Hospitality Two, Inc. 2001 Incentive Plan (incorporated by reference to Exhibit 10.4 to Amended Registration Statement on Form S-11 (File No. 333-53984) filed on May 22,
2002)*                                                                                                                                                                                                                                                                                              
|      | 
|10.5  |  | Apple Hospitality Two, Inc. 2001 Non-Employee Directors Stock Option Plan (incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-11 (File No. 333-84098) filed on May
22, 2002)*                                                                                                                                                                                                                                                                            
|      | 
|10.6  |  | Purchase Agreement between Residence Inn III LLC, as Seller, and Apple Hospitality Two, Inc., as Purchaser, dated as of May 18, 2001 (incorporated by reference to Exhibit 10.1 as included in
Amendment No. 1 to Current Report on Form 8-K (File No. 333-53984) originally filed on October 16, 2001)                                                                                                                                                                             
|      | 
|10.7  |  | Amendment and Joinder to Purchase Agreement entered into by Residence Inn III LLC and Apple Hospitality Two, Inc., and Joined in by Marriott Residence Inn USA Limited Partnership, as Seller,
dated as of July 30, 2001 (incorporated by reference to Exhibit 10.2 as included in Amendment No. 1 to Current Report on Form 8-K (File No. 333-53984) originally filed on October 16, 2001)                                                                                         
|      | 
|10.8  |  | Second Amendment and Joinder to Purchase Agreement entered into by Residence III LLC, Apple Hospitality Two, Inc. and Marriott Residence Inn USA Limited Partnership, and Joined in by
Crestline Capital Corporation, CC USAGP LLC, CCMH Desert Springs Corporation and CCRI USA LLC, dated as of August 31, 2001 (incorporated by reference to Exhibit 10.3 as included in Amendment No. 1 to Current Report on Form 8-K (File No. 333-53984)
originally filed on October 16, 2001)
|      | 
|10.9  |  | Consent and Amendment Agreement with Release by and between Wells Fargo Bank Minnesota, N.A., as Trustee for the registered certificate holders of certain Commercial Mortgage Pass-Through
Certificates, Series 2000-2, and Residence Inn III LLC, dated as of September 28, 2001 (incorporated by reference to Exhibit 10.4 as included in Amendment No. 1 to Current Report on Form 8-K (File No. 333-53984) originally filed on October 16,
2001)                               
|      | 
|10.10 |  | Environmental Indemnity Agreement by Apple Hospitality Two, Inc. and Apple Suites Advisors in favor of Wells Fargo Bank Minnesota, N.A., as Trustee for the registered certificate holders of
certain Commercial Mortgage Pass-Through Certificates, Series 2000-2, dated as of September 28, 2001 (incorporated by reference to Exhibit 10.5 as included in Amendment No. 1 to Current Report on Form 8-K (File No. 333-53984) originally filed on
October 16, 2001)               
|      | 
|10.11 |  | Master Hotel Lease Agreement by and between Residence Inn III LLC and Apple Hospitality Management, dated as of September 28, 2001 (incorporated by reference to Exhibit 10.6 as included in
Amendment No. 1 to Current Report on Form 8-K (File No. 333-53984) originally filed on October 16, 2001)                                                                                                                                                                               
|      | 
|10.12 |  | Amended And Restated Management Agreement by and between Apple Hospitality Management, Inc. and Residence Inn By Marriott, Inc., dated as of September 28, 2001 (incorporated by reference to
Exhibit 10.7 as included in Amendment No. 1 to Current Report on Form 8-K (File No. 333-53984) originally filed on October 16, 2001)                                                                                                                                                  
|      | 
|10.13 |  | Owner Agreement, by and between Residence Inns III LLC, Apple Hospitality Management, Inc. and Residence Inn By Marriott, Inc., dated as of September 28, 2001 (incorporated by reference to
Exhibit 10.8 as included in Amendment No. 1 to Current Report on Form 8-K (File No. 333-53984) originally filed on October 16, 2001)                                                                                                                                                   





