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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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



For the fiscal year ended December 31, 2005



| ̈ | 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



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APPLE HOSPITALITY TWO, INC.

(Exact name of registrant as specified in its
charter)



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



(804) 344-8121

(Registrants telephone number, including area code)



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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)



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  x



Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No  x



Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer ̈Accelerated filer  x        Non-accelerated filer ̈



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



There is currently no established public market in which the Companys common shares are traded. Based upon the offering price of Apple Hospitality Two, Inc.s shares, which was $10 on June 30, 2005,
the aggregate market value of the voting common equity held by non-affiliates of the registrant on such date was $379,499,180. The Company does not have any non-voting common equity.



The number of common shares outstanding on March 1, 2006 was 40,428,688.



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 2006 annual meeting of shareholders to be held May 11, 2006.



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APPLE HOSPITALITY TWO, INC.



FORM 10-K



INDEX



|           |  |          |  |                                                                                                              |  |       
|---------- |  | -------- |  | ------------------------------------------------------------------------------------------------------------ |  | ------
|           |  |          |  |                                                                                                              |  | Page #
|Part I     |  |          |  |                                                                                                              |  |       
|           |  | Item 1.  |  | Business                                                                                                     |  | 3     
|           |  | Item 1A. |  | Risk Factors                                                                                                 |  | 6     
|           |  | Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 7     
|           |  | Item 2.  |  | Properties                                                                                                   |  | 7     
|           |  | Item 3.  |  | Legal Proceedings                                                                                            |  | 10    
|           |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 10    
|           |  |          | 
|Part II    |  |          |  |                                                                                                              |  |       
|           |  |          | 
|           |  | Item 5.  |  | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 11    
|           |  | Item 6.  |  | Selected Financial Data                                                                                      |  | 14    
|           |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 15    
|           |  | Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 24    
|           |  | Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 25    
|           |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures                        |  | 44    
|           |  | Item 9A. |  | Controls and Procedures                                                                                      |  | 44    
|           |  | Item 9B. |  | Other Information                                                                                            |  | 44    
|           |  |          | 
|Part III   |  |          |  |                                                                                                              |  |       
|           |  |          | 
|           |  | Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 45    
|           |  | Item 11. |  | Executive Compensation                                                                                       |  | 45    
|           |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                                               |  | 45    
|           |  | Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 45    
|           |  | Item 14. |  | Principal Accounting Fees and Services                                                                       |  | 45    
|           |  |          | 
|Part IV    |  |          |  |                                                                                                              |  |       
|           |  |          | 
|           |  | Item 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 46    
|           | 
|Signatures |  | 49      



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



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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 and Item 1A.



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. 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
(REIT) that owns extended-stay hotels. The REIT Modernization Act, effective January 1, 2001, permits REITs to establish taxable businesses to conduct certain previously disallowed business activities. The Company has
wholly-owned taxable REIT subsidiaries (collectively, the Lessees), 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.



In 2005, the Company engaged UBS
Investment Bank to assist in reviewing and evaluating various strategic alternatives for the Company. Those alternatives include a possible sale of the Company, merger or listing. The Company cannot provide any assurances that it will initiate any
of these alternatives.



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 funds
from operations and cash available for distributions. 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 its hotels by aggressively managing its room rates, renovating, redeveloping, partnering with industry leaders in hotel management and franchising its hotels with leading brands in the industry. All of these
factors can improve hotel operational performance and customer satisfaction, which in turn can improve financial results.



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The Company believes that completed and planned renovation and redevelopment activities as well as market penetration
will increase revenue per available room (RevPAR) at its hotels. As required by its various management agreements, the Company is committed to funding 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 $7.2 million held in escrow for future furniture, fixture and equipment purchases at December 31, 2005. 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 continues 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. Based on the performance and location of two hotels, the Company has entered into contracts to sell
these properties for a gross sale price of $5.8 million. These transactions should be completed in the first quarter of 2006.



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. Although there can be no assurance about the need for additional debt, it is anticipated that cash from operations and the
Companys existing revolving line of credit will meet substantially all of the Companys cash requirements.



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. The Company has contracted to sell two of the Residence Inn by Marriott hotels, consisting of 179 suites. The results of these two hotels have been classified as discontinued operations. Total revenues for the hotels in continuing
operations totaled $225.4 million, $210.5 million and $192.6 million for the years ended December 31, 2005, 2004 and 2003. For those same periods, the hotels achieved average occupancy of 78%, 76% and 74%, ADR of $100, $95 and $91 and RevPAR of
$78, $72 and $67. The overall increase in RevPAR reflects the increase in business of newly renovated hotels and the overall improvement in the hospitality industry.



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



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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. Marriott also charges system fees to operate as a
Residence Inn by Marriott and for the right to use its brand services including its reservation system.



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 REIT Six, Inc., and Apple REIT Seven, 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., Apple REIT
Six, Inc. and Apple REIT Seven, Inc. Additionally, the Companys Board of Directors has members that are also on the Board of Directors of Apple Hospitality Five, Inc., Apple REIT Six, Inc. or Apple REIT Seven, Inc.



Employees



During 2005, 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, 2005, the Company had 31 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.



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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 1A. Risk Factors



The following list describes several risk factors which are applicable to the Company:



The Company is subject to the risks of hotel operations.



The Companys hotels are subject to all of the risks common to the hotel industry. These risks could adversely affect hotel occupancy and the rates that can be
charged for hotel rooms as well as hotel operating expenses, and generally include:



| |  |  | increases in supply of hotel rooms that exceed increases in demand;
| | - |  | -------------------------------------------------------------------



| |  |  | increases in energy costs and other travel expenses that reduce business and leisure travel;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | reduced business and leisure travel due to continued geo-political uncertainty, including terrorism;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | adverse effects of declines in general and local economic activity;
| | - |  | -------------------------------------------------------------------



| |  |  | adverse effects of a downturn in the hotel industry.
| | - |  | ----------------------------------------------------



The Company does not have control over market and business conditions.



Changes in general or local economic or market conditions, increased costs of energy, increased costs of insurance, increased costs of products, increased costs and
shortages of labor, competitive factors, fuel shortages, quality of management, the ability of a hotel chain to fulfill any obligations to operators of its hotel business, limited alternative uses for the building, changing consumer habits,
condemnation or uninsured losses, changing demographics, changing traffic patterns, inability to remodel outmoded buildings as required by the franchise or lease agreement and other factors beyond the Companys control may reduce the value of
properties that the Company owns and cash available to make distributions to the shareholders may be reduced.



Adverse trends in the hotel industry may impact the Companys properties.



The success of the Companys properties will depend largely on the property operators ability to adapt to dominant trends in the hotel industry as well as
greater competitive pressures, increased consolidation, industry overbuilding, dependence on consumer spending patterns and changing demographics, the introduction of new concepts and products, availability of labor, price levels and general
economic conditions. The success of a particular hotel brand, the ability of a hotel brand to fulfill any obligations to operators of its business, and trends in the hotel industry may affect the Companys income and the funds it has available
to distribute to shareholders.



An economic downturn and concern about
terrorist activities could adversely affect the travel and lodging industries and may affect hotel operations for the Companys hotels.



As part of the effects of an economic downturn, the lodging industry could experience a significant decline in business caused by a reduction in travel for both business
and pleasure. Consistent with the rest of the lodging industry, the hotels the Company owns or acquires may experience declines in occupancy and average daily rates due to the decline in travel. Any kind of terrorist activity within the United
States, including terrorist acts against public institutions or buildings or modes of public transportation (including airlines, trains or buses) could lessen travel by the public, which could have a negative effect on any of the Companys
hotel operations. Any terrorist act directly against or affecting any of the Companys properties would also negatively affect operations. The Companys property insurance will typically cover losses for property damage to the properties
if there are terrorist attacks against the Companys properties. However, the Company is not insured for losses arising from terrorist attacks against other properties or against modes of public transportation (such as airlines, trains or
buses), even though such terrorist attacks may curtail travel generally and negatively affect the Companys hotel operations.



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There may be business interruption due to natural disaster.



Being in the real estate industry, the Company is exposed to natural disasters both locally
and nationally, and although management believes there is adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Companys financial position and results of
operations.



The hotel industry is seasonal.



The hotel industry is seasonal in nature. Generally, occupancy rates and hotel revenues are
greater in the second and third quarters than in the first and fourth quarters. As a result of the seasonality of the hotel industry, there may be quarterly fluctuations in results of operations of properties leased to subsidiaries. As a result, the
Company may need to enter into short-term borrowing in certain periods in order to offset these fluctuations in revenues and to make distributions to shareholders.



There may be operational limitations associated with management and franchise agreements affecting the Companys properties and
these limitations may prevent the Company from using these properties to its best advantage for the Companys shareholders.



Apple Hospitality Management, Inc. and Apple Suites Management, Inc., the Companys wholly-owned taxable REIT subsidiaries (or their subsidiaries), operate all of
the properties pursuant to franchise or license agreements with nationally recognized hotel brands. These franchise agreements contain specific standards for, and restrictions and limitations on, the operation and maintenance of the Companys
properties in order to maintain uniformity within the franchiser system. The Company does not know whether those limitations may conflict with its ability to create specific business plans tailored to each property and to each market.



The company faces competition in the hotel industry, which may limit its profitability and
return to its shareholders.



The hotel industry is highly competitive.
This competition could reduce occupancy levels and rental revenues at the Companys properties, which would adversely affect its operations. The Company faces competition from many sources. It faces competition from other hotels both in the
immediate vicinity and the geographic market where the Companys hotels are located. Over-building in the hotel industry will increase the number of rooms available and may decrease occupancy and room rates. In addition, increases in operating
costs due to inflation may not be offset by increased room rates. The Company also faces competition from nationally recognized hotel brands with which the Company will not be associated.



The Companys qualification as a real estate investment trust involves the application of highly technical and complex provisions of
the Internal Revenue Code.



The rules governing REITs are highly
technical and complex. They require ongoing compliance with a variety of tests that depend, among other things, on future operations. While the Company expects to satisfy these tests and will make its best efforts to do so, it cannot ensure it will
qualify as a REIT for any particular year, or that the applicable law will not change and adversely affect it and its shareholders.



Item 1B. Unresolved Staff Comments



None.



Item 2. Properties



As of December 31,
2005, 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. Two
of the Residence Inn hotels, comprised of 179 suites, are reported as held for sale and are excluded from the following table which shows 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.



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Real Estate and Accumulated Depreciation

As of December 31, 2005

(Dollars in thousands)



