UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

(Mark One)

For the Quarterly Period Ended September 30, 2004

Or

For the transition period from           to         

     Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate by check mark whether the registrants are accelerated filers (as defined in Exchange Act Rule 12b-2). Yes x No o

     As of October 28, 2004, La Quinta Corporation had 188.1 million shares of common stock outstanding and La Quinta Properties, Inc. had 100,000 shares of class A common stock and 178.7 million shares of class B common stock outstanding.

TABLE OF CONTENTS

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About this Joint Quarterly Report

     This joint quarterly report on Form 10-Q, which we sometimes refer to as this Joint Quarterly Report, is filed by both La Quinta Corporation, a Delaware corporation (“LQ Corporation”), and its controlled subsidiary, La Quinta Properties, Inc., a Delaware corporation (“LQ Properties”), that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. Both LQ Corporation and LQ Properties have securities that are publicly traded and listed on the New York Stock Exchange. Accordingly, this Joint Quarterly Report includes information, including financial statements, about LQ Corporation on a consolidated basis with its controlled subsidiary, LQ Properties, as well as financial statements for LQ Properties on a consolidated basis.

     In this Joint Quarterly Report, unless the context otherwise requires, the term LQ Corporation includes those entities owned or controlled by LQ Corporation (including its controlled subsidiaries, LQ Properties and La Quinta Inns, Inc.); the term LQ Properties includes those entities owned or controlled by LQ Properties; and the terms “we,” “us,” “our,” “the companies,” “La Quinta” or “The La Quinta Companies” refer to LQ Corporation, LQ Properties and their respective subsidiaries, collectively. The terms “paired shares” and “paired common stock” mean the shares of common stock of LQ Corporation, par value $0.01 per share, that are attached and trade as a single unit with the shares of Class B common stock, par value $0.01 per share, of LQ Properties.

Forward-Looking Statements

     Certain statements in this Joint Quarterly Report that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “anticipates,” “expects,” “intends,” “estimates,” “projects” and other similar expressions, which are predictions of or indicate future events and trends, typically identify forward-looking statements.

     We have used forward-looking statements in a number of parts of this Joint Quarterly Report, including, without limitation, “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements may include statements regarding the intent, belief or current expectations of the companies or their respective directors or officers with respect to the matters discussed in this Joint Quarterly Report. Our forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or the timing of events to differ materially from those described in the forward-looking statements.

     Please see the risks identified in our Joint Annual Report on Form 10-K (“Joint Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2004, our Joint Registration Statement on Form S-4 (“Joint Registration Statement”) filed with the SEC on September 29, 2004, and other risks described from time to time in our annual, quarterly and current reports filed with the SEC. The risks and uncertainties described in these reports include those related to our lodging business, our investments in real estate, LQ Properties’ status as a REIT, our capital expenditures and requirements, our corporate structure, our debt and liquidity needs, our acquisition-related risks, including our ability to identify candidates that meet our financial and strategic criteria, our ability to successfully complete any acquisitions that we may enter into, and to effectively integrate the business of any company that we may acquire (including our ability to successfully integrate Baymont Inns & Suites and Woodfield Suites into our operations), as well as risks and uncertainties related to our industry, the economy, weather conditions, the aftermath of United States military action in Iraq, the possibility of further terrorist attacks on the United States and global affairs. We have discussed these risks and uncertainties in detail in our Joint Annual Report and Joint Registration Statement and we encourage you to read those risk factors in their entirety in order to understand the risks and uncertainties that can affect our forward-looking statements as well as our business generally.

     Given the risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements that may be made in this Joint Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or other changes.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LA QUINTA CORPORATION

The accompanying condensed notes, together with the Notes to the Consolidated Financial Statements
contained within The La Quinta Companies’ Form 10-K for the year ended
December 31, 2003, are an integral part of these financial statements.

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LA QUINTA CORPORATION

The accompanying condensed notes, together with the Notes to the Consolidated Financial Statements
contained within The La Quinta Companies’ Form 10-K for the year ended
December 31, 2003, are an integral part of these financial statements.

2

LA QUINTA CORPORATION

Supplemental disclosure of cash flow information (note 2)

The accompanying condensed notes, together with the Notes to the Consolidated Financial Statements
contained within The La Quinta Companies’ Form 10-K for the year ended
December 31, 2003, are an integral part of these financial statements.

3

LA QUINTA PROPERTIES, INC.

The accompanying condensed notes, together with the Notes to the Consolidated Financial Statements
contained within The La Quinta Companies’ Form 10-K for the year ended
December 31, 2003, are an integral part of these financial statements.