---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.14 |  | Non-Disturbance Agreement and Consent of Manager by Apple Hospitality Management, Inc. and Residence Inn III LLC to Wells Fargo Bank Minnesota, N.A., as Trustee for the registered certificate
holders of certain Commercial Mortgage Pass-Through Certificates, Series 2000-2, consented and agreed to by Residence Inn By Marriott, Inc., dated as of September 28, 2001 (incorporated by reference to Exhibit 10.9 as included in Amendment No. 1 to
Current Report on Form 8-K (File No. 333-53984) originally filed on October 16, 2001)
|      | 
|10.15 |  | Consent to Merger dated as of March 29, 2002 by and between Marriott Residence Inn Limited Partnership, AHT Res I GP, Inc., RIBM One LLC, AHM Res I Limited Partnership and LaSalle Bank
National Association, as Trustee for Mortgage Pass-Through Certificates Series 1996-2. (Incorporated by reference to Exhibit of the same number to Current Report on Form 8-K filed on April 15, 2002; SEC File No. 333-53984).                                                                                                                      
|      | 
|10.16 |  | Consent to Merger dated as of March 29, 2002 by and between Marriott Residence Inn Limited Partnership, AHT Res I GP, Inc., RIBM One LLC, AHM Res I Limited Partnership and LaSalle Bank
National Association, as Indenture Trustee for the benefit of the Holders of iStar Asset Receivables Trust Collateralized Mortgage Bonds Series 2000-1. (Incorporated by reference to Exhibit of the same number to Current Report on Form 8-K filed on
April 15, 2002; SEC File No. 333-53984).                                                     
|      | 
|10.17 |  | Amendment and Restatement of Management Agreement dated as of March 29, 2002 by and between Residence Inn by Marriott, Inc. and AHM Res I Limited Partnership. (Incorporated by reference to
Exhibit of the same number to Current Report on Form 8-K filed on April 15, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                                       
|      | 
|10.18 |  | Owner Agreement dated as of March 29, 2002 by and between Marriott Residence Inn Limited Partnership, AHM Res I Limited Partnership and Residence Inn By Marriott, Inc. (Incorporated by
reference to Exhibit of the same number to Current Report on Form 8-K filed on April 15, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                              
|      | 
|10.19 |  | Limited Partnership Agreement of AHM Res I Limited Partnership (a subsidiary of registrant leasing real property). (Incorporated by reference to Exhibit of the same number to Current Report
on Form 8-K filed on April 15, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                                                                                   
|      | 
|10.20 |  | Limited Liability Company Operating Agreement of Residence Inn III LLC (a subsidiary of registrant owning real property). (Incorporated by reference to Exhibit of the same number to Current
Report on Form 8-K filed on April 15, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                                                                            
|      | 
|10.21 |  | Amendment to Limited Liability Company Operating Agreement of Residence Inn III LLC. (Incorporated by reference to Exhibit of the same number to Current Report on Form 8-K filed on April 15,
2002; SEC File No. 333-53984).                                                                                                                                                                                                                                                                                                                 
|      | 
|10.22 |  | Amended and Restated Management Agreement dated as of August 28, 2002 by AHM Res II Limited Partnership and Residence Inn By Marriott, Inc. (Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                                                                    
|      | 
|10.23 |  | Master Hotel Lease Agreement dated as of August 28, 2002 by and between Marriott Residence Inn II Limited Partnership and AHM Res II Limited Partnership (regarding 22 hotels). (Incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                                
|      | 
|10.24 |  | Schedule setting forth information on a substantially identical Master Hotel Lease Agreement (regarding one hotel). (Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K
filed on September 12, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                                                                                            
|      | 
|10.25 |  | Amended and Restated Certificate of Limited Partnership of Marriott Residence Inn II Limited Partnership (a subsidiary of registrant owning real property). (Incorporated by reference to
Exhibit 10.4 to Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).                                                                                                                                                                                                                                                    