|                            |  |              |        |              |   |                                           |  |   |                  |  |              |       |  |                      |        |               |   |                  |   |             |      |  |                |  |             |  |    
|--------------------------- |  | ------------ | ------ | ------------ | - | ----------------------------------------- |  | - | ---------------- |  | ------------ | ----- |  | -------------------- | ------ | ------------- | - | ---------------- | - | ----------- | ---- |  | -------------- |  | ----------- |  | ---
|                            |  |              |        | Initial Cost |   | SubsequentlyCapitalized Bldg. Imp. & FF&E |  |   |                  |  |              |       |  |                      |        |               |   |                  |  
|Description                 |  | Encumbrances |        | Land         |   | Bldg./FF&E                                |  |   | Total Gross Cost |  | Acc. Deprec. |       |  | Date of Construction |        | Date Acquired |   | Depreciable Life |   | # of Suites
|Akron, Ohio                 |  | $            | 5,453  |              | $ | 597                                       |  | $ | 3,665            |  | $            | 2,368 |  | $                    | 6,630  |               | $ | (1,103           | ) |             | 1987 |  | August 2002    |  | 3  39 yrs. |  | 112
|Arcadia, California         |  |              | 14,833 |              |   | 2,284                                     |  |   | 6,380            |  |              | 2,106 |  |                      | 10,770 |               |   | (1,380           | ) |             | 1989 |  | August 2002    |  | 3  39 yrs. |  | 120
|Atlanta, Georgia            |  |              | 4,108  |              |   | 1,757                                     |  |   | 10,360           |  |              | 1,290 |  |                      | 13,407 |               |   | (1,739           | ) |             | 1990 |  | September 2001 |  | 3  39 yrs. |  | 126
|Atlanta/Buckhead, Georgia   |  |              | 1,913  |              |   | 4,568                                     |  |   | 9,087            |  |              | 301   |  |                      | 13,956 |               |   | (1,106           | ) |             | 1997 |  | January 2003   |  | 3  39 yrs. |  | 92 
|Atlanta/Cumberland, Georgia |  |              | 4,685  |              |   | 2,202                                     |  |   | 8,618            |  |              | 606   |  |                      | 11,426 |               |   | (1,135           | ) |             | 1990 |  | January 2003   |  | 3  39 yrs. |  | 124
|Atlanta/Peachtree, Georgia  |  |              | 2,624  |              |   | 953                                       |  |   | 3,629            |  |              | 696   |  |                      | 5,278  |               |   | (653             | ) |             | 1990 |  | January 2003   |  | 3  39 yrs. |  | 92 
|Bakersfield, California     |  |              | 3,651  |              |   | 1,870                                     |  |   | 7,567            |  |              | 1,416 |  |                      | 10,853 |               |   | (1,462           | ) |             | 1990 |  | September 2001 |  | 3  39 yrs. |  | 114
|Baltimore, Maryland         |  |              | 8,434  |              |   | 1,601                                     |  |   | 15,553           |  |              | 811   |  |                      | 17,965 |               |   | (1,738           | ) |             | 1998 |  | January 2003   |  | 3  39 yrs. |  | 147
|Birmingham, Alabama         |  |              | 5,566  |              |   | 1,227                                     |  |   | 4,349            |  |              | 2,281 |  |                      | 7,857  |               |   | (1,005           | ) |             | 1986 |  | August 2002    |  | 3  39 yrs. |  | 128
|Boca Raton, Florida         |  |              | 3,745  |              |   | 1,360                                     |  |   | 3,871            |  |              | 227   |  |                      | 5,458  |               |   | (493             | ) |             | 1988 |  | August 2002    |  | 3  39 yrs. |  | 120
|Boston, Massachusetts       |  |              | 6,389  |              |   | 4,707                                     |  |   | 12,730           |  |              | 1,847 |  |                      | 19,284 |               |   | (2,195           | ) |             | 1989 |  | September 2001 |  | 3  39 yrs. |  | 130
|Boston, Massachusetts       |  |              | 4,614  |              |   | 1,193                                     |  |   | 4,774            |  |              | 2,219 |  |                      | 8,186  |               |   | (1,196           | ) |             | 1989 |  | August 2002    |  | 3  39 yrs. |  | 96 
|Boulder, Colorado           |  |              | 10,042 |              |   | 3,428                                     |  |   | 12,532           |  |              | 611   |  |                      | 16,571 |               |   | (1,406           | ) |             | 1991 |  | January 2003   |  | 3  39 yrs. |  | 112
|Boulder, Colorado           |  |              | 5,726  |              |   | 1,179                                     |  |   | 8,538            |  |              | 3,544 |  |                      | 13,261 |               |   | (2,054           | ) |             | 1986 |  | March 2002     |  | 3  39 yrs. |  | 128
|Buckhead, Georgia           |  |              | 4,867  |              |   | 3,231                                     |  |   | 4,267            |  |              | 2,470 |  |                      | 9,968  |               |   | (1,185           | ) |             | 1987 |  | March 2002     |  | 3  39 yrs. |  | 136
|Chesterfield, Missouri      |  |              | 2,672  |              |   | 1,148                                     |  |   | 3,480            |  |              | 2,099 |  |                      | 6,727  |               |   | (762             | ) |             | 1986 |  | March 2002     |  | 3  39 yrs. |  | 104
|Cincinatti, Ohio            |  |              | 4,564  |              |   | 1,573                                     |  |   | 5,472            |  |              | 391   |  |                      | 7,436  |               |   | (930             | ) |             | 1990 |  | September 2001 |  | 3  39 yrs. |  | 118
|Clearwater, Florida         |  |              | 5,623  |              |   | 2,687                                     |  |   | 8,108            |  |              | 741   |  |                      | 11,536 |               |   | (978             | ) |             | 1998 |  | January 2003   |  | 3  39 yrs. |  | 112
|Clearwater, Florida         |  |              | 3,536  |              |   | 1,759                                     |  |   | 3,266            |  |              | 1,945 |  |                      | 6,970  |               |   | (817             | ) |             | 1986 |  | August 2002    |  | 3  39 yrs. |  | 88 
|Columbia, South Carolina    |  |              | 4,374  |              |   | 475                                       |  |   | 5,732            |  |              | 2,301 |  |                      | 8,508  |               |   | (1,370           | ) |             | 1988 |  | August 2002    |  | 3  39 yrs. |  | 128
|Columbus North, Ohio        |  |              | 1,670  |              |   | 641                                       |  |   | 3,527            |  |              | 464   |  |                      | 4,632  |               |   | (622             | ) |             | 1985 |  | March 2002     |  | 3  39 yrs. |  | 96 
|Concord, California         |  |              | 5,933  |              |   | 4,937                                     |  |   | 16,804           |  |              | 1,342 |  |                      | 23,083 |               |   | (2,586           | ) |             | 1989 |  | September 2001 |  | 3  39 yrs. |  | 126
|Costa Mesa, California      |  |              | 7,158  |              |   | 3,773                                     |  |   | 6,825            |  |              | 3,239 |  |                      | 13,837 |               |   | (1,441           | ) |             | 1986 |  | March 2002     |  | 3  39 yrs. |  | 144
|Cumberland, Georgia         |  |              | 2,863  |              |   | 1,938                                     |  |   | 3,622            |  |              | 542   |  |                      | 6,102  |               |   | (686             | ) |             | 1987 |  | March 2002     |  | 3  39 yrs. |  | 130
|Dallas, Texas               |  |              | 5,020  |              |   | 1,397                                     |  |   | 8,271            |  |              | 557   |  |                      | 10,225 |               |   | (1,384           | ) |             | 1989 |  | September 2001 |  | 3  39 yrs. |  | 120
|Dallas/Addison, Texas       |  |              | 5,154  |              |   | 2,059                                     |  |   | 8,511            |  |              | 663   |  |                      | 11,233 |               |   | (1,093           | ) |             | 1990 |  | January 2003   |  | 3  39 yrs. |  | 120
|Dallas/Las Colinas, Texas   |  |              | 5,341  |              |   | 2,772                                     |  |   | 9,592            |  |              | 494   |  |                      | 12,858 |               |   | (1,200           | ) |             | 1990 |  | January 2003   |  | 3  39 yrs. |  | 136
|Dallas/Plano, Texas         |  |              | 2,343  |              |   | 521                                       |  |   | 5,219            |  |              | 364   |  |                      | 6,104  |               |   | (806             | ) |             | 1997 |  | January 2003   |  | 3  39 yrs. |  | 99 
|Dayton North, Ohio          |  |              | 1,384  |              |   | 320                                       |  |   | 2,539            |  |              | 187   |  |                      | 3,046  |               |   | (381             | ) |             | 1987 |  | March 2002     |  | 3  39 yrs. |  | 64 
|Dayton South, Ohio          |  |              | 2,911  |              |   | 443                                       |  |   | 4,353            |  |              | 2,006 |  |                      | 6,802  |               |   | (1,179           | ) |             | 1985 |  | March 2002     |  | 3  39 yrs. |  | 96 
|Deerfield, Illinois         |  |              | 8,090  |              |   | 1,442                                     |  |   | 6,665            |  |              | 1,981 |  |                      | 10,088 |               |   | (1,407           | ) |             | 1989 |  | August 2002    |  | 3  39 yrs. |  | 128
|Detroit, Michigan           |  |              | 2,343  |              |   | 508                                       |  |   | 4,543            |  |              | 532   |  |                      | 5,583  |               |   | (708             | ) |             | 1990 |  | January 2003   |  | 3  39 yrs. |  | 76 
|Dulles/Washington, D.C.     |  |              | 6,962  |              |   | 2,419                                     |  |   | 15,104           |  |              | 421   |  |                      | 17,944 |               |   | (1,315           | ) |             | 1998 |  | January 2003   |  | 3  39 yrs. |  | 109
|Dunwoody, Georgia           |  |              | 2,625  |              |   | 1,988                                     |  |   | 4,725            |  |              | 885   |  |                      | 7,598  |               |   | (935             | ) |             | 1984 |  | March 2002     |  | 3  39 yrs. |  | 144



8



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##### Table of Contents

Real Estate and Accumulated Depreciation

As of December 31, 2005

(Dollars in thousands)



|                                   |  |              |         |              |   |                                           |  |   |                  |  |              |        |  |                      |         |               |   |                  |   |             |      |  |                |  |             |  |      
|---------------------------------- |  | ------------ | ------- | ------------ | - | ----------------------------------------- |  | - | ---------------- |  | ------------ | ------ |  | -------------------- | ------- | ------------- | - | ---------------- | - | ----------- | ---- |  | -------------- |  | ----------- |  | -----
|                                   |  |              |         | Initial Cost |   | SubsequentlyCapitalized Bldg. Imp. & FF&E |  |   |                  |  |              |        |  |                      |         |               |   |                  |  
|Description                        |  | Encumbrances |         | Land         |   | Bldg./FF&E                                |  |   | Total Gross Cost |  | Acc. Deprec. |        |  | Date of Construction |         | Date Acquired |   | Depreciable Life |   | # of Suites
|Greensboro, North Carolina         |  | $            | 4,869   |              | $ | 1,518                                     |  | $ | 5,211            |  | $            | 78     |  | $                    | 6,807   |               | $ | (698             | ) |             | 1987 |  | August 2002    |  | 3  39 yrs. |  | 128  
|Home OfficeRichmond, Virginia     |  |              |        |              |   | 138                                       |  |   | 766              |  |              | 49     |  |                      | 953     |               |   | (377             | ) |             | 1950 |  | January 2003   |  | 3  39 yrs. |  |     
|Houston, Texas                     |  |              | 4,564   |              |   | 960                                       |  |   | 8,903            |  |              | 1,449  |  |                      | 11,312  |               |   | (1,626           | ) |             | 1990 |  | September 2001 |  | 3  39 yrs. |  | 110  
|Irvine, California                 |  |              | 12,734  |              |   | 2,904                                     |  |   | 6,049            |  |              | 2,187  |  |                      | 11,140  |               |   | (1,426           | ) |             | 1989 |  | August 2002    |  | 3  39 yrs. |  | 112  
|Jackson, Mississippi               |  |              | 2,811   |              |   | 897                                       |  |   | 8,271            |  |              | 444    |  |                      | 9,612   |               |   | (854             | ) |             | 1997 |  | January 2003   |  | 3  39 yrs. |  | 91   
|Jackson, Mississippi               |  |              | 3,356   |              |   | 786                                       |  |   | 4,125            |  |              | 2,267  |  |                      | 7,178   |               |   | (1,020           | ) |             | 1986 |  | August 2002    |  | 3  39 yrs. |  | 120  
|Jacksonville, Florida              |  |              | 4,869   |              |   | 566                                       |  |   | 4,001            |  |              | 2,700  |  |                      | 7,267   |               |   | (1,057           | ) |             | 1986 |  | August 2002    |  | 3  39 yrs. |  | 112  
|Kalamazoo, Michigan                |  |              | 3,933   |              |   | 1,313                                     |  |   | 3,896            |  |              | 1,392  |  |                      | 6,601   |               |   | (769             | ) |             | 1989 |  | August 2002    |  | 3  39 yrs. |  | 83   
|La Jolla, California               |  |              | 18,754  |              |   | 17,255                                    |  |   | 11,854           |  |              | 7,195  |  |                      | 36,304  |               |   | (3,651           | ) |             | 1986 |  | March 2002     |  | 3  39 yrs. |  | 288  
|Las Vegas, Nevada                  |  |              | 20,599  |              |   | 3,685                                     |  |   | 8,786            |  |              | 918    |  |                      | 13,389  |               |   | (1,004           | ) |             | 1989 |  | August 2002    |  | 3  39 yrs. |  | 192  
|Lombard, Illinois                  |  |              | 5,154   |              |   | 1,166                                     |  |   | 5,740            |  |              | 526    |  |                      | 7,432   |               |   | (1,386           | ) |             | 1987 |  | March 2002     |  | 3  39 yrs. |  | 144  
|Long Beach, California             |  |              | 11,071  |              |   | 7,325                                     |  |   | 11,597           |  |              | 670    |  |                      | 19,592  |               |   | (1,545           | ) |             | 1987 |  | March 2002     |  | 3  39 yrs. |  | 216  
|Lubbock, Texas                     |  |              | 2,497   |              |   | 410                                       |  |   | 2,754            |  |              | 1,439  |  |                      | 4,603   |               |   | (699             | ) |             | 1986 |  | August 2002    |  | 3  39 yrs. |  | 80   
|Memphis, Tennessee                 |  |              | 2,532   |              |   | 2,038                                     |  |   | 4,755            |  |              | 386    |  |                      | 7,179   |               |   | (600             | ) |             | 1986 |  | August 2002    |  | 3  39 yrs. |  | 105  
|Meriden, Connecticut               |  |              | 4,108   |              |   |                                          |  |   | 9,092            |  |              | 799    |  |                      | 9,891   |               |   | (1,533           | ) |             | 1989 |  | September 2001 |  | 3  39 yrs. |  | 106  
|Montgomery, Alabama                |  |              | 2,282   |              |   | 965                                       |  |   | 5,025            |  |              | 376    |  |                      | 6,366   |               |   | (867             | ) |             | 1990 |  | September 2001 |  | 3  39 yrs. |  | 94   
|Pensacola, Florida                 |  |              | 3,536   |              |   | 336                                       |  |   | 2,297            |  |              | 1,743  |  |                      | 4,376   |               |   | (1,161           | ) |             | 1985 |  | August 2002    |  | 3  39 yrs. |  | 64   
|Philadelphia, Pennsylvania         |  |              | 5,971   |              |   | 1,395                                     |  |   | 5,650            |  |              | 2,265  |  |                      | 9,310   |               |   | (1,279           | ) |             | 1988 |  | August 2002    |  | 3  39 yrs. |  | 88   
|Philadelphia/Malvern, Pennsylvania |  |              | 1,912   |              |   |                                          |  |   | 16,285           |  |              | 303    |  |                      | 16,588  |               |   | (1,662           | ) |             | 1998 |  | January 2003   |  | 3  39 yrs. |  | 123  
|Placentia, California              |  |              | 7,640   |              |   | 3,397                                     |  |   | 4,663            |  |              | 2,092  |  |                      | 10,152  |               |   | (1,251           | ) |             | 1988 |  | August 2002    |  | 3  39 yrs. |  | 112  
|Portland, Oregon                   |  |              | 4,506   |              |   | 3,095                                     |  |   | 7,705            |  |              | 351    |  |                      | 11,151  |               |   | (681             | ) |             | 1998 |  | January 2003   |  | 3  39 yrs. |  | 123  
|Redmond, Washington                |  |              | 19,118  |              |   | 6,777                                     |  |   | 27,736           |  |              | 233    |  |                      | 34,746  |               |   | (2,381           | ) |             | 1990 |  | January 2003   |  | 3  39 yrs. |  | 180  
|Richmond, Virginia                 |  |              | 5,258   |              |   | 790                                       |  |   | 9,035            |  |              | 497    |  |                      | 10,322  |               |   | (1,125           | ) |             | 1998 |  | January 2003   |  | 3  39 yrs. |  | 123  
|Salt Lake City, Utah               |  |              | 2,343   |              |   | 377                                       |  |   | 5,142            |  |              | 388    |  |                      | 5,907   |               |   | (729             | ) |             | 1996 |  | January 2003   |  | 3  39 yrs. |  | 98   
|San Ramon, California              |  |              | 5,020   |              |   | 3,448                                     |  |   | 15,542           |  |              | 463    |  |                      | 19,453  |               |   | (2,105           | ) |             | 1989 |  | September 2001 |  | 3  39 yrs. |  | 106  
|Santa Fe, New Mexico               |  |              | 8,040   |              |   | 1,411                                     |  |   | 4,840            |  |              | 209    |  |                      | 6,460   |               |   | (620             | ) |             | 1986 |  | August 2002    |  | 3  39 yrs. |  | 120  
|Sharonville, Ohio                  |  |              | 1,909   |              |   | 2,087                                     |  |   | 3,790            |  |              | 3,775  |  |                      | 9,652   |               |   | (1,617           | ) |             | 1985 |  | March 2002     |  | 3  39 yrs. |  | 144  
|Shreveport, Louisiana              |  |              | 4,045   |              |   | 298                                       |  |   | 2,503            |  |              | 13     |  |                      | 2,814   |               |   | (348             | ) |             | 1983 |  | August 2002    |  | 3  39 yrs. |  | 72   
|Southfield, Michigan               |  |              | 4,199   |              |   | 1,738                                     |  |   | 3,869            |  |              | 1,140  |  |                      | 6,747   |               |   | (902             | ) |             | 1987 |  | March 2002     |  | 3  39 yrs. |  | 144  
|St. Louis, Missouri                |  |              | 4,506   |              |   | 2,099                                     |  |   | 9,712            |  |              | 269    |  |                      | 12,080  |               |   | (826             | ) |             | 2000 |  | January 2003   |  | 3  39 yrs. |  | 145  
|St. Louis/Galleria, Missouri       |  |              | 6,251   |              |   | 1,970                                     |  |   | 5,554            |  |              | 3,117  |  |                      | 10,641  |               |   | (1,136           | ) |             | 1986 |  | March 2002     |  | 3  39 yrs. |  | 152  
|                                   |  |              |         |              |   |                                           |  |   |                  |  |              |        |  |                      |         |               |   |                  |   |             |      |  |                |  |             |  |      
|Investment in hotels               |  | $            | 355,603 |              | $ | 136,101                                   |  | $ | 467,426          |  | $            | 83,680 |  | $                    | 687,207 |               | $ | (77,385          | ) |             |      |  |                |  |             |  | 7,690
|                                   |  |              |         |              |   |                                           |  |   |                  |  |              |        |  |                      |         |               |   |                  |   |             |      |  |                |  |             |  |      



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Investment in hotels at December 31, 2005, consisted of the following (in thousands):



|                                  |  |   |         |  
|--------------------------------- |  | - | ------- | -
|Land                              |  | $ | 135,795 |  
|Building and improvements         |  |   | 493,614 |  
|Furniture, fixtures and equipment |  |   | 57,798  |  
|                                  |  |   |         |  
|Total                             |  |   | 687,207 |  
|Less: accumulated depreciation    |  |   | (77,385 | )
|                                  |  |   |         |  
|Investment in hotels, net         |  | $ | 609,822 |  
|                                  |  |   |         |  



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.