4

LA QUINTA PROPERTIES, INC.

The accompanying condensed notes, together with the Notes to the Consolidated Financial Statements
contained within The La Quinta Companies’ Form 10-K for the year ended
December 31, 2003, are an integral part of these financial statements.

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LA QUINTA PROPERTIES, INC.

The accompanying condensed notes, together with the Notes to the Consolidated Financial Statements
contained within The La Quinta Companies’ Form 10-K for the year ended
December 31, 2003, are an integral part of these financial statements.

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LA QUINTA CORPORATION
LA QUINTA PROPERTIES. INC.

1. Nature of Business and Summary of Significant Accounting Policies

Nature of Business

     La Quinta Corporation (“LQ Corporation”) and its controlled subsidiary, La Quinta Properties, Inc. (“LQ Properties”), primarily focus on the lodging business. La Quinta’s lodging real estate assets are primarily owned by LQ Properties or one or more of its direct and indirect subsidiaries. LQ Corporation operates all of its owned lodging properties through its subsidiary, La Quinta Inns, Inc.

     In September 2004, we completed the acquisition of substantially all the assets of the limited service lodging division of The Marcus Corporation (the “Acquisition”), for a total purchase price of approximately $419.2 million, including estimated transaction costs and net working capital adjustments. As of September 30, 2004, approximately $44.2 million of the total purchase price is being held in escrow pending completion of certain transfer requirements. The Acquisition included 90 Baymont Inns & Suites (including one management contract), seven Woodfield Suites and one Budgetel Inn, plus all the trade rights associated with the Baymont, Woodfield Suites and Budgetel brands, and the Baymont franchise system of 87 hotels. These 185 hotels are located across 33 states, with approximately one-half of the hotels in the Midwestern region of the United States.

     Our trade names, trademarks and service marks include La Quinta®, La Quinta Inns®, La Quinta Inn & Suites®, Returns®, Baymont®, Baymont Inns & Suites®, Woodfield Suites®, Budgetel® and Guest Ovations®. We franchise our La Quinta and Baymont brands to independent owner/operators. As of September 30, 2004, La Quinta either operated or franchised over 560 hotels with approximately 63,000 rooms located across the United States. Our lodging properties are particularly sensitive to adverse economic and competitive conditions and trends and such conditions could adversely affect our business, financial condition and results of operations.

     The common stock of LQ Corporation and the Class B common stock of LQ Properties are attached and trade together as a single unit. The term LQ Corporation includes those entities owned or controlled by LQ Corporation (including its controlled subsidiaries LQ Properties and La Quinta Inns, Inc.); the term LQ Properties includes those entities owned or controlled by LQ Properties; and the terms “we,” “us,” “our,” “the companies,” “La Quinta,” or “The La Quinta Companies” refer to LQ Corporation, LQ Properties and their respective subsidiaries, collectively.

Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

     Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted in this Joint Quarterly Report on Form 10-Q (referred to as this Joint Quarterly Report), in accordance with the Rules and Regulations of the Securities and Exchange Commission (the “SEC”). We believe the disclosures contained in this Joint Quarterly Report are adequate to make the information presented not misleading. See our Joint Annual Report on Form 10-K filed on March 15, 2004 for additional information relevant to significant accounting policies that we follow.

     We believe the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial statements. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for any other interim period or for the entire year.

     The accompanying consolidated financial statements represent the financial position and results of operations and cash flows of LQ Corporation on a consolidated basis with its controlled subsidiary, LQ Properties and LQ Properties on a consolidated basis. In each case, the consolidated financial statements include the assets, liabilities, revenues and expenses of entities (in the absence of other factors determining control) where LQ Corporation and/or LQ Properties own over 50% of the voting shares of another company or, in the case of partnership investments, where LQ Corporation and/or LQ Properties own a majority of the general partnership interest. In addition, other than our two consolidated joint

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ventures, we currently manage one hotel under a management agreement with a third party. We determined that we do not: (1) maintain an equity ownership position, (2) have the ability to exercise significant influence or (3) have exposure to risks of operations that are sufficient to require consolidation of the managed hotel. Separate financial statements have been presented for LQ Properties because LQ Properties has securities that are publicly traded on the New York Stock Exchange. All significant intercompany balances and transactions have been eliminated in consolidation.

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates. Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassified amounts principally relate to discontinued operations (see Note 5 — Discontinued Operations).