---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                              
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.26 |  | Amended and Restated Limited Partnership Agreement of Marriott Residence Inn II Limited Partnership (a subsidiary of registrant owning real property). (Incorporated by reference to Exhibit
10.5 to Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).                        
|      | 
|10.27 |  | Amended and Restated Certificate of Limited Partnership of AHM Res II Limited Partnership (a subsidiary of registrant Leasing real property). (Incorporated by reference to Exhibit 10.6 to
Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).                                 
|      | 
|10.28 |  | Amended and Restated Limited Partnership Agreement of AHM Res II Limited Partnership (a subsidiary of registrant leasing real property). (Incorporated by reference to Exhibit 10.7 to Current
Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).                                      
|      | 
|10.29 |  | Hotel Lease Agreement, dated January 17, 2003, by and between AHT Redmond, Inc. and AHM-SPE I, Inc. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on February
3, 2003; SEC File No. 000-49748).                                                                             
|      | 
|10.30 |  | Management Agreement, dated January 28, 1998, by RedInn Hotel, L.P. and Residence Inn By Marriott, Inc. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on
February 3, 2003; SEC File No. 000-49748).                                                                         
|      | 
|10.31 |  | Assignment, Assumption and Amendment of Management Agreement, dated as of January 17, 2003, by and among RedInn Hotel, L.P., AHM-SPE I, Inc. and Residence Inn By Marriott, Inc. (Incorporated
by reference to Exhibit 10.3 to Current Report on Form 8-K filed on February 3, 2003; SEC File No. 000-49748).
|      | 
|10.32 |  | Owner Agreement, dated as of January 17, 2003, by and among AHT Redmond, Inc., AHM-SPE I, Inc. and Residence Inn By Marriott, Inc. (Incorporated by reference to Exhibit 10.4 to Current Report
on Form 8-K filed on February 3, 2003; SEC File No. 000-49748).                                              
|      | 
|10.33 |  | Environmental Indemnity Agreement, made as of November 10, 2004 jointly and severally by Marriott Residence Inn II Limited Partnership and Apple Hospitality Two, Inc., in favor of Wachovia
Bank, National Association regarding property located in Jacksonville, Florida. (FILED HEREWITH).               
|      | 
|10.34 |  | Schedule setting forth information on twenty additional and substantially identical Environmental Indemnity Agreements (substantially identical to Exhibit 10.33 in this filing). (FILED
HEREWITH).                                                                                                          
|      | 
|10.35 |  | Indemnity and Guaranty Agreement, made as of November 10, 2004 by Apple Hospitality Two, Inc., in favor of Wachovia Bank, National Association regarding property located in Jacksonville,
Florida. (FILED HEREWITH).                                                                                        
|      | 
|10.36 |  | Schedule setting forth information on twenty additional and substantially identical Indemnity and Guaranty Agreements (substantially identical to Exhibit 10.35 in this filing). (FILED
HEREWITH).                                                                                                           
|      | 
|10.37 |  | Assignment of Contracts and Permits, made as of November 10, 2004, from Marriott Residence Inn II Limited Partnership to Wachovia Bank, National Association regarding property located in
Jacksonville, Florida. (FILED HEREWITH).                                                                          
|      | 
|10.38 |  | Schedule setting forth information on twenty additional and substantially identical Assignments of Contracts and Permits (substantially identical to Exhibit 10.37 in this filing). (FILED
HEREWITH).                                                                                                        
|      | 
|10.39 |  | Hotel Lease Agreement, effective as of November 10, 2004 between Marriott Residence Inn II Limited Partnership and AHM Res II Limited Partnership regarding property located in Jacksonville,
Florida. (FILED HEREWITH).                                                                                     
|      | 
|10.40 |  | Schedule setting forth information on twenty two additional and substantially identical Hotel Lease Agreements (substantially identical to Exhibit 10.39 in this filing). (FILED
HEREWITH).                                                                                                                  





---

##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.41 |  | First Amendment to Amended and Restated Management Agreement, dated as of November 10, 2004, by and between Residence Inn by Marriott, Inc. and AHM Res II Limited Partnership. (FILED
HEREWITH).                                                                                              
|      | 
|10.42 |  | First Amendment to Owner Agreement, dated as of November 10, 2004, by and among Marriott Residence Inn II Limited Partnership, AHM Res II Limited Partnership, AHT Residence Inn II Limited
Partnership, AHT Carolina Limited Partnership and Residence Inn by Marriott, Inc. (FILED HEREWITH).
|      | 
|21.1  |  | Subsidiaries of the Registrant (FILED HEREWITH).                                                                                                                                                                                                                                               
|      | 
|23.1  |  | Consent of Ernst & Young LLP (FILED HEREWITH).                                                                                                                                                                                                                                                 
|      | 
|31.1  |  | Certification of the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).                                                                                                                                                             
|      | 
|31.2  |  | Certification of the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).                                                                                                                                                             
|      | 
|32.1  |  | Certification of the Companys Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(FILED HEREWITH).                                                                                   



|* | Denotes Compensation Plan.
|- | --------------------------