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##### 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 is deemed to be the offering price of the shares, which is currently $10.00
per share. This 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 and, the Company is repurchasing shares at $10.00 from shareholders. On
December 31, 2005, there were approximately 11,000 beneficial shareholders of the Companys common shares.



Distributions totaling $33.4 million, $37.6 million, and $54.2 million were paid to the common shareholders and Series C convertible shareholders during 2005, 2004 and
2003. Distributions were paid in an amount of $0.80, $0.90 and $1.50 per share for the years ended December 31, 2005, 2004 and 2003. 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. In 2005 the quarterly 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, 2005, there were 202,402 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, 2005, 1.6 million Units have been issued under the dividend reinvestment plan,
representing $16.2 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



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##### Table of Contents

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 determines the funds otherwise available to fund the share redemption
program are needed for other purposes. For the year ended December 31, 2005, the Company redeemed approximately $9.3 million, representing approximately 928,576 Units. The following is a summary of redemptions during the fourth quarter of 2005:



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 2005 |  | 231,970                       |  | $                          | 9.98 |                                                                             | 2,680,577 |                                                                           | (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 and C convertible preferred shares 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.



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##### Table of Contents

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.



During the second quarter of 2005, the Company engaged UBS Investment Bank to assist in
reviewing and evaluating various strategic alternatives for the Company. Those alternatives include a possible sale of the Company, merger or listing. The Company cannot provide any assurance that it will initiate or complete any of these strategic
alternatives.



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##### Table of Contents

Item 6. Selected Financial Data



The
following table sets forth selected financial data for the years ended December 31, 2005, 2004, 2003, 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, the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K.



SELECTED FINANCIAL DATA



|                                                               |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|-------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ----------------------------------- | - | ------- | ----------------------------------- |  | - | ----------------------------------- | - |  | ---------------------------------------------------------- | ------- | - |  | - | -------- | -
|(in thousands except pershare and statistical data)            |  | For the year endedDecember 31, 2005 |         |   | 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 (d) |        
|Revenues:                                                      |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Suite revenue                                                  |  | $                                   | 219,942 |   |                                     | $ | 204,701 |                                     |  | $ | 186,457                             |   |  | $                                                          | 101,973 |   |  | $ | 10,022   |  
|Other revenue                                                  |  |                                     | 5,451   |   |                                     |   | 5,843   |                                     |  |   | 6,136                               |   |  |                                                            | 3,281   |   |  |   | 415      |  
|Reimbursed expenses                                            |  |                                     | 2,076   |   |                                     |   | 649     |                                     |  |   |                                    |   |  |                                                            |        |   |  |   |         |  
|                                                               |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Total revenue                                                  |  |                                     | 227,469 |   |                                     |   | 211,193 |                                     |  |   | 192,593                             |   |  |                                                            | 105,254 |   |  |   | 10,437   |  
|                                                               |  |                                     |         |   |                                    
|Expenses:                                                      |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Hotel expenses                                                 |  |                                     | 134,190 |   |                                     |   | 126,084 |                                     |  |   | 117,042                             |   |  |                                                            | 58,337  |   |  |   | 5,625    |  
|Taxes, insurance and other                                     |  |                                     | 13,837  |   |                                     |   | 14,884  |                                     |  |   | 12,560                              |   |  |                                                            | 6,515   |   |  |   | 553      |  
|Reimbursed expenses                                            |  |                                     | 2,076   |   |                                     |   | 649     |                                     |  |   |                                    |   |  |                                                            |        |   |  |   |         |  
|General and administrative                                     |  |                                     | 2,026   |   |                                     |   | 2,505   |                                     |  |   | 1,948                               |   |  |                                                            | 1,943   |   |  |   | 491      |  
|Transaction advisory fees                                      |  |                                     | 322     |   |                                     |   |        |                                     |  |   |                                    |   |  |                                                            |        |   |  |   |         |  
|Depreciation                                                   |  |                                     | 25,722  |   |                                     |   | 24,363  |                                     |  |   | 19,016                              |   |  |                                                            | 7,467   |   |  |   | 1,085    |  
|Merger costs                                                   |  |                                     |        |   |                                     |   |        |                                     |  |   | 15,914                              |   |  |                                                            |        |   |  |   |         |  
|Debt extinguishment costs                                      |  |                                     |        |   |                                     |   | 8,803   |                                     |  |   |                                    |   |  |                                                            |        |   |  |   |         |  
|Interest and other expenses, net                               |  |                                     | 27,162  |   |                                     |   | 26,810  |                                     |  |   | 23,919                              |   |  |                                                            | 12,109  |   |  |   | (634     | )
|                                                               |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Total expenses                                                 |  |                                     | 205,335 |   |                                     |   | 204,098 |                                     |  |   | 190,399                             |   |  |                                                            | 86,371  |   |  |   | 7,120    |  
|Income from continuing operations                              |  |                                     | 22,134  |   |                                     |   | 7,095   |                                     |  |   | 2,194                               |   |  |                                                            | 18,883  |   |  |   | 3,317    |  
|Discontinued operations (a)                                    |  |                                     | (3,262  | ) |                                     |   | (646    | )                                   |  |   | (697                                | ) |  |                                                            | (16     | ) |  |   |         |  
|                                                               |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Net income                                                     |  | $                                   | 18,872  |   |                                     | $ | 6,449   |                                     |  | $ | 1,497                               |   |  | $                                                          | 18,867  |   |  | $ | 3,317    |  
|                                                               |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Per Share                                                      |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|From continuing operations - basic and diluted                 |  | $                                   | 0.53    |   |                                     | $ | 0.17    |                                     |  | $ | 0.05                                |   |  | $                                                          | 0.88    |   |  | $ | 0.52     |  
|From discontinued operations - basic and diluted               |  |                                     | (0.08   | ) |                                     |   | (0.02   | )                                   |  |   | (0.01                               | ) |  |                                                            |        |   |  |   |         |  
|                                                               |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Earnings per common share - basic and diluted                  |  | $                                   | 0.45    |   |                                     | $ | 0.15    |                                     |  | $ | 0.04                                |   |  | $                                                          | 0.88    |   |  | $ | 0.52     |  
|                                                               |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Distributions paid to common shareholders                      |  | $                                   | 0.80    |   |                                     | $ | 0.90    |                                     |  | $ | 1.50                                |   |  | $                                                          | 1.00    |   |  | $ | 0.50     |  
|Weighted-average common shares outstanding - basic and diluted |  |                                     | 41,717  |   |                                     |   | 41,728  |                                     |  |   | 41,421                              |   |  |                                                            | 21,557  |   |  |   | 6,334    |  
|                                                               |  |                                     |         |   |                                    
|Balance Sheet Data                                             |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Cash and cash equivalents                                      |  | $                                   | 415     |   |                                     | $ | 13,118  |                                     |  | $ | 17,296                              |   |  | $                                                          | 125,522 |   |  | $ | 15,469   |  
|Investment in hotels, net                                      |  | $                                   | 609,822 |   |                                     | $ | 636,206 |                                     |  | $ | 638,658                             |   |  | $                                                          | 388,034 |   |  | $ | 121,078  |  
|Total assets                                                   |  | $                                   | 638,176 |   |                                     | $ | 664,604 |                                     |  | $ | 692,113                             |   |  | $                                                          | 557,754 |   |  | $ | 178,381  |  
|Notes payable-secured                                          |  | $                                   | 359,752 |   |                                     | $ | 372,762 |                                     |  | $ | 362,763                             |   |  | $                                                          | 269,297 |   |  | $ | 52,874   |  
|Shareholders equity                                           |  | $                                   | 261,357 |   |                                     | $ | 275,738 |                                     |  | $ | 308,920                             |   |  | $                                                          | 262,982 |   |  | $ | 120,461  |  
|Net book value per share                                       |  | $                                   | 6.26    |   |                                     | $ | 6.61    |                                     |  | $ | 7.37                                |   |  | $                                                          | 8.72    |   |  | $ | 8.66     |  
|                                                               |  |                                     |         |   |                                    
|Other Data                                                     |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Cash flow from:                                                |  |                                     |         |   |                                     |   |         |                                     |  |   |                                     |   |  |                                                            |         |   |  |   |          |  
|Operating activities                                           |  | $                                   | 46,819  |   |                                     | $ | 20,367  |                                     |  | $ | 35,923                              |   |  | $                                                          | 24,003  |   |  | $ | 4,694    |  
|Investing activities                                           |  | $                                   | (13,970 | ) |                                     | $ | (2,239  | )                                   |  | $ | (71,682                             | ) |  | $                                                          | (28,257 | ) |  | $ | (108,918 | )
|Financing activities                                           |  | $                                   | (45,552 | ) |                                     | $ | (22,306 | )                                   |  | $ | (72,467                             | ) |  | $                                                          | 114,307 |   |  | $ | 119,693  |  
|Number of hotels owned at end of period                        |  |                                     | 66      |   |                                     |   | 66      |                                     |  |   | 66                                  |   |  |                                                            | 48      |   |  |   | 10       |  
|Average Daily Rate (ADR) (b)                                   |  | $                                   | 100     |   |                                     | $ | 95      |                                     |  | $ | 91                                  |   |  | $                                                          | 92      |   |  | $ | 102      |  
|Occupancy                                                      |  |                                     | 78      | % |                                     |   | 76      | %                                   |  |   | 74                                  | % |  |                                                            | 78      | % |  |   | 76       | %
|Revenue Per Available Room (RevPAR) (c)                        |  | $                                   | 78      |   |                                     | $ | 72      |                                     |  | $ | 67                                  |   |  | $                                                          | 71      |   |  | $ | 78       |  



(a) Discontinued operations includes
a loss of $3,364 on assets held for sale at December 31, 2005.

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

(c) ADR multiplied by occupancy.

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



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##### 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 and included in Item 1A of this report.



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. At December 31, 2005, the Company owned 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 its 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 2005 the Company experienced significant improvement in its financial results due to a major
renovation program it completed in 2004 and the overall hospitality industry improvement. The Company continually monitors the profitability of its properties and attempts to maximize shareholder value by timely disposal of properties. At the end of
2005, the Company committed to selling two under-performing assets. The properties are Residence Inns in Charlotte, North Carolina and Spartanburg, South Carolina. The Company recorded a discontinued operations loss of $3.4 million based on the
anticipated net sale proceeds less the properties net book value.



Results from Continuing Operations for Years 2005 and 2004



|                                               |  |                                       |         |   |                            |     |   |      |   |         |                            |  |     |               |  |     |  
|---------------------------------------------- |  | ------------------------------------- | ------- | - | -------------------------- | --- | - | ---- | - | ------- | -------------------------- |  | --- | ------------- |  | --- | -
|                                               |  | Year ended December 31, 2005 and 2004 |        
|(in thousands, except statistical information) |  | 2005                                  |         |   | Percentageof hotel revenue |     |   | 2004 |   |         | Percentageof hotel revenue |  |     | Percentchange | 
|Total hotel revenues                           |  | $                                     | 225,393 |   |                            | 100 | % |      | $ | 210,544 |                            |  | 100 | %             |  | 7   | %
|Hotel direct expenses                          |  |                                       | 134,190 |   |                            | 60  | % |      |   | 126,084 |                            |  | 60  | %             |  | 6   | %
|Taxes, insurance and other expense             |  |                                       | 13,837  |   |                            | 6   | % |      |   | 14,884  |                            |  | 7   | %             |  | -7  | %
|General and administrative                     |  |                                       | 2,026   |   |                            | 1   | % |      |   | 2,505   |                            |  | 1   | %             |  | -19 | %
|Depreciation                                   |  |                                       | 25,722  |   |                            |     |   |      |   | 24,363  |                            |  |     |               |  | 6   | %
|Interest expense, net                          |  |                                       | 27,162  |   |                            |     |   |      |   | 26,810  |                            |  |     |               |  | 1   | %
|ADR                                            |  | $                                     | 100     |   |                            |     |   |      | $ | 95      |                            |  |     |               |  | 5   | %
|Occupancy                                      |  |                                       | 78      | % |                            |     |   |      |   | 76      | %                          |  |     |               |  | 3   | %
|RevPAR                                         |  | $                                     | 78      |   |                            |     |   |      | $ | 72      |                            |  |     |               |  | 8   | %



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##### Table of Contents

Hotels Owned



At December 31, 2005 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 properties consisting of 1,922 suites. Two of the Residence Inn hotels, in Charlotte, North Carolina and Spartanburg, South Carolina, are reported as held for sale and are excluded
from the following table which shows the location of each hotel, the date acquired, and the number of suites of each hotel.



|                   |  |               |  |                 |  |               |  |            
|------------------ |  | ------------- |  | --------------- |  | ------------- |  | -----------
|City               |  | State         |  | Franchise/Brand |  | Date Acquired |  | # of Suites
|Birmingham         |  | Alabama       |  | Residence Inn   |  | August-02     |  | 128        
|Montgomery         |  | Alabama       |  | Residence Inn   |  | September-01  |  | 94         
|Arcadia            |  | California    |  | Residence Inn   |  | August-02     |  | 120        
|Bakersfield        |  | California    |  | Residence Inn   |  | September-01  |  | 114        
|Concord            |  | California    |  | Residence Inn   |  | September-01  |  | 126        
|Costa Mesa         |  | California    |  | Residence Inn   |  | March-02      |  | 144        
|Irvine             |  | California    |  | Residence Inn   |  | August-02     |  | 112        
|La Jolla           |  | California    |  | Residence Inn   |  | March-02      |  | 288        
|Long Beach         |  | California    |  | Residence Inn   |  | March-02      |  | 216        
|Placentia          |  | California    |  | Residence Inn   |  | August-02     |  | 112        
|San Ramon          |  | California    |  | Residence Inn   |  | September-01  |  | 106        
|Boulder            |  | Colorado      |  | Homewood Suites |  | January-03    |  | 112        
|Boulder            |  | Colorado      |  | Residence Inn   |  | March-02      |  | 128        
|Meriden            |  | Connecticut   |  | Residence Inn   |  | September-01  |  | 106        
|Clearwater         |  | Florida       |  | Homewood Suites |  | January-03    |  | 112        
|Boca Raton         |  | Florida       |  | Residence Inn   |  | August-02     |  | 120        
|Clearwater         |  | Florida       |  | Residence Inn   |  | August-02     |  | 88         
|Jacksonville       |  | Florida       |  | Residence Inn   |  | August-02     |  | 112        
|Pensacola          |  | Florida       |  | Residence Inn   |  | August-02     |  | 64         
|Atlanta Airport    |  | Georgia       |  | Residence Inn   |  | September-01  |  | 126        
|Atlanta/Buckhead   |  | Georgia       |  | Residence Inn   |  | March-02      |  | 136        
|Atlanta/Buckhead   |  | Georgia       |  | Homewood Suites |  | January-03    |  | 92         
|Atlanta/Cumberland |  | Georgia       |  | Residence Inn   |  | March-02      |  | 130        
|Atlanta/Cumberland |  | Georgia       |  | Homewood Suites |  | January-03    |  | 124        
|Atlanta/Peachtree  |  | Georgia       |  | Homewood Suites |  | January-03    |  | 92         
|Dunwoody           |  | Georgia       |  | Residence Inn   |  | March-02      |  | 144        
|Deerfield          |  | Illinois      |  | Residence Inn   |  | August-02     |  | 128        
|Lombard            |  | Illinois      |  | Residence Inn   |  | March-02      |  | 144        
|Shreveport         |  | Louisiana     |  | Residence Inn   |  | August-02     |  | 72         
|Baltimore          |  | Maryland      |  | Homewood Suites |  | January-03    |  | 147        
|Boston             |  | Massachusetts |  | Residence Inn   |  | August-02     |  | 96         
|Boston             |  | Massachusetts |  | Residence Inn   |  | September-01  |  | 130        
|Detroit            |  | Michigan      |  | Homewood Suites |  | January-03    |  | 76         
|Kalamazoo          |  | Michigan      |  | Residence Inn   |  | August-02     |  | 83         