Seasonality

     The lodging industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in revenue, profit margins and net earnings. In addition, the opening of newly constructed hotels and the timing of any hotel acquisitions or sales may cause a variation of revenue from quarter to quarter.

Investments in Securities

     At December 31, 2003, LQ Properties owned approximately $122.2 million in face amount of 7.114% Exercisable Put Option Securities (the “Securities”) due August 15, 2004 issued by the Meditrust Exercisable Put Option Securities Trust (the “Trust”). The Securities represented beneficial interests in the Trust and were classified as held-to-maturity under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” LQ Properties was also the issuer of a $150 million Exercisable Put Option Note due August 15, 2011 (the “7.114% Note”) to the Trust. The 7.114% Note was the sole asset of the Trust. On August 16, 2004, the Securities and the 7.114% Note were retired when we repurchased the 7.114% Note (see Note 8 — Indebtedness).

Valuation of Long-Lived Assets and Intangible Assets

     La Quinta regularly reviews the performance of long-lived assets on an ongoing basis for impairment as well as when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. La Quinta identifies properties it intends to sell and properties it intends to hold for use. For each lodging asset held for use, if the sum of expected future cash flows (undiscounted and without interest charges) is less than the net book value of the asset, the excess of the net book value over La Quinta’s estimate of fair value of the asset is charged to current earnings. We estimate fair value primarily by (1) discounting expected future cash flows or (2) based on expected liquidated sales proceeds, relying on common hotel valuation methods such as multiples of room revenue or per room valuations. La Quinta’s estimate of fair value of the asset then becomes the new cost basis of the asset and this new cost basis is then depreciated over the asset’s remaining life. When management identifies an asset as held for sale, has obtained authority to sell the property, and expects to sell the asset within twelve months, the asset is classified as held for sale. Depreciation of the asset is discontinued and the carrying value is reduced, if necessary, to the estimated fair value less costs to sell by recording a charge to current earnings. All assets held for sale are monitored through the date of sale for potential adjustment based on offers La Quinta is willing to take under serious consideration and continued review of facts and circumstances. A gain or loss on disposition is recorded to the extent that the amounts ultimately received for the sale of assets differ from the adjusted book values of the assets. Gains on sales of assets are recognized at the time the assets are sold provided there is reasonable assurance the sales price will be collected and any future activities to be performed by the companies relating to the assets sold are expected to be insignificant.

     In January 2002, we implemented Statement of Financial Accounting Standard No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” and determined that the La Quinta trademarks were finite lived assets and amortized these assets over 21 years based on management’s assessment of the life and fair value of the brands. During September 2004, we determined that the La Quinta trademarks have an indefinite useful life based on changes in circumstances of factors used to determine the useful lives primarily as a result of the establishment and growth of our franchise program. In accordance with SFAS 142, these assets will no longer be amortized and will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

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     As part of the Acquisition, we acquired intangible assets related to the Baymont trademarks as well as the existing Baymont franchising agreements. Management determined that the Baymont trademarks have an indefinite useful life. These assets will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that these assets might be impaired. The intangible asset related to the Baymont franchising agreements is deemed to have a finite life and will be amortized over the average life of the associated franchise agreements, including potential renewals, based on the interest method of amortization.

Stock-Based Compensation

     La Quinta has various stock-based employee compensation plans and accounts for those plans using the intrinsic value method as prescribed under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” No stock-based employee compensation cost is charged to earnings for options, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The companies grant restricted stock awards to certain employees. The difference between the price to the employee and the market value at grant date is charged to unearned compensation, carried as a component of equity and amortized over the related vesting period.

     Had compensation cost for the companies’ stock option-based compensation plans been determined based on the fair value at the grant dates for awards under the plans consistent with the method pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the companies’ net loss and loss per share would have increased to the pro forma amounts indicated below:

Recent Accounting Standards

     In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As a result of further discussion by the FASB on October 8, 2003, the FASB clarified that minority interests in consolidated partnerships with specified finite lives should be reclassified as liabilities and presented at fair market value unless the interests are convertible into the equity of the parent. Fair market value adjustments occurring subsequent to July 1, 2003 would be recorded as a component of interest expense. At their October 29, 2003 meeting, the FASB agreed to indefinitely defer the implementation of a portion of SFAS 150 regarding the accounting treatment for minority interests in finite life partnerships. Therefore, until a final resolution is reached, we will not implement this aspect of the standard. If we were to adopt this aspect of the standard under its current provisions, we would reclassify approximately $5.7 million of minority interest to a liability and recognize a gain of approximately $0.1 million as a cumulative effect of change in accounting principle, net of taxes.