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##### Table of Contents

|                     |  |                |  |                 |  |               |  |            
|-------------------- |  | -------------- |  | --------------- |  | ------------- |  | -----------
|City                 |  | State          |  | Franchise/Brand |  | Date Acquired |  | # of Suites
|Southfield           |  | Michigan       |  | Residence Inn   |  | March-02      |  | 144        
|Jackson              |  | Mississippi    |  | Homewood Suites |  | January-03    |  | 91         
|Jackson              |  | Mississippi    |  | Residence Inn   |  | August-02     |  | 120        
|Chesterfield         |  | Missouri       |  | Residence Inn   |  | March-02      |  | 104        
|St. Louis            |  | Missouri       |  | Homewood Suites |  | January-03    |  | 145        
|St. Louis/Galleria   |  | Missouri       |  | Residence Inn   |  | March-02      |  | 152        
|Las Vegas            |  | Nevada         |  | Residence Inn   |  | August-02     |  | 192        
|Santa Fe             |  | New Mexico     |  | Residence Inn   |  | August-02     |  | 120        
|Greensboro           |  | North Carolina |  | Residence Inn   |  | August-02     |  | 128        
|Akron                |  | Ohio           |  | Residence Inn   |  | August-02     |  | 112        
|Cincinnati           |  | Ohio           |  | Residence Inn   |  | September-01  |  | 118        
|Columbus North       |  | Ohio           |  | Residence Inn   |  | March-02      |  | 96         
|Dayton North         |  | Ohio           |  | Residence Inn   |  | March-02      |  | 64         
|Dayton South         |  | Ohio           |  | Residence Inn   |  | March-02      |  | 96         
|Sharonville          |  | Ohio           |  | Residence Inn   |  | March-02      |  | 144        
|Portland             |  | Oregon         |  | Homewood Suites |  | January-03    |  | 123        
|Philadelphia/Malvern |  | Pennsylvania   |  | Homewood Suites |  | January-03    |  | 123        
|Philadelphia         |  | Pennsylvania   |  | Residence Inn   |  | August-02     |  | 88         
|Columbia             |  | South Carolina |  | Residence Inn   |  | August-02     |  | 128        
|Memphis              |  | Tennessee      |  | Residence Inn   |  | August-02     |  | 105        
|Dallas/Addison       |  | Texas          |  | Homewood Suites |  | January-03    |  | 120        
|Dallas/Las Colinas   |  | Texas          |  | Homewood Suites |  | January-03    |  | 136        
|Dallas/Plano         |  | Texas          |  | Homewood Suites |  | January-03    |  | 99         
|Dallas               |  | Texas          |  | Residence Inn   |  | September-01  |  | 120        
|Houston              |  | Texas          |  | Residence Inn   |  | September-01  |  | 110        
|Lubbock              |  | Texas          |  | Residence Inn   |  | August-02     |  | 80         
|Salt Lake City       |  | Utah           |  | Homewood Suites |  | January-03    |  | 98         
|Richmond             |  | Virginia       |  | Homewood Suites |  | January-03    |  | 123        
|Herndon              |  | Virginia       |  | Homewood Suites |  | January-03    |  | 109        
|Redmond              |  | Washington     |  | Residence Inn   |  | January-03    |  | 180        
|                     |  |                |  |                 |  |               |  |            
|                     |  |                |  |                 |  |               |  | 7,690      
|                     |  |                |  |                 |  |               |  |            



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.



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##### Table of Contents

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) plus one stand-alone hotel. Each of these portfolios has 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. For the years ended December 31, 2005 and 2004, the Company incurred and paid incentive management fees of $1.3 million and
$0.3 million.



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  |                                | $ | 9.3      |  | $                        | 16.0 |           | $ | 0.9                                        |  | $ | 15.1 |  | $ | 0.0
|Res II  |  |             | 7.0  |                                |   | 6.8      |  |                          | 13.8 |           |   | 0.0                                        |  |   | 13.8 |  |   | 0.0
|Res III |  |             | 0.0  |                                |   | 1.4      |  |                          | 1.4  |           |   | 0.5                                        |  |   | 0.9  |  |   | 0.7
|Redmond |  |             | 0.0  |                                |   | 1.2      |  |                          | 1.2  |           |   | 1.2                                        |  |   | 0.0  |  |   | 0.0
|        |  |             |      |                                |   |          |  |                          |      |           |   |                                            |  |   |      |  |   |    
|Total   |  | $           | 13.7 |                                | $ | 18.7     |  | $                        | 32.4 |           | $ | 2.6                                        |  | $ | 29.8 |  | $ | 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. For the years ended December 31, 2005 and 2004, total fees incurred under the Marriott agreements were $19.1 million and $18.4 million, or 10.9% and 11.3% 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 2005 or
2004. 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. For the years ended December 31, 2005 and 2004, total
expenses for franchise fees, management fees, advertising expenses and other reimbursable services were $6.2 million and $6.0 million, or 11.9% and 11.8% of revenue, provided by the Hilton managed properties for each of those years.



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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. AFA is 100% owned by Glade M. Knight, the Companys Chairman and CEO. For the years ended December 31, 2005 and 2004, the company earned and received advisory fee revenue of approximately $0.7 million in both years.
These amounts are included in other revenue.



The Company also provides support
services to Apple Six Advisors, Inc. (A6A), Apple REIT Six, Inc., and Apple REIT Seven, 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. The Company started providing these services in the second quarter of 2004. For the years ended December 31, 2005 and 2004, the Company received
reimbursement of its costs totaling approximately $2.1 million and $0.6 million. Mr. Knight is Chairman and Chief Executive Officer of Apple Hospitality Five, Inc., Apple REIT Six, Inc. and Apple REIT Seven, Inc. Additionally, the
Companys Board of Directors has members that are also on the Board of Directors of Apple Hospitality Five, Inc., Apple REIT Six, Inc. or Apple REIT Seven, Inc.



Results of Operations for Years 2005 and 2004



During 2005, the Company experienced improvements in operations as compared to the prior year. Better economic conditions in many of its
markets and completion of hotel renovations in 2004 led to an increase in RevPAR by 8% over the prior year. The Company anticipates continued improvement in 2006. However, as the Company will continue to selectively renovate hotels and since general
economic conditions can not be projected, there can be no assurance that the improvements will continue.



Revenues



The Companys principal source of revenue is hotel suites revenue and related other revenue. For the years ended December 31, 2005 and 2004 the Company had
total hotel revenue from continuing operations of $225.4 million and $210.5 million. For the years ended December 31, 2005 and 2004, the hotels achieved average occupancy of 78% and 76%, ADR of $100 and $95 and RevPAR of $78 and $72. 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 overall improvement in the hospitality
industry and completion of the renovation of 26 hotels during 2004. During the renovation program, suites were taken out of service. The Company will continue to focus on maximizing revenue through increased room rates, as it is not anticipated that
occupancy will increase from its current level.



Expenses



The Companys hotel operating expenses from
continuing operations totaled $134.2 million and $126.1 million or 60% of revenue for the years ended December 31, 2005 and 2004. Operational efficiencies from increased revenue were offset by incentive fees earned by the managers for improved
financial results.



Taxes, insurance and other expense from continuing
operations for the years ended December 31, 2005 and 2004 was $13.8 million or 6% of revenue and $14.9 million or 7% of revenue. The decrease is due to lower insurance rates and property tax assessments negotiated by the Company. The Company
will continue to aggressively manage these areas; however, continued reductions are not anticipated due to increased insurance rates from the



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Companys carriers related to their losses in 2005. Also, there is greater potential for aggressive real estate tax assessments, and thus greater real
estate tax expenses, from local municipalities as real estate values increase across the country.



The Companys general and administrative expenses for the years ended December 31, 2005 and 2004 were $2.0 million and $2.5 million or 1% of revenue in both years.



In 2005 the Company engaged UBS Investment Bank to assist in reviewing and evaluating various
strategic alternatives for the Company. Those alternatives include a possible sale of the Company, merger or listing. In connection with these activities, the Company incurred $322,000 in expenses. The Company cannot provide any assurances that it
will initiate or complete any of the strategic alternatives.



Depreciation
expense for the years ended December 31, 2005 and 2004 was $25.7 million and $24.4 million. Depreciation expense represents expense of the Companys 64 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.



Interest expense was $27.4 million and $27.2 million for the years ended December 31, 2005 and 2004. In 2004 the Company capitalized interest of $496,000 associated with its renovation program, while in 2005 the Company only
capitalized $184,000 due to less rooms out of service for renovation.



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 $1.8 million in loan costs which are being amortized over
10 years and also recognized a loss on early extinguishment of debt of approximately $8.8 million, which included a credit of $1.9 million related to the debts outstanding fair value adjustment.



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



For the years ended December 31, 2004 and 2003 the Company had total hotel revenue from
continuing operations of $210.5 million and $192.6 million. 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. 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 from continuing operations totaled $126.1
million or 60% of revenue and $117.0 million or 61% of revenue for the years ended December 31, 2004 and 2003. The improvement as a percentage of revenue was a result of improved RevPAR.



Taxes, insurance and other expense from continuing operations for the years ended
December 31, 2004 and 2003 was $14.9 million or 7% of revenue and $12.6 million or 7% of revenue. 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. The increase is due substantially to increased reporting and accounting requirements under Section 404 of the Sarbanes-Oxley Act.



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Depreciation expense from continuing operations for the years ended December 31, 2004 and 2003 was $24.4 million and
$19.0 million. Depreciation expense represents expense of the Companys 64 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 net of interest income was $26.8 million and $23.9 million for the years ended December 31, 2004 and 2003, respectively. The increase was 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.



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 $1.8 million in loan costs which are being amortized over 10 years and recognized a loss on early extinguishment of debt of approximately $8.8 million, which included 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.



Liquidity and
Capital Resources



|                                                                          |  |        |         |                                          |   |           |  |           |        |             |   |        |  |   |        
|------------------------------------------------------------------------- |  | ------ | ------- | ---------------------------------------- | - | --------- |  | --------- | ------ | ----------- | - | ------ |  | - | -------
|                                                                          |  |        |         | Amount of Commitment expiring per period
|Commercial Commitments (000s)                                            |  | Totals |         | Less than1 year                          |   | 2-3 years |  | 4-5 years |        | Over 5years
|Total Debt Commitments (including approximately $177 million in interest) |  | $      | 532,373 |                                          | $ | 32,028    |  | $         | 71,961 |             | $ | 68,136 |  | $ | 360,248
|Note payable-related party                                                |  |        | 4,480   |                                          |   |          |  |           | 4,480  |             |   |       |  |   |       
|                                                                          |  |        |         |                                          |   |           |  |           |        |             |   |        |  |   |        
|Total Commercial Commitments                                              |  | $      | 536,853 |                                          | $ | 32,028    |  | $         | 76,441 |             | $ | 68,136 |  | $ | 360,248
|                                                                          |  |        |         |                                          |   |           |  |           |        |             |   |        |  |   |        



Cash and cash equivalents



Cash and cash equivalents totaled $0.4 million at December 31, 2005
and $13.1 million at December 31, 2004. The Company plans to use this cash to pay debt service and general corporate expenses. The decrease in cash and cash equivalents is due to the partial repayment of the Companys revolving line of
credit as well as capital improvements, redemptions and distributions.



The
cash flow generated from the properties owned is the Companys principal source of liquidity. In addition, the Company had approximately $11.2 million available under its revolving line of credit at December 31, 2005.



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. As of December 31, 2005, approximately
1.6 million Units were issued under the dividend reinvestment plan representing proceeds to the Company of approximately $16.2 million, under this plan.



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##### Table of Contents

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 terms of, suspend, or terminate the Unit Redemption Program.
During the years ended December 31, 2005 and 2004, the Company redeemed 928,576 and 882,773 Units in the amounts of $9.3 million and $8.8 million 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, 2005 are as follows (in thousands):



|                                      |  |   |        
|------------------------------------- |  | - | -------
|2006                                  |  | $ | 7,098  
|2007                                  |  |   | 15,754 
|2008                                  |  |   | 8,329  
|2009                                  |  |   | 9,083  
|2010                                  |  |   | 101,561
|Thereafter                            |  |   | 217,936
|                                      |  |   |        
|                                      |  |   | 359,761
|Fair Value Adjustment of Assumed Debt |  |   | 4,149  
|                                      |  |   |        
|                                      |  | $ | 363,910
|                                      |  |   |        



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 was refinanced in April 2005, changing it to a two-year $15 million revolving line of credit. This revolving line of
credit is secured by two properties and bears interest at LIBOR (4.39% at December 31, 2005) plus 2.5% per year. At December 31, 2005 the outstanding balance on the revolving line of credit was $3.8 million.



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 recognized a loss on early extinguishment of debt of approximately $8.8 million and incurred approximately $1.8
million in loan costs which are being amortized over 10 years.



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. The Company declared and paid dividends of



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##### Table of Contents

$0.90 per Unit outstanding for the year ended December 31, 2004. In 2005 the distribution rate was $0.80 and was paid quarterly. 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 2005, 13% of the dividend was characterized as return of
capital and 87% ordinary income.



The Company has ongoing capital commitments
to fund its capital improvements. Through the Lessees, the Company is required, under all management agreements with the Manager, to make available to the Lessees, 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 capital improvements in addition to the 5% requirement in 2004.
During the years ended December 31, 2005 and 2004, the Company capitalized approximately $10.5 million and $22.2 million, in capital improvements to the properties. Of the amount capitalized during the year ended December 31, 2004,
approximately $16 million related to the Companys major renovation program and approximately $6 million, related to the Companys normal furniture, fixtures and equipment expenditures. 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 or that distributions will not include a return of capital.



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.



Subsequent Events



In January 2006, the Company declared and distributed to its shareholders dividends in the amount of $8.3 million ($0.20 per share).



In January 2006, the Company redeemed 257,634 Units in the amount of $2.6 million.



In January 2006, through the Companys Dividend Reinvestment Plan,
235,205 Units totaling $2.4 million were reinvested.



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



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##### Table of Contents

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, 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.



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.



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



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. The Company will adopt Statement 123 (R) in the first quarter of 2006. The adoption of the statement is not anticipated to have a material impact on the
Companys results of operations or financial position.



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, 2005, 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 following table summarizes the
annual maturities and average interest rates and estimated fair market value at December 31, 2005.



|                      |  |      |       |   |      |   |        |      |  |   |       |   |  |      |       |   |            |   |         |       |  |                    |         |                  |  |   |         |  |   |         |  |   |        
|--------------------- |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ----- | - |  | ---- | ----- | - | ---------- | - | ------- | ----- |  | ------------------ | ------- | ---------------- |  | - | ------- |  | - | ------- |  | - | -------
|(000s)               |  | 2006 |       |   | 2007 |   |        | 2008 |  |   | 2009  |   |  | 2010 |       |   | Thereafter |   |         | Total |  | TotalCarryingValue |         | FairMarket Value
|Maturities            |  | $    | 7,098 |   |      | $ | 15,754 |      |  | $ | 8,329 |   |  | $    | 9,083 |   |            | $ | 101,561 |       |  | $                  | 217,936 |                  |  | $ | 359,761 |  | $ | 363,910 |  | $ | 387,000
|Average interest rate |  |      | 7.6   | % |      |   | 7.6    | %    |  |   | 7.6   | % |  |      | 7.6   | % |            |   | 7.6     | %     |  |                    | 7.2     | %                |  |   |         |  |   |         |  |   |        



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##### Table of Contents

Item 8. Financial Statements and Supplementary Data



Report of Management on Internal Control over Financial Reporting



March 7, 2006



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, 2005, 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, 2005, 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, has 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 Chairman and Chief Executive
Officer |  |  |  | Bryan Peery Chief Financial
Officer (Principal Accounting Officer)



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

on Internal Control over Financial Reporting



The Board of Directors and Shareholders

Apple Hospitality Two, Inc.



We have audited
managements assessment, included in the accompanying Report of Management Internal Control over Financial Reporting, that Apple Hospitality Two, Inc. maintained effective internal control over financial reporting as of
December 31, 2005, 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, 2005,
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, 2005, 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, 2005 and 2004, and the related consolidated statements of operations,
shareholders equity and cash flows for each of the three years ended December 31, 2005 and our report dated March 7, 2006, expressed an unqualified opinion thereon.



/s/ Ernst & Young LLP



Richmond, Virginia

March 7, 2006



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##### 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, 2005 and 2004, and the
related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index of
Item 15. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule 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, 2005 and 2004, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, 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, 2005, 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 7, 2006 expressed an unqualified opinion thereon.



/s/ Ernst & Young LLP



Richmond, Virginia

March 7, 2006



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##### Table of Contents

Apple Hospitality Two, Inc.

Consolidated Balance Sheets

(in thousands, except share data)



|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                              |  | December 31, 2005 |         |   | December 31, 2004 |  
|ASSETS                                                                                                                                        |  |                   |         |   |                   |   |         |  
|Investment in hotels, net of accumulated depreciation of $77,385 and $52,331 respectively                                                     |  | $                 | 609,822 |   |                   | $ | 636,206 |  
|Hotels held for sale                                                                                                                          |  |                   | 5,572   |   |                   |   |        |  
|Cash and cash equivalents                                                                                                                     |  |                   | 415     |   |                   |   | 13,118  |  
|Restricted cash-Furniture, fixtures & equipment and other escrows                                                                             |  |                   | 9,209   |   |                   |   | 7,259   |  
|Due from third party managers                                                                                                                 |  |                   | 8,289   |   |                   |   | 4,647   |  
|Other assets                                                                                                                                  |  |                   | 4,869   |   |                   |   | 3,374   |  
|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                  |  | $                 | 638,176 |   |                   | $ | 664,604 |  
|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|                                                                                                                                              |  |                  
|LIABILITIES                                                                                                                                   |  |                   |         |   |                   |   |         |  
|Notes payable-secured                                                                                                                         |  | $                 | 359,752 |   |                   | $ | 372,762 |  
|Note payable-related party                                                                                                                    |  |                   | 4,158   |   |                   |   | 3,881   |  
|Accounts payable & accrued expenses                                                                                                           |  |                   | 3,272   |   |                   |   | 2,531   |  
|Accounts payable-prior limited partners                                                                                                       |  |                   | 8,478   |   |                   |   | 8,501   |  
|Interest payable                                                                                                                              |  |                   | 1,159   |   |                   |   | 1,191   |  
|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|TOTAL LIABILITIES                                                                                                                             |  |                   | 376,819 |   |                   |   | 388,866 |  
|                                                                                                                                              |  |                  
|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; 40,451,116 and 40,442,616 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 40,451,116 shares, and 40,442,616 shares, respectively                 |  |                   | 347,495 |   |                   |   | 347,376 |  
|Distributions greater than net income                                                                                                         |  |                   | (96,314 | ) |                   |   | (81,814 | )
|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                    |  |                   | 261,357 |   |                   |   | 275,738 |  
|                                                                                                                                              |  |                   |         |   |                   |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                    |  | $                 | 638,176 |   |                   | $ | 664,604 |  
|                                                                                                                                              |  |                   |         |   |                   |   |         |  



See notes to consolidated financial
statements.



28



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##### Table of Contents

Apple Hospitality Two, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)



|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  
|------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------- | - | ------- | --------------------------- |  | - | ------- | -
|                                                        |  | Year endedDecember 31, 2005 |         |   | Year endedDecember 31, 2004 |   |         | Year endedDecember 31, 2003 | 
|REVENUES                                                |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Suite revenue                                           |  | $                           | 219,942 |   |                             | $ | 204,701 |                             |  | $ | 186,457 |  
|Other revenue                                           |  |                             | 5,451   |   |                             |   | 5,843   |                             |  |   | 6,136   |  
|Reimbursed expenses                                     |  |                             | 2,076   |   |                             |   | 649     |                             |  |   |        |  
|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Total revenues                                          |  |                             | 227,469 |   |                             |   | 211,193 |                             |  |   | 192,593 |  
|                                                        |  |                             |        
|EXPENSES                                                |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Hotel operating expense                                 |  |                             | 57,165  |   |                             |   | 54,187  |                             |  |   | 48,809  |  
|Hotel administrative expense                            |  |                             | 20,023  |   |                             |   | 18,730  |                             |  |   | 17,887  |  
|Sales and marketing                                     |  |                             | 15,281  |   |                             |   | 14,804  |                             |  |   | 13,837  |  
|Utilities                                               |  |                             | 11,223  |   |                             |   | 9,998   |                             |  |   | 9,529   |  
|Repair and maintenance                                  |  |                             | 12,477  |   |                             |   | 11,549  |                             |  |   | 11,248  |  
|Franchise fees                                          |  |                             | 7,781   |   |                             |   | 8,198   |                             |  |   | 7,535   |  
|Management fees                                         |  |                             | 6,712   |   |                             |   | 5,367   |                             |  |   | 5,006   |  
|Chain services                                          |  |                             | 3,528   |   |                             |   | 3,251   |                             |  |   | 3,191   |  
|Taxes, insurance and other                              |  |                             | 13,837  |   |                             |   | 14,884  |                             |  |   | 12,560  |  
|Merger expense-related party                            |  |                             |        |   |                             |   |        |                             |  |   | 15,914  |  
|Reimbursed expense                                      |  |                             | 2,076   |   |                             |   | 649     |                             |  |   |        |  
|General and administrative                              |  |                             | 2,026   |   |                             |   | 2,505   |                             |  |   | 1,948   |  
|Transaction advisory fees                               |  |                             | 322     |   |                             |   |        |                             |  |   |        |  
|Depreciation of real-estate owned                       |  |                             | 25,722  |   |                             |   | 24,363  |                             |  |   | 19,016  |  
|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Total expenses                                          |  |                             | 178,173 |   |                             |   | 168,485 |                             |  |   | 166,480 |  
|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Operating income                                        |  |                             | 49,296  |   |                             |   | 42,708  |                             |  |   | 26,113  |  
|Interest income                                         |  |                             | 210     |   |                             |   | 382     |                             |  |   | 841     |  
|Debt extinguishment costs                               |  |                             |        |   |                             |   | (8,803  | )                           |  |   |        |  
|Interest expense                                        |  |                             | (27,372 | ) |                             |   | (27,192 | )                           |  |   | (24,760 | )
|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Income from continuing operations                       |  |                             | 22,134  |   |                             |   | 7,095   |                             |  |   | 2,194   |  
|                                                        |  |                             |        
|Loss from discontinued operations                       |  |                             | (3,262  | ) |                             |   | (646    | )                           |  |   | (697    | )
|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Net income                                              |  | $                           | 18,872  |   |                             | $ | 6,449   |                             |  | $ | 1,497   |  
|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Net income (loss) per common share:                     |  |                             |         |   |                             |   |         |                             |  |   |         |  
|From continuing operations                              |  | $                           | 0.53    |   |                             | $ | 0.17    |                             |  | $ | 0.05    |  
|From discontinued operations                            |  |                             | (0.08   | ) |                             |   | (0.02   | )                           |  |   | (0.01   | )
|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  
|                                                        |  | $                           | 0.45    |   |                             | $ | 0.15    |                             |  | $ | 0.04    |  
|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Weighted average shares outstanding (basic and diluted) |  |                             | 41,717  |   |                             |   | 41,728  |                             |  |   | 41,421  |  
|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  
|Distributions paid per common share                     |  | $                           | 0.80    |   |                             | $ | 0.90    |                             |  | $ | 1.50    |  
|                                                        |  |                             |         |   |                             |   |         |                             |  |   |         |  



See notes to consolidated financial
statements.



29



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##### Table of Contents

Apple Hospitality Two, Inc.

Consolidated Statements of Shareholders Equity

(in thousands, except
per share data)



|                                                                                       |  |                                     |   |  |                                     |     |              |                 |       |                                     |   |                 |                           |        |        |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ----------------------------------- | - |  | ----------------------------------- | --- | ------------ | --------------- | ----- | ----------------------------------- | - | --------------- | ------------------------- | ------ | ------ |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                       |  | 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 January 1, 2003                                                             |  | 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 converted 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 |  
|Common shares redeemed                                                                 |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           | (929   | )      |  |   | (9,252  | ) |  |   |        |   |  |   | (9,252  | )
|Common shares issued through dividend reinvestment                                     |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           | 937    |        |  |   | 9,371   |   |  |   |        |   |  |   | 9,371   |  
|Net income                                                                             |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           |       |        |  |   |        |   |  |   | 18,872  |   |  |   | 18,872  |  
|Cash distributions declared to shareholders ($0.80 per share)                          |  |                                    |   |  |                                     |    |              |                 |      |                                     |   |                |                           |       |        |  |   |        |   |  |   | (33,372 | ) |  |   | (33,372 | )
|                                                                                       |  |                                     |   |  |                                     |     |              |                 |       |                                     |   |                 |                           |        |        |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2005                                                           |  |                                    |   |  | $                                   |    |              |                 | 1,272 |                                     | $ | 10,176          |                           | 40,451 |        |  | $ | 347,495 |   |  | $ | (96,314 | ) |  | $ | 261,357 |  
|                                                                                       |  |                                     |   |  |                                     |     |              |                 |       |                                     |   |                 |                           |        |        |  |   |         |   |  |   |         |   |  |   |         |  



See notes to consolidated financial
statements.



30



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##### Table of Contents

Apple Hospitality Two, Inc.

Consolidated Statements of Cash Flows

(in thousands)



|                                                                               |  |                             |         |   |                             |   |          |                             |  |   |          |  
|------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | --------------------------- | - | -------- | --------------------------- |  | - | -------- | -
|                                                                               |  | Year endedDecember 31, 2005 |         |   | Year endedDecember 31, 2004 |   |          | Year endedDecember 31, 2003 | 
|Cash flow provided by operating activities:                                    |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Net income                                                                     |  | $                           | 18,872  |   |                             | $ | 6,449    |                             |  | $ | 1,497    |  
|Adjustments to reconcile net income to cash provided by operating activities:  |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Depreciation, including discontinued operations                                |  |                             | 25,986  |   |                             |   | 24,626   |                             |  |   | 19,264   |  
|Non-cash portion of merger related expense                                     |  |                             |        |   |                             |   |         |                             |  |   | 13,576   |  
|Net amortization of fair value adjustment to mortgage notes payable            |  |                             | (861    | ) |                             |   | (3,930   | )                           |  |   | (2,506   | )
|Amortization of deferred financing costs                                       |  |                             | 329     |   |                             |   | 143      |                             |  |   | 124      |  
|Loss on hotels classified as held for sale included in discontinued operations |  |                             | 3,364   |   |                             |   |         |                             |  |   |         |  
|Changes in operating assets and liabilities, net of amounts acquired/assumed:  |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Due from/to third party manager                                                |  |                             | (1,717  | ) |                             |   | (7,024   | )                           |  |   | 7,030    |  
|Other escrows                                                                  |  |                             | 133     |   |                             |   | 1,167    |                             |  |   | (201     | )
|Other assets                                                                   |  |                             | (250    | ) |                             |   | 885      |                             |  |   | 66       |  
|Accounts payable-affiliate                                                     |  |                             | 277     |   |                             |   | 286      |                             |  |   | (18      | )
|Interest payable                                                               |  |                             | (32     | ) |                             |   | (89      | )                           |  |   | (39      | )
|Accrued expenses                                                               |  |                             | 718     |   |                             |   | (2,146   | )                           |  |   | (2,870   | )
|                                                                               |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Net cash provided by operating activities                                      |  |                             | 46,819  |   |                             |   | 20,367   |                             |  |   | 35,923   |  
|Cash flow from investing activities:                                           |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Decrease (increase) in cash restricted for capital improvements                |  |                             | (2,374  | ) |                             |   | 11,379   |                             |  |   | 2,399    |  
|Net cash paid for hotel acquisitions                                           |  |                             |        |   |                             |   |         |                             |  |   | (12,550  | )
|Net cash paid for acquisition of Apple Suites, Inc. and Apple Suites Advisors  |  |                             |        |   |                             |   |         |                             |  |   | (15,341  | )
|Decrease in prior shareholder escrow                                           |  |                             |        |   |                             |   | 8,815    |                             |  |   |         |  
|Capital improvements                                                           |  |                             | (10,463 | ) |                             |   | (22,174  | )                           |  |   | (48,326  | )
|(Increase) decrease in deposits on capital improvement projects                |  |                             | (1,133  | ) |                             |   | (259     | )                           |  |   | 2,136    |  
|                                                                               |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Net cash used in investing activities                                          |  |                             | (13,970 | ) |                             |   | (2,239   | )                           |  |   | (71,682  | )
|Cash flow from financing activities:                                           |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Proceeds from issuance of common stock                                         |  |                             | 9,371   |   |                             |   | 6,749    |                             |  |   |         |  
|Redemption of common stock                                                     |  |                             | (9,252  | ) |                             |   | (8,779   | )                           |  |   | (8,832   | )
|Proceeds from mortgage notes payable                                           |  |                             |        |   |                             |   | 135,000  |                             |  |   |         |  
|Net proceeds (payments) from secured line of credit                            |  |                             | (7,175  | ) |                             |   | 11,000   |                             |  |   |         |  
|Repayment of unsecured line of credit                                          |  |                             |        |   |                             |   |         |                             |  |   | (3,000   | )
|Payment of financing costs                                                     |  |                             | (150    | ) |                             |   | (1,722   | )                           |  |   |         |  
|Reduction in debt service escrow                                               |  |                             |        |   |                             |   | 5,118    |                             |  |   |         |  
|Repayment of secured notes payable                                             |  |                             | (4,974  | ) |                             |   | (132,071 | )                           |  |   | (6,391   | )
|Cash distributions paid to shareholders                                        |  |                             | (33,372 | ) |                             |   | (37,601  | )                           |  |   | (54,244  | )
|                                                                               |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Net cash used in financing activities                                          |  |                             | (45,552 | ) |                             |   | (22,306  | )                           |  |   | (72,467  | )
|Decrease in cash and cash equivalents                                          |  |                             | (12,703 | ) |                             |   | (4,178   | )                           |  |   | (108,226 | )
|Cash and cash equivalents, beginning of period                                 |  |                             | 13,118  |   |                             |   | 17,296   |                             |  |   | 125,522  |  
|                                                                               |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Cash and cash equivalents, end of period                                       |  | $                           | 415     |   |                             | $ | 13,118   |                             |  | $ | 17,296   |  
|                                                                               |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Supplemental information:                                                      |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Interest paid, net of amounts capitalized                                      |  | $                           | 27,937  |   |                             | $ | 27,863   |                             |  | $ | 27,146   |  
|Non-cash transactions:                                                         |  |                             |         |   |                             |   |          |                             |  |   |          |  
|Other assets assumed in acquisitions                                           |  | $                           |        |   |                             | $ |         |                             |  | $ | 1,779    |  
|Escrows assumed in acquisitions                                                |  | $                           |        |   |                             | $ |         |                             |  | $ | 1,131    |  
|Assumption of mortgage notes payable                                           |  | $                           |        |   |                             | $ |         |                             |  | $ | 102,363  |  
|Issuance of common stock                                                       |  | $                           |        |   |                             | $ |         |                             |  | $ | 90,107   |  
|Issuance of Series C shares                                                    |  | $                           |        |   |                             | $ |         |                             |  | $ | 10,200   |  
|Liabilities assumed in acquisition                                             |  | $                           |        |   |                             | $ |         |                             |  | $ | 4,136    |  