     In January 2003 and as amended in December 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” (as amended “FIN 46” or “FIN 46R,” respectively), which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties (“variable interest entities”). Variable interest entities (“VIEs”) are required to be consolidated by their primary beneficiaries if they do not effectively

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disperse risks among the parties involved. Under FIN 46, the primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests. In applying FIN 46, management has utilized available information and reasonable assumptions and estimates in evaluating whether an entity is a VIE and which party is the primary beneficiary. These assumptions and estimates are subjective and the use of different assumptions could result in different conclusions. FIN 46 also requires new disclosures about VIEs.

     We have occasionally provided, and, at our discretion, may upon occasion provide, franchisees with various forms of financing or incentive payments with varying terms, based on a number of factors. These factors include: the amount of the financing, the number of hotels involved and their locations, the number of rooms involved, relevant market conditions, the creditworthiness of the franchisee and any proposed guarantors, and other factors that may warrant the provision of assistance with conversion to our brand. We evaluate these various forms of financing or incentive payments to determine the appropriate accounting treatment under the requirements of FIN 46.

     On February 1, 2003, we adopted FIN 46 for VIEs created after January 31, 2003 and for VIEs in which we obtained an interest after January 31, 2003 and, in both cases, it did not have a material impact on our consolidated financial statements. In December 2003, the FASB issued FIN 46R, under which the consolidation requirement for entities formed prior to February 1, 2003 that are not considered special purpose entities was deferred until the end of the first interim period ending after March 15, 2004. We evaluated whether the provisions of FIN 46R are applicable to the franchise arrangements discussed above as well as other arrangements which may meet the criteria of FIN 46R. We believe that there are currently no material arrangements that either meet the definition of a VIE or where we are the primary beneficiary that would require consolidation.

2. Supplemental Cash Flow Information

     Details of interest and income taxes paid for LQ Corporation follow:

3. Acquisition

     In September 2004, La Quinta acquired substantially all of the assets of the limited service lodging division of The Marcus Corporation for a total purchase price of approximately $419.2 million, including estimated transaction costs and net working capital adjustments. As of September 30, 2004, approximately $44.2 million of the total purchase price was being held in escrow pending completion of certain transfer requirements. As part of the agreement, La Quinta acquired 90 Baymont Inns & Suites (including one management contract), seven Woodfield Suites and one Budgetel Inn. In addition, La Quinta acquired all of the trade rights associated with the Baymont, Woodfield Suites, and Budgetel brands, and the Baymont franchise system of 87 hotels. The 185 hotels (containing approximately 17,700 rooms) are located across 33 states, with approximately one-half of the hotels in the Midwestern region of the United States. With this acquisition, we have achieved our strategic objective of gaining an additional limited service lodging brand as well as increasing our geographic diversity.

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     The following table summarizes the preliminary allocation of the total purchase price, including estimated transaction costs, to the acquired assets and liabilities based on their fair values at the date of the Acquisition.

4. Intangible Assets and Goodwill

     The following is a summary of our intangible assets:

5. Discontinued Operations

     During 2003, discontinued operations included three company-owned hotels and TeleMatrix, Inc., a business component that provides telephone equipment and software for the lodging industry. We classified the assets and liabilities as discontinued components under the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). As a result, all periods presented in the financial statements and footnotes have been restated to report the separately identifiable results of operations and cash flows of the components as discontinued operations. During the fourth quarter of 2003, the companies sold the three hotels and TeleMatrix, Inc. for gross proceeds of approximately $13.7 million, resulting in a gain on sale of approximately $0.9 million. At September 30, 2004, no assets held for sale were subject to SFAS 144 classification as discontinued operations.

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     The following is a summary of consolidated statements of operations information for discontinued operations:

6. Property and Equipment

     The following is a summary of our investment in property and equipment:

     At September 30, 2004 and December 31, 2003, the net book value of lodging property and equipment was $2,413.8 million and $2,098.3 million, respectively. During the nine months ended September 30, 2004, we expended approximately $372.8 million for lodging property and equipment purchased as a result of the Acquisition described in Note 3 and $36.7 million in capital improvements related to lodging properties. During the nine months ended September 30, 2003, we expended approximately $31.1 million in capital improvements related to lodging properties. Additionally, we recorded depreciation expense and write-offs of approximately $29.9 million and $26.5 million for the three months ended September 30, 2004 and 2003, respectively, and $82.2 million and $80.1 million for the nine months ended September 30, 2004 and 2003, respectively. We recorded no impairments on held for use properties for the three months ended September 30, 2004 and 2003. Impairments totaling $12.2 million and $65.0 million were recorded for the nine months ended September 30, 2004 and 2003, respectively.