See notes to consolidated financial
statements.



31



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##### Table of Contents

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.



At December 31, 2005 the Company owned 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, net



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 39 years for buildings, 10 years for 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, 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.



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.



32



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##### Table of Contents

Hotels held for Sale



For hotels classified as held for sale, the Company estimates the net selling price of such
hotel. Net selling price is estimated as the amount at which the hotel could be bought or sold (fair value) less costs to sell. Fair value is determined considering prevailing market conditions and/or current estimated net sales proceeds from
pending offers, if appropriate. If the hotels net selling price is less than the carrying amount of the hotel, a reserve for loss is established. Depreciation is no longer recorded on hotels held for sale. In December 2005 and January 2006,
the Company entered contracts to sell two hotels and a loss on discontinued operations of $3.4 million was recorded representing the differences in fair value less selling costs and net book value.



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, 2005, 2004 and 2003.



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 2005 distributions of $0.80 per share for tax purposes was 87% ordinary income and 13% return of capital, 2004 distributions of $0.90 per share
for tax purposes was 55% ordinary income and 45% return of capital and 2003 distributions of $1.50 per share for tax purposes was 84% ordinary income and 16% return of capital (unaudited).



The Lessees, as taxable REIT subsidiaries of the Company, are subject to federal and state
income taxes. The taxable REIT subsidiaries incurred a financial reporting and taxable loss for the years ended December 31, 2005, 2004 and 2003, 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 $33.0 and $22.3 million at December 31, 2005 and 2004. There are no material differences
between the book and tax basis of the Companys assets.



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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.



Reclassifications



Certain amounts in the 2004 and 2003 consolidated financial statements have been
reclassified in order to conform to the 2005 presentation with no effect on previously reported shareholders equity or net income. See also Note 11, Discontinued Operations, for discussion of reclassifications related to the pending sale of
two hotels.



Summary of Recent Accounting
Pronouncements



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. The Company will adopt
Statement 123 (R) in the first quarter of 2006. The adoption of the statement is not anticipated to have a material impact on the Companys results of operations or financial position.



Note 2



Investment in Hotels



At December 31, 2005, 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. Two of the hotels owned are classified as hotels held for sale.



Investment in hotels consisted of the following as of December 31 (in thousands):



|                                 |  |      |         |   |      |   |         |  
|-------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                 |  | 2005 |         |   | 2004 |  
|Land                             |  | $    | 135,795 |   |      | $ | 139,111 |  
|Building and improvements        |  |      | 493,614 |   |      |   | 493,678 |  
|Furniture fixtures and equipment |  |      | 57,798  |   |      |   | 55,748  |  
|                                 |  |      |         |   |      |   |         |  
|                                 |  |      | 687,207 |   |      |   | 688,537 |  
|                                 |  |      |         |   |      |   |         |  
|Less: accumulated depreciation   |  |      | (77,385 | ) |      |   | (52,331 | )
|                                 |  |      |         |   |      |   |         |  
|Investment in hotels, net        |  | $    | 609,822 |   |      | $ | 636,206 |  
|                                 |  |      |         |   |      |   |         |  



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##### Table of Contents

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 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.



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##### 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, 2005 are as follows (in thousands):



|                                      |  |   |        
|------------------------------------- |  | - | -------
|2006                                  |  | $ | 7,098  
|2007                                  |  |   | 15,754 
|2008                                  |  |   | 8,329  
|2009                                  |  |   | 9,083  
|2010                                  |  |   | 101,561
|Thereafter                            |  |   | 217,936
|                                      |  |   |        
|                                      |  |   | 359,761
|Fair Value Adjustment of Assumed Debt |  |   | 4,149  
|                                      |  |   |        
|                                      |  | $ | 363,910
|                                      |  |   |        



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, 2005 and 2004 was approximately $79.2 million and $80.5 million.



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 $1.8 million in loan costs which are being amortized over 10 years using the effective interest
method, and the Company recognized debt extinguishment costs in 2004 of approximately $8.8 million, which includes a credit of $1.9 million related to the debts outstanding fair value adjustment. The outstanding balance at December 31,
2005 and 2004 was $134.8 million and $135.0 million.



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, 2005 and 2004 was approximately $45.6 million and $47.7 million.



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 2010. The outstanding balance at December 31, 2005 and 2004 was approximately $19.1 and $19.4 million.



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, 2005 and 2004 was approximately $9.0 and $9.2 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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, 2005 and 2004 was $7.1 and $7.2 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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, 2005 and 2004 was $10.0 and $10.2 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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, 2005 and 2004 was $46.9 million and $47.6 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In 2005 the Company refinanced its $16 million dollar secured line of credit (originally entered into in 2004). The short-term credit
facility was changed to a two-year $15 million revolving line of credit. This revolving line of credit is secured by two properties and bears interest at LIBOR (4.39% at December 31, 2005) plus 2.5% per year. At December 31, 2005 the
outstanding balance on the revolving line of credit was $3.8 million.



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, 2005 and 2004 was $4.2
million and $3.9 million.



The fair value of the Companys notes payable
at December 31, 2005 was approximately $387.0 million. The carrying value of $376.6 million approximated fair value at December 31, 2004.



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 in 2003 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



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##### Table of Contents

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.



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 and C 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, 2005 |        | Year endedDecember 31, 2004 |   | Year endedDecember 31, 2003
|Net income, as reported                                                                                                       |  | $                           | 18,872 |                             | $ | 6,449                       |  | $ | 1,497 
|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 |  |                             | 35     |                             |   | 33                          |  |   | 10,233
|                                                                                                                              |  |                             |        |                             |   |                             |  |   |       
|Pro forma net income as if the fair value method had been applied to all option grants                                        |  | $                           | 18,837 |                             | $ | 6,416                       |  | $ | 1,440 
|                                                                                                                              |  |                             |        |                             |   |                             |  |   |       
|Earnings per common share:                                                                                                    |  |                             |        |                             |   |                             |  |   |       
|Basic and diluted-as reported                                                                                                 |  | $                           | 0.45   |                             | $ | 0.15                        |  | $ | 0.04  
|Basic and diluted-pro forma                                                                                                   |  | $                           | 0.45   |                             | $ | 0.15                        |  | $ | 0.03  



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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 2005, 2004 and 2003: risk-free
interest rates of 4.0%, 4.14% and 4.06%; expected volatility of approximately 0.236, 0.272 and 0.244; expected dividend yields of 8%, and expected lives of approximately 10 years. Fair value of options granted was $0.74, $1.00 and $0.72.



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 years ended December 31, 2005 and 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 2005, 2004 and 2003, the Company granted
47,210, 33,372, and 33,212 options to purchase shares under the Directors Plan. Additionally, in 2003, the Company converted 45,888 options granted under the Apple Suites Directors Plan to Company options with the same terms and agreements. No
options have been granted under the Companys Incentive Plan. Activity in the Companys share option plans during 2005, 2004 and 2003 is summarized in the following table:



|                                     |  |         |  |         |  |        
|------------------------------------ |  | ------- |  | ------- |  | -------
|                                     |  | 2005    |  | 2004    |  | 2003   
|Outstanding, beginning of year:      |  | 155,192 |  | 121,820 |  | 42,720 
|Granted                              |  | 47,210  |  | 33,372  |  | 79,100 
|Exercised                            |  |        |  |        |  |       
|Expired or canceled                  |  |        |  |        |  |       
|                                     |  |         |  |         |  |        
|Outstanding, end of year:            |  | 202,402 |  | 155,192 |  | 121,820
|                                     |  |         |  |         |  |        
|Exercisable, end of year:            |  | 202,402 |  | 155,192 |  | 121,820
|                                     |  |         |  |         |  |        
|The weighted-average exercise price: |  | 9.84    |  | 9.79    |  | 9.73   



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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 (Res I, Res II and Res III) plus one stand-alone hotel. Each of these portfolios has 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. For the years ended December 31, 2005, 2004 and 2003, the Company incurred and paid incentive management fees of $1.3 million, $0.3 million and $0.5 million.



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  |                                | $ | 9.3      |  | $                        | 16.0 |           | $ | 0.9                                        |  | $ | 15.1 |  | $ | 0.0
|Res II  |  |             | 7.0  |                                |   | 6.8      |  |                          | 13.8 |           |   | 0.0                                        |  |   | 13.8 |  |   | 0.0
|Res III |  |             | 0.0  |                                |   | 1.4      |  |                          | 1.4  |           |   | 0.5                                        |  |   | 0.9  |  |   | 0.7
|Redmond |  |             | 0.0  |                                |   | 1.2      |  |                          | 1.2  |           |   | 1.2                                        |  |   | 0.0  |  |   | 0.0
|        |  |             |      |                                |   |          |  |                          |      |           |   |                                            |  |   |      |  |   |    
|Total   |  | $           | 13.7 |                                | $ | 18.7     |  | $                        | 32.4 |           | $ | 2.6                                        |  | $ | 29.8 |  | $ | 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. For the years ended December 31, 2005, 2004 and 2003, total fees incurred under the Marriott agreements were $19.1 million, $18.4 million and $17.4 million or 10.9%, 11.3%, and 11.6% of revenue
provided by the Marriott managed properties.



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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 2005 or 2004. 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. For the years ended December 31, 2005, 2004 and 2003, total expenses for franchise fees, management fees, advertising expenses and other
reimbursable services were $6.2 million, $6.0 million and $5.3 million, or 11.9%, 11.8% and 11.9% of revenue, provided by the Hilton managed properties for each of those years.



Note 7



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.



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).



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. For the years ended December 31, 2005, 2004 and 2003, the company earned and received advisory fee revenue of approximately $0.7 million, $0.7
million and $0.3 million. These amounts are included in other revenue.



The
Company also provides support services to Apple Six Advisors, Inc. (A6A), Apple REIT Six, Inc., and Apple REIT Seven, 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. The Company started providing these services in the second quarter of 2004. For the years ended December 31, 2005 and 2004,
the Company received reimbursement of its costs totaling approximately $2.1 million and $0.6 million. Mr. Knight is Chairman and Chief Executive Officer of Apple Hospitality Five, Inc., Apple REIT Six, Inc. and Apple REIT Seven, Inc.
Additionally, the Companys Board of Directors has members that are also on the Board of Directors of Apple Hospitality Five, Inc., Apple REIT Six, Inc. or Apple REIT Seven, Inc.



41



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##### Table of Contents

Note 8



Quarterly Financial Data (unaudited)



The following is a summary of quarterly results of operations for the years ended December 31, 2005 and December 31, 2004, in thousands, except per share data:



|                                                   |  |               |        |               |   |              |  |               |        |  |   |        |  
|-------------------------------------------------- |  | ------------- | ------ | ------------- | - | ------------ |  | ------------- | ------ |  | - | ------ | -
|2005                                               |  | First Quarter |        | SecondQuarter |   | ThirdQuarter |  | FourthQuarter |       
|Total revenue                                      |  | $             | 53,234 |               | $ | 57,513       |  | $             | 60,972 |  | $ | 55,750 |  
|Income from continuing operations                  |  | $             | 3,729  |               | $ | 6,989        |  | $             | 7,457  |  | $ | 3,959  |  
|Net income                                         |  | $             | 3,662  |               | $ | 7,072        |  | $             | 7,466  |  | $ | 672    |  
|EPS from continuing operations (basic and diluted) |  | $             | 0.09   |               | $ | 0.17         |  | $             | 0.18   |  | $ | 0.09   |  
|EPS (basic and diluted)                            |  | $             | 0.09   |               | $ | 0.17         |  | $             | 0.18   |  | $ | 0.01   |  
|Distributions paid per share                       |  | $             | 0.20   |               | $ | 0.20         |  | $             | 0.20   |  | $ | 0.20   |  
|                                                   |  |               |        |              
|2004                                               |  | First Quarter |        | SecondQuarter |   | ThirdQuarter |  | FourthQuarter |       
|Total revenue                                      |  | $             | 48,813 |               | $ | 53,853       |  | $             | 58,011 |  | $ | 50,516 |  
|Income from continuing operations                  |  | $             | 2,305  |               | $ | 5,237        |  | $             | 6,927  |  | $ | (7,374 | )
|Net income                                         |  | $             | 2,086  |               | $ | 5,122        |  | $             | 6,751  |  | $ | (7,510 | )
|EPS from continuing operations (basic and diluted) |  | $             | 0.05   |               | $ | 0.13         |  | $             | 0.17   |  | $ | (0.18  | )
|EPS (basic and diluted)                            |  | $             | 0.05   |               | $ | 0.12         |  | $             | 0.16   |  | $ | (0.18  | )
|Distributions paid per share                       |  | $             | 0.25   |               | $ | 0.25         |  | $             | 0.20   |  | $ | 0.20   |  



Note 9



Pro Forma Information (unaudited)



The following pro forma information for the year ended December 31, 2003 is presented
as if the acquisition of Apple Suites, Inc. occurred on January 1, 2003. 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
|Hotel revenues from continuing operations                           |  | $                 | 196,313
|Net income from continuing operations                               |  | $                 | 18,099 
|Net income per share, basic and diluted, from continuing operations |  | $                 | 0.38   



Note 10



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.