     At September 30, 2004 and December 31, 2003, the net book value of corporate property and equipment was $36.8 million and $33.0 million, respectively. During the nine months ended September 30, 2004 and 2003, we expended $11.6 million and $9.2 million, respectively, in capital improvements related to corporate property and equipment. Additionally, we recorded depreciation expense and write-offs on corporate property and equipment of approximately $2.6 million and $5.1 million for the three months ended September 30, 2004 and 2003, respectively, and $7.9 million and $13.4 million for the nine months ended September 30, 2004 and 2003, respectively.

     At December 31, 2003, certain properties continued to be classified as held for sale. These properties were classified as held for sale prior to the initial application of SFAS 144 and were being accounted for under the transition provisions of SFAS 144 with respect to the inclusion of these properties’ related results of operations in the companies’ continuing operations. In addition, during the initial one year period, circumstances arose that resulted in some properties not selling by the end of that period. At December 31, 2003, the estimated fair market value of properties held for sale under the transition provisions of SFAS 144 was $3.5 million. The remaining properties were sold during the nine months ended September 30, 2004 for net proceeds of $3.4 million resulting in a loss on sale of $0.1 million. During the three and nine months ended September 30, 2003, one and four hotels, respectively, with an aggregate net book value of $3.6 million and $9.8 million, respectively, were sold. Net proceeds on these transactions were $3.6 million and $9.7 million, respectively, resulting in no loss and a net loss of $0.1 million, respectively. Impairments of $0.5 million and $1.7 million were recorded during the three and nine months ended September 30, 2003, respectively.

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     At September 30, 2004 certain land parcels continue to be classified as held for sale; however, they are not included in discontinued operations as they do not meet the definition of components of an entity under the provisions of SFAS 144. At September 30, 2004 and December 31, 2003, the estimated fair market value of these properties was approximately $5.7 million and $9.0 million, respectively. During the three months ended September 30, 2004, one land parcel with a net book value of $1.0 million was reclassified from held for sale to held for use based on management’s assessment of the future use of the property. During the nine months ended September 30, 2004, we sold one land parcel with a net book value of $1.9 million for net proceeds of $1.9 million. No land parcels were sold during the comparable periods of 2003. We recorded no impairments during the three months ended September 30, 2004 and 2003. Impairments of $0.5 million and $0.4 million were recorded on one land parcel during the nine months ended September 30, 2004 and 2003, respectively.

     We regularly review the performance of long-lived assets on an ongoing basis for impairment as well as when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For each lodging asset held for use, if the sum of expected future cash flows (undiscounted and without interest charges) is less than the net book value of the asset, the excess of the net book value over La Quinta’s estimate of fair value of the asset is charged to current earnings. We estimate fair value primarily by (1) discounting expected future cash flows or (2) based on expected liquidated sales proceeds, relying on common hotel valuation methods such as multiples of room revenue or per room valuations. For each asset held for sale, the carrying value is reduced, if necessary, to the expected sales proceeds less costs to sell by recording a charge to current earnings.

     We continue to evaluate the assets in our total portfolio as well as to pursue an orderly disposition of our held for sale assets. There can be no assurance if, or when, sales will be completed or whether such sales will be completed on terms that will enable us to realize the full carrying value of such assets.

     During the three months ended September 30, 2004, a number of our hotels sustained varying amounts of damage as a result of hurricanes which devastated much of the State of Florida. While the damage is still being assessed, an estimate of the casualty loss (net of recoveries from insurance) of approximately $1.7 million has been recorded against the cost of the assets. In addition, an estimate of approximately $0.2 million in repair and maintenance expenses has been recorded.

7. Mortgages and Other Notes Receivable

     At September 30, 2004 and December 31, 2003, the net book value of mortgages receivable was approximately $26.2 million. The interest income on the mortgage loans was approximately $0.2 million and $0.1 million for the three months ended September 30, 2004 and 2003, respectively, and $0.5 million for each of the nine month periods ended September 30, 2004 and 2003.

     At September 30, 2004 and December 31, 2003, the net book value of other notes receivable was approximately $0.2 million and $31.8 million, respectively. Other notes receivable at December 31, 2003 was comprised of a subordinated note received as consideration in connection with the sale of certain healthcare assets during 2001 as well as other notes. Interest income on the subordinated note was approximately $0.1 million and $1.0 million for the three months ended September 30, 2004 and 2003, respectively, and $2.2 million and $3.1 million for the nine months ended September 30, 2004 and 2003, respectively. The subordinated note was repaid during the three months ended September 30, 2004 resulting in a gain on early repayment of approximately $2.1 million.