42



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##### Table of Contents

Note 11



Discontinued Operations



The Company adopted FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (FAS 144) as of January 1, 2002. FAS 144 requires, among other things, that the
primary assets and liabilities and the results of operations of the Companys investment in hotels which have been sold subsequent to January 1, 2002, or are held for disposition subsequent to January 1, 2002, be classified as
discontinued operations and segregated in the consolidated statements of operations and balance sheets. Hotels classified as held for sale generally represent hotels that are under contract for sale and are expected to close within the next twelve
months.



Based on the performance and location of two of its Residence Inn
hotels, Charlotte, North Carolina and Spartanburg, South Carolina, the Company committed at the end of 2005 to sell the two properties. The results of operations for the years ended December 31, 2005, 2004 and 2003 for these properties are
classified on the Consolidated Statements of Operations in the line item Loss from discontinued operations. Included in discontinued operations for the year ended December 31, 2005, is the estimated loss on sale of $3.4 million.
This loss is based on the anticipated sale proceeds and the net book value of the properties. The Company expects to complete these transactions in the first quarter of 2006.



The following table sets forth the components of discontinued operations for these hotels for the years ended December 31, 2005, 2004
and 2003 (in thousands):



|                                |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                |  | 2005 |        |   | 2004 |   |        | 2003 | 
|Total revenue                   |  | $    | 3,451  |   |      | $ | 3,098  |      |  | $ | 3,213  |  
|Hotel operating expenses        |  |      | (2,875 | ) |      |   | (2,717 | )    |  |   | (2,673 | )
|Taxes, insurance and other      |  |      | (210   | ) |      |   | (182   | )    |  |   | (203   | )
|Depreciation                    |  |      | (264   | ) |      |   | (263   | )    |  |   | (248   | )
|Interest expense                |  |      |       |   |      |   | (582   | )    |  |   | (786   | )
|Loss on sale of hotels          |  |      | (3,364 | ) |      |   |       |      |  |   |       |  
|                                |  |      |        |   |      |   |        |      |  |   |        |  
|Loss on discontinued operations |  | $    | (3,262 | ) |      | $ | (646   | )    |  | $ | (697   | )
|                                |  |      |        |   |      |   |        |      |  |   |        |  



Note 12



Subsequent Events



In January 2006, the Company declared and distributed to its shareholders dividends in the amount of $8.3 million ($0.20 per share).



In January 2006, the Company redeemed 257,634 Units in the amount of $2.6
million.



In January 2006, through the Companys Dividend Reinvestment
Plan, 235,205 Units totaling $2.4 million were reinvested.



43



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##### 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 and the Companys Independent Registered Accounting Firms attestation report regarding internal control
over financial reporting.



Item 9B. Other Information



None.



44



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##### Table of Contents

PART III



Item 10. Directors and Executive Officers of the Registrant



The information required by Items 401, 405 and 406 of Regulation S-K will be set forth in the Companys 2006 Proxy Statement. For the limited purpose of providing the information necessary to comply with
this Item 10, the 2006 Proxy Statement is incorporated herein by this reference.



Item 11. Executive Compensation



The
information required by Item 402 of Regulation S-K will be set forth in the Companys 2006 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 11, the 2006 Proxy Statement is
incorporated herein by this reference.



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters



The information required by Items 201(d) and 403 of Regulation S-K will be set forth in the Companys 2006 Proxy Statement. For the limited purpose of providing the
information necessary to comply with this Item 12, the 2006 Proxy Statement is incorporated herein by this reference.



Item 13. Certain Relationships and Related Transactions



The information required by Item 404 of Regulation S-K will be set forth in the Companys 2006 Proxy Statement. For the limited purpose of providing the information necessary to comply with this
Item 13, the 2006 Proxy Statement is incorporated herein by this reference.



Item 14. Principal Accounting Fees and Services



This information required by Item 9(e) of Schedule 14A will be set forth in the Companys 2006 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 14, the 2006 Proxy
Statement is incorporated herein by this reference.



45



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##### Table of Contents

PART IV



Item 15. Exhibits and Financial Statement Schedules



| | 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, 2005 and 2004



Consolidated
Statements of Operations for the years ended December 31, 2005, 2004 and 2003



Consolidated Statements of Shareholders Equity for the years ended December 31, 2005, 2004 and 2003



Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003



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



46



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##### Table of Contents

SCHEDULE III

Real Estate and Accumulated Depreciation

As of December 31, 2005

(Dollars in thousands)



|                               |  |              |        |              |            |                                          |  |                  |        |              |   |       |                      |   |               |  |                  |        |             |  |      |  |                |  |             |  |    
|------------------------------ |  | ------------ | ------ | ------------ | ---------- | ---------------------------------------- |  | ---------------- | ------ | ------------ | - | ----- | -------------------- | - | ------------- |  | ---------------- | ------ | ----------- |  | ---- |  | -------------- |  | ----------- |  | ---
|                               |  | Encumbrances |        | Initial Cost |            | SubsequentlyCapitalizedBldg. Imp. & FF&E |  | Total Gross Cost |        | Acc. Deprec. |   |       | Date of Construction |   | Date Acquired |  | Depreciable Life |        | # of Suites
|Description                    |  |              | Land   |              | Bldg./FF&E |                                          |  |                  |        |              |   |      
|Akron, Ohio                    |  | $            | 5,453  |              | $          | 597                                      |  | $                | 3,665  |              | $ | 2,368 |                      | $ | 6,630         |  | $                | (1,103 | )           |  | 1987 |  | August 2002    |  | 3  39 yrs. |  | 112
|Arcadia, California            |  |              | 14,833 |              |            | 2,284                                    |  |                  | 6,380  |              |   | 2,106 |                      |   | 10,770        |  |                  | (1,380 | )           |  | 1989 |  | August 2002    |  | 3  39 yrs. |  | 120
|Atlanta, Georgia               |  |              | 4,108  |              |            | 1,757                                    |  |                  | 10,360 |              |   | 1,290 |                      |   | 13,407        |  |                  | (1,739 | )           |  | 1990 |  | September 2001 |  | 3  39 yrs. |  | 126
|Atlanta/Buckhead, Georgia      |  |              | 1,913  |              |            | 4,568                                    |  |                  | 9,087  |              |   | 301   |                      |   | 13,956        |  |                  | (1,106 | )           |  | 1997 |  | January 2003   |  | 3  39 yrs. |  | 92 
|Atlanta/Cumberland, Georgia    |  |              | 4,685  |              |            | 2,202                                    |  |                  | 8,618  |              |   | 606   |                      |   | 11,426        |  |                  | (1,135 | )           |  | 1990 |  | January 2003   |  | 3  39 yrs. |  | 124
|Atlanta/Peachtree, Georgia     |  |              | 2,624  |              |            | 953                                      |  |                  | 3,629  |              |   | 696   |                      |   | 5,278         |  |                  | (653   | )           |  | 1990 |  | January 2003   |  | 3  39 yrs. |  | 92 
|Bakersfield, California        |  |              | 3,651  |              |            | 1,870                                    |  |                  | 7,567  |              |   | 1,416 |                      |   | 10,853        |  |                  | (1,462 | )           |  | 1990 |  | September 2001 |  | 3  39 yrs. |  | 114
|Baltimore, Maryland            |  |              | 8,434  |              |            | 1,601                                    |  |                  | 15,553 |              |   | 811   |                      |   | 17,965        |  |                  | (1,738 | )           |  | 1998 |  | January 2003   |  | 3  39 yrs. |  | 147
|Birmingham, Alabama            |  |              | 5,566  |              |            | 1,227                                    |  |                  | 4,349  |              |   | 2,281 |                      |   | 7,857         |  |                  | (1,005 | )           |  | 1986 |  | August 2002    |  | 3  39 yrs. |  | 128
|Boca Raton, Florida            |  |              | 3,745  |              |            | 1,360                                    |  |                  | 3,871  |              |   | 227   |                      |   | 5,458         |  |                  | (493   | )           |  | 1988 |  | August 2002    |  | 3  39 yrs. |  | 120
|Boston, Massachusetts          |  |              | 6,389  |              |            | 4,707                                    |  |                  | 12,730 |              |   | 1,847 |                      |   | 19,284        |  |                  | (2,195 | )           |  | 1989 |  | September 2001 |  | 3  39 yrs. |  | 130
|Boston, Massachusetts          |  |              | 4,614  |              |            | 1,193                                    |  |                  | 4,774  |              |   | 2,219 |                      |   | 8,186         |  |                  | (1,196 | )           |  | 1989 |  | August 2002    |  | 3  39 yrs. |  | 96 
|Boulder, Colorado              |  |              | 10,042 |              |            | 3,428                                    |  |                  | 12,532 |              |   | 611   |                      |   | 16,571        |  |                  | (1,406 | )           |  | 1991 |  | January 2003   |  | 3  39 yrs. |  | 112
|Boulder, Colorado              |  |              | 5,726  |              |            | 1,179                                    |  |                  | 8,538  |              |   | 3,544 |                      |   | 13,261        |  |                  | (2,054 | )           |  | 1986 |  | March 2002     |  | 3  39 yrs. |  | 128
|Buckhead, Georgia              |  |              | 4,867  |              |            | 3,231                                    |  |                  | 4,267  |              |   | 2,470 |                      |   | 9,968         |  |                  | (1,185 | )           |  | 1987 |  | March 2002     |  | 3  39 yrs. |  | 136
|Chesterfield, Missouri         |  |              | 2,672  |              |            | 1,148                                    |  |                  | 3,480  |              |   | 2,099 |                      |   | 6,727         |  |                  | (762   | )           |  | 1986 |  | March 2002     |  | 3  39 yrs. |  | 104
|Cincinatti, Ohio               |  |              | 4,564  |              |            | 1,573                                    |  |                  | 5,472  |              |   | 391   |                      |   | 7,436         |  |                  | (930   | )           |  | 1990 |  | September 2001 |  | 3  39 yrs. |  | 118
|Clearwater, Florida            |  |              | 5,623  |              |            | 2,687                                    |  |                  | 8,108  |              |   | 741   |                      |   | 11,536        |  |                  | (978   | )           |  | 1998 |  | January 2003   |  | 3  39 yrs. |  | 112
|Clearwater, Florida            |  |              | 3,536  |              |            | 1,759                                    |  |                  | 3,266  |              |   | 1,945 |                      |   | 6,970         |  |                  | (817   | )           |  | 1986 |  | August 2002    |  | 3  39 yrs. |  | 88 
|Columbia, South Carolina       |  |              | 4,374  |              |            | 475                                      |  |                  | 5,732  |              |   | 2,301 |                      |   | 8,508         |  |                  | (1,370 | )           |  | 1988 |  | August 2002    |  | 3  39 yrs. |  | 128
|Columbus North, Ohio           |  |              | 1,670  |              |            | 641                                      |  |                  | 3,527  |              |   | 464   |                      |   | 4,632         |  |                  | (622   | )           |  | 1985 |  | March 2002     |  | 3  39 yrs. |  | 96 
|Concord, California            |  |              | 5,933  |              |            | 4,937                                    |  |                  | 16,804 |              |   | 1,342 |                      |   | 23,083        |  |                  | (2,586 | )           |  | 1989 |  | September 2001 |  | 3  39 yrs. |  | 126
|Costa Mesa, California         |  |              | 7,158  |              |            | 3,773                                    |  |                  | 6,825  |              |   | 3,239 |                      |   | 13,837        |  |                  | (1,441 | )           |  | 1986 |  | March 2002     |  | 3  39 yrs. |  | 144
|Cumberland, Georgia            |  |              | 2,863  |              |            | 1,938                                    |  |                  | 3,622  |              |   | 542   |                      |   | 6,102         |  |                  | (686   | )           |  | 1987 |  | March 2002     |  | 3  39 yrs. |  | 130
|Dallas, Texas                  |  |              | 5,020  |              |            | 1,397                                    |  |                  | 8,271  |              |   | 557   |                      |   | 10,225        |  |                  | (1,384 | )           |  | 1989 |  | September 2001 |  | 3  39 yrs. |  | 120
|Dallas/Addison, Texas          |  |              | 5,154  |              |            | 2,059                                    |  |                  | 8,511  |              |   | 663   |                      |   | 11,233        |  |                  | (1,093 | )           |  | 1990 |  | January 2003   |  | 3  39 yrs. |  | 120
|Dallas/Las Colinas, Texas      |  |              | 5,341  |              |            | 2,772                                    |  |                  | 9,592  |              |   | 494   |                      |   | 12,858        |  |                  | (1,200 | )           |  | 1990 |  | January 2003   |  | 3  39 yrs. |  | 136
|Dallas/Plano, Texas            |  |              | 2,343  |              |            | 521                                      |  |                  | 5,219  |              |   | 364   |                      |   | 6,104         |  |                  | (806   | )           |  | 1997 |  | January 2003   |  | 3  39 yrs. |  | 99 
|Dayton North, Ohio             |  |              | 1,384  |              |            | 320                                      |  |                  | 2,539  |              |   | 187   |                      |   | 3,046         |  |                  | (381   | )           |  | 1987 |  | March 2002     |  | 3  39 yrs. |  | 64 
|Dayton South, Ohio             |  |              | 2,911  |              |            | 443                                      |  |                  | 4,353  |              |   | 2,006 |                      |   | 6,802         |  |                  | (1,179 | )           |  | 1985 |  | March 2002     |  | 3  39 yrs. |  | 96 
|Deerfield, Illinois            |  |              | 8,090  |              |            | 1,442                                    |  |                  | 6,665  |              |   | 1,981 |                      |   | 10,088        |  |                  | (1,407 | )           |  | 1989 |  | August 2002    |  | 3  39 yrs. |  | 128
|Detroit, Michigan              |  |              | 2,343  |              |            | 508                                      |  |                  | 4,543  |              |   | 532   |                      |   | 5,583         |  |                  | (708   | )           |  | 1990 |  | January 2003   |  | 3  39 yrs. |  | 76 
|Dulles/Washington, D.C.        |  |              | 6,962  |              |            | 2,419                                    |  |                  | 15,104 |              |   | 421   |                      |   | 17,944        |  |                  | (1,315 | )           |  | 1998 |  | January 2003   |  | 3  39 yrs. |  | 109
|Dunwoody, Georgia              |  |              | 2,625  |              |            | 1,988                                    |  |                  | 4,725  |              |   | 885   |                      |   | 7,598         |  |                  | (935   | )           |  | 1984 |  | March 2002     |  | 3  39 yrs. |  | 144
|Greensboro, North Carolina     |  |              | 4,869  |              |            | 1,518                                    |  |                  | 5,211  |              |   | 78    |                      |   | 6,807         |  |                  | (698   | )           |  | 1987 |  | August 2002    |  | 3  39 yrs. |  | 128
|Home OfficeRichmond, Virginia |  |              |       |              |            | 138                                      |  |                  | 766    |              |   | 49    |                      |   | 953           |  |                  | (377   | )           |  | 1950 |  | January 2003   |  | 3  39 yrs. |  |   
|Houston, Texas                 |  |              | 4,564  |              |            | 960                                      |  |                  | 8,903  |              |   | 1,449 |                      |   | 11,312        |  |                  | (1,626 | )           |  | 1990 |  | September 2001 |  | 3  39 yrs. |  | 110
|Irvine, California             |  |              | 12,734 |              |            | 2,904                                    |  |                  | 6,049  |              |   | 2,187 |                      |   | 11,140        |  |                  | (1,426 | )           |  | 1989 |  | August 2002    |  | 3  39 yrs. |  | 112
|Jackson, Mississippi           |  |              | 2,811  |              |            | 897                                      |  |                  | 8,271  |              |   | 444   |                      |   | 9,612         |  |                  | (854   | )           |  | 1997 |  | January 2003   |  | 3  39 yrs. |  | 91 



47



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##### Table of Contents

SCHEDULE III

Real Estate and Accumulated Depreciation

As of December 31, 2005

(Dollars in thousands)



|                                   |  |              |         |              |            |                                          |  |                  |         |              |   |        |                      |   |               |  |                  |         |             |  |      |  |                |  |             |  |      
|---------------------------------- |  | ------------ | ------- | ------------ | ---------- | ---------------------------------------- |  | ---------------- | ------- | ------------ | - | ------ | -------------------- | - | ------------- |  | ---------------- | ------- | ----------- |  | ---- |  | -------------- |  | ----------- |  | -----
|                                   |  | Encumbrances |         | Initial Cost |            | SubsequentlyCapitalizedBldg. Imp. & FF&E |  | Total Gross Cost |         | Acc. Deprec. |   |        | Date of Construction |   | Date Acquired |  | Depreciable Life |         | # of Suites
|Description                        |  |              | Land    |              | Bldg./FF&E |                                          |  |                  |         |              |   |       
|Jackson, Mississippi               |  | $            | 3,356   |              | $          | 786                                      |  | $                | 4,125   |              | $ | 2,267  |                      | $ | 7,178         |  | $                | (1,020  | )           |  | 1986 |  | August 2002    |  | 3  39 yrs. |  | 120  
|Jacksonville, Florida              |  |              | 4,869   |              |            | 566                                      |  |                  | 4,001   |              |   | 2,700  |                      |   | 7,267         |  |                  | (1,057  | )           |  | 1986 |  | August 2002    |  | 3  39 yrs. |  | 112  
|Kalamazoo, Michigan                |  |              | 3,933   |              |            | 1,313                                    |  |                  | 3,896   |              |   | 1,392  |                      |   | 6,601         |  |                  | (769    | )           |  | 1989 |  | August 2002    |  | 3  39 yrs. |  | 83   
|La Jolla, California               |  |              | 18,754  |              |            | 17,255                                   |  |                  | 11,854  |              |   | 7,195  |                      |   | 36,304        |  |                  | (3,651  | )           |  | 1986 |  | March 2002     |  | 3  39 yrs. |  | 288  
|Las Vegas, Nevada                  |  |              | 20,599  |              |            | 3,685                                    |  |                  | 8,786   |              |   | 918    |                      |   | 13,389        |  |                  | (1,004  | )           |  | 1989 |  | August 2002    |  | 3  39 yrs. |  | 192  
|Lombard, Illinois                  |  |              | 5,154   |              |            | 1,166                                    |  |                  | 5,740   |              |   | 526    |                      |   | 7,432         |  |                  | (1,386  | )           |  | 1987 |  | March 2002     |  | 3  39 yrs. |  | 144  
|Long Beach, California             |  |              | 11,071  |              |            | 7,325                                    |  |                  | 11,597  |              |   | 670    |                      |   | 19,592        |  |                  | (1,545  | )           |  | 1987 |  | March 2002     |  | 3  39 yrs. |  | 216  
|Lubbock, Texas                     |  |              | 2,497   |              |            | 410                                      |  |                  | 2,754   |              |   | 1,439  |                      |   | 4,603         |  |                  | (699    | )           |  | 1986 |  | August 2002    |  | 3  39 yrs. |  | 80   
|Memphis, Tennessee                 |  |              | 2,532   |              |            | 2,038                                    |  |                  | 4,755   |              |   | 386    |                      |   | 7,179         |  |                  | (600    | )           |  | 1986 |  | August 2002    |  | 3  39 yrs. |  | 105  
|Meriden, Connecticut               |  |              | 4,108   |              |            |                                         |  |                  | 9,092   |              |   | 799    |                      |   | 9,891         |  |                  | (1,533  | )           |  | 1989 |  | September 2001 |  | 3  39 yrs. |  | 106  
|Montgomery, Alabama                |  |              | 2,282   |              |            | 965                                      |  |                  | 5,025   |              |   | 376    |                      |   | 6,366         |  |                  | (867    | )           |  | 1990 |  | September 2001 |  | 3  39 yrs. |  | 94   
|Pensacola, Florida                 |  |              | 3,536   |              |            | 336                                      |  |                  | 2,297   |              |   | 1,743  |                      |   | 4,376         |  |                  | (1,161  | )           |  | 1985 |  | August 2002    |  | 3  39 yrs. |  | 64   
|Philadelphia, Pennsylvania         |  |              | 5,971   |              |            | 1,395                                    |  |                  | 5,650   |              |   | 2,265  |                      |   | 9,310         |  |                  | (1,279  | )           |  | 1988 |  | August 2002    |  | 3  39 yrs. |  | 88   
|Philadelphia/Malvern, Pennsylvania |  |              | 1,912   |              |            |                                         |  |                  | 16,285  |              |   | 303    |                      |   | 16,588        |  |                  | (1,662  | )           |  | 1998 |  | January 2003   |  | 3  39 yrs. |  | 123  
|Placentia, California              |  |              | 7,640   |              |            | 3,397                                    |  |                  | 4,663   |              |   | 2,092  |                      |   | 10,152        |  |                  | (1,251  | )           |  | 1988 |  | August 2002    |  | 3  39 yrs. |  | 112  
|Portland, Oregon                   |  |              | 4,506   |              |            | 3,095                                    |  |                  | 7,705   |              |   | 351    |                      |   | 11,151        |  |                  | (681    | )           |  | 1998 |  | January 2003   |  | 3  39 yrs. |  | 123  
|Redmond, Washington                |  |              | 19,118  |              |            | 6,777                                    |  |                  | 27,736  |              |   | 233    |                      |   | 34,746        |  |                  | (2,381  | )           |  | 1990 |  | January 2003   |  | 3  39 yrs. |  | 180  
|Richmond, Virginia                 |  |              | 5,258   |              |            | 790                                      |  |                  | 9,035   |              |   | 497    |                      |   | 10,322        |  |                  | (1,125  | )           |  | 1998 |  | January 2003   |  | 3  39 yrs. |  | 123  
|Salt Lake City, Utah               |  |              | 2,343   |              |            | 377                                      |  |                  | 5,142   |              |   | 388    |                      |   | 5,907         |  |                  | (729    | )           |  | 1996 |  | January 2003   |  | 3  39 yrs. |  | 98   
|San Ramon, California              |  |              | 5,020   |              |            | 3,448                                    |  |                  | 15,542  |              |   | 463    |                      |   | 19,453        |  |                  | (2,105  | )           |  | 1989 |  | September 2001 |  | 3  39 yrs. |  | 106  
|Santa Fe, New Mexico               |  |              | 8,040   |              |            | 1,411                                    |  |                  | 4,840   |              |   | 209    |                      |   | 6,460         |  |                  | (620    | )           |  | 1986 |  | August 2002    |  | 3  39 yrs. |  | 120  
|Sharonville, Ohio                  |  |              | 1,909   |              |            | 2,087                                    |  |                  | 3,790   |              |   | 3,775  |                      |   | 9,652         |  |                  | (1,617  | )           |  | 1985 |  | March 2002     |  | 3  39 yrs. |  | 144  
|Shreveport, Louisiana              |  |              | 4,045   |              |            | 298                                      |  |                  | 2,503   |              |   | 13     |                      |   | 2,814         |  |                  | (348    | )           |  | 1983 |  | August 2002    |  | 3  39 yrs. |  | 72   
|Southfield, Michigan               |  |              | 4,199   |              |            | 1,738                                    |  |                  | 3,869   |              |   | 1,140  |                      |   | 6,747         |  |                  | (902    | )           |  | 1987 |  | March 2002     |  | 3  39 yrs. |  | 144  
|St. Louis, Missouri                |  |              | 4,506   |              |            | 2,099                                    |  |                  | 9,712   |              |   | 269    |                      |   | 12,080        |  |                  | (826    | )           |  | 2000 |  | January 2003   |  | 3  39 yrs. |  | 145  
|St. Louis/Galleria, Missouri       |  |              | 6,251   |              |            | 1,970                                    |  |                  | 5,554   |              |   | 3,117  |                      |   | 10,641        |  |                  | (1,136  | )           |  | 1986 |  | March 2002     |  | 3  39 yrs. |  | 152  
|                                   |  |              |         |              |            |                                          |  |                  |         |              |   |        |                      |   |               |  |                  |         |             |  |      |  |                |  |             |  |      
|Investment in hotels               |  | $            | 355,603 |              | $          | 136,101                                  |  | $                | 467,426 |              | $ | 83,680 |                      | $ | 687,207       |  | $                | (77,385 | )           |  |      |  |                |  |             |  | 7,690
|                                   |  |              |         |              |            |                                          |  |                  |         |              |   |        |                      |   |               |  |                  |         |             |  |      |  |                |  |             |  |      



|                                |  |      |         |      |  |                                 |      |   |        |     
|------------------------------- |  | ---- | ------- | ---- |  | ------------------------------- | ---- | - | ------ | ----
|                                |  | 2005 |         |      |  |                                 | 2005 |  
|Real estate owned:              |  |      |         |      |  | Accumulated depreciation:       |      |   |        |     
|Balance as of January 1         |  | $    | 688,537 |      |  | Balance as of January 1         |      | $ | 52,331 |     
|Improvements                    |  |      | 8,575   |      |  | Depreciation expense            |      |   | 25,722 |     
|Reclass to hotels held for sale |  |      | (9,905  | )(2) |  | Reclass to hotels held for sale |      |   | (668   | )(2)
|                                |  |      |         |      |  |                                 |      |   |        |     
|Balance at December 31          |  | $    | 687,207 |      |  | Balance at December 31          |      | $ | 77,385 |     
|                                |  |      |         |      |  |                                 |      |   |        |     



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

|(2) | Reclassification to hotels held for sale includes a loss of $3.4 million in 2005 on discontinued operations.
|--- | ------------------------------------------------------------------------------------------------------------



48



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SIGNATURES



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



|                            |  |                                                                                                              |  |  |  |                     |  | 
|--------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  |  |  | ------------------- |  | 
|APPLE HOSPITALITY TWO, INC. |  |                                                                                                              |  |  |  |                    
|                            |  |                                                                                                              | 
|By:                         |  | /s/ GLADE M. KNIGHT                                                                                          |  |  |  | Date: March 9, 2006
|                            |  | Glade M. Knight, Chairman of the
Board, Chief Executive Officer, and President
(Principal Executive Officer) |  |  |  |                     |  | 
|                            |  |                                                                                                              | 
|By:                         |  | /s/ Bryan Peery                                                                                              |  |  |  | Date: March 9, 2006
|                            |  | Bryan Peery, Chief Financial Officer
(Principal Financial and Principal 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, 2006
|    |  | Glade M. Knight, Director       |  |  |  |                     |  | 
|    |  |                                 | 
|By: |  | /s/ Glenn W. Bunting, Jr.       |  |  |  | Date: March 9, 2006
|    |  | Glenn W. Bunting, Jr., Director |  |  |  |                     |  | 
|    |  |                                 | 
|By: |  | /s/ Lisa B. Kern                |  |  |  | Date: March 9, 2006
|    |  | Lisa B. Kern, Director          |  |  |  |                     |  | 
|    |  |                                 | 
|By: |  | /s/ Bruce H. Matson             |  |  |  | Date: March 9, 2006
|    |  |                                 |  | 
|    |  | Bruce H. Matson, Director       |  |  |  |                     |  | 
|    |  |                                 | 
|By: |  | /s/ Michael S. Waters           |  |  |  | Date: March 9, 2006
|    |  | Michael S. Waters, Director     |  |  |  |                     |  | 
|    |  |                                 | 
|By: |  | /s/ Robert M. Wily              |  |  |  | Date: March 9, 2006
|    |  | Robert M. Wily, Director        |  |  |  |                     |  | 



49



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##### 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 |  | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Form 10-Q filed on August 4, 2005; SEC File No. 000-49748).                                                                                                                                                                                                                                                                                                                                                                                
|    | 
|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).                                                              
|    | 
|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).                                                                                                                                                                                                                         



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##### Table of Contents

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 (incorporated
by reference to Exhibit 4.10 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                                                          
|     | 
|4.11 |  | Schedule setting forth information on twenty additional and substantially identical Promissory Notes (substantially identical to Exhibit 4.10 in this filing) (incorporated by reference to
Exhibit 4.11 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                                                                            
|     | 
|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 (incorporated by reference to Exhibit 4.12 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                                
|     | 
|4.13 |  | Schedule setting forth information on ten additional and substantially identical mortgages (substantially identical to Exhibit 4.12 in this filing) (incorporated by reference to Exhibit 4.13
to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                                                                                      
|     | 
|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 (incorporated by reference to Exhibit 4.14 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                               
|     | 
|4.15 |  | Schedule setting forth information on nine additional and substantially identical mortgages (substantially identical to Exhibit 4.14 in this filing) (incorporated by reference to Exhibit 4.15
to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                                                                                     
|     | 
|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 (incorporated by reference to Exhibit 4.16 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                               
|     | 
|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)
(incorporated by reference to Exhibit 4.17 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                                                    
|     | 
|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).                                                                                                                                                                                                         
|     | 
|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).                                                                                                                                                                                      



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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)                                                                                                                                                                                                             
|      | 
|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)



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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).                                                                                                                                                                                               
|      | 
|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).                                                                                                                                                                                                                  



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                         
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 (incorporated by reference to Exhibit 10.33 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).  
|      | 
|10.34 |  | Schedule setting forth information on twenty additional and substantially identical Environmental Indemnity Agreements (substantially identical to Exhibit 10.33 in this filing) (incorporated
by reference to Exhibit 10.34 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                             
|      | 
|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 (incorporated by reference to Exhibit 10.35 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                           
|      | 
|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) (incorporated
by reference to Exhibit 10.36 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                              
|      | 
|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 (incorporated by reference to Exhibit 10.37 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                             
|      | 
|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)
(incorporated by reference to Exhibit 10.38 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                           
|      | 
|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 (incorporated by reference to Exhibit 10.39 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                        
|      | 
|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) (incorporated by
reference to Exhibit 10.40 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                                     
|      | 
|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 (incorporated by
reference to Exhibit 10.41 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).                                                                                               
|      | 
|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. (incorporated by reference to Exhibit 10.42 to Form 10-K filed on March 11, 2005; SEC File No. 000-49748).



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##### Table of Contents

|     |  |                                                                                                                                                                                                             
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.
|- | --------------------------