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8. Indebtedness

     Indebtedness at September 30, 2004 and December 31, 2003 was as follows:

Notes Payable

     During the nine months ended September 30, 2004, we repaid $19.5 million in principal on notes payable scheduled to mature on March 15, 2004.

     On August 16, 2004, La Quinta Properties exercised its option to repurchase the $150 million 7.114% Note included in notes payable at December 31, 2003. The Securities, which had pass-through characteristics, represented beneficial interests in the Trust that held the 7.114% Note. The Trust was established as part of a 1997 financing to hold the 7.114% Note. (See Note 1 - Investments in Securities.) LQ Properties was both the owner of the Securities issued by the Trust as well as the issuer of the 7.114% Note held by the Trust. A third party (the “Call Holder”) exercised its option to purchase the 7.114% Note at 100% of its principal amount on August 16, 2004 (the “Call Option”), which would have permitted the Call Holder to subsequently remarket the 7.114% Note at an increased interest rate. In response, on August 16, 2004, we repurchased the 7.114% Note from the Call Holder for $171.4 million and retired the note, in lieu of having the 7.114% Note remarketed and the interest rate reset. The repurchase price was equal to the sum of the present values of the remaining principal and interest payments, as determined in accordance with the documents governing the obligations of LQ Properties with respect to the 7.114% Note, discounted at the rate of U.S. Treasury securities having maturities similar to the remaining term of the 7.114% Note, plus accrued and unpaid interest. As of August 16, 2004 and December 31, 2003, LQ Properties owned $122.2 million of the Securities issued by the Trust. Accordingly, LQ Properties received a $122.2 million contemporaneous distribution from the Trust. As a result, LQ Properties recorded an expense of $21.4 million for retirement of the 7.114% Note. Upon the initial application of SFAS No. 133, “Accounting for Derivative Instruments and Hedge Accounting” (“SFAS 133”), LQ Properties determined that the Call Option and repurchase did not meet the characteristics of derivative instruments as defined in SFAS 133.

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     On August 19, 2004, LQ Properties issued $200 million of senior notes bearing a coupon rate of 7% and having a maturity of August 15, 2012, which LQ Corporation guaranteed. During 2003, LQ Properties issued $325 million of senior notes bearing a coupon rate of 8.875% and having a maturity of March 15, 2011, which LQ Corporation also guaranteed. These senior notes are subject to, among other types of covenants, certain restrictive financial incurrence covenants, such as limitations on the incurrence of indebtedness (pro forma fixed charge coverage ratio must exceed 2.0 times, excluding certain adjustments, in order to incur additional debt) and restricted payments (generally limited to 95% of funds from operations as defined in the indenture pursuant to which the notes were issued). In addition to the financial covenants, the indenture also includes, among other limitations, limitations on asset sales, issuances of certain capital stock, sale and leaseback transactions and affiliate transactions.

Bank Notes Payable

     In November 2003, we refinanced our previous credit agreement, as amended, with a bank group that provided a $125 million revolving line of credit (the “2001 Credit Facility”) to provide a $150 million revolving line of credit (the “2003 Credit Facility”). The 2003 Credit Facility, which matures in April 2007, is secured by a pledge of stock of our subsidiaries and intercompany debt evidenced by promissory notes and contains a subjective acceleration clause contingent upon a material adverse effect. LQ Properties is the borrower under the facility and LQ Corporation is the guarantor.

     In connection with the Acquisition, on July 14, 2004, we amended the 2003 Credit Facility to:

•

permit the Acquisition;

•

increase the permitted incremental term loan facility allowed under the 2003 Credit Facility from $150 million to $200 million;

•

permit LQ Properties to issue up to $200 million of additional senior unsecured notes;

•

increase permitted capital expenditures; and

•

modify or waive certain other provisions of the 2003 Credit Facility.

     Approximately $129.9 million (net of a $20.1 million outstanding letter of credit) was available under the 2003 Credit Facility at September 30, 2004. Borrowings under the 2003 Credit Facility currently bear interest at the London Interbank Offered Rate (“LIBOR”) plus 2.5%. During the nine months ended September 30, 2004, there were no borrowings under the 2003 Credit Facility other than the letters of credit.

     The 2003 Credit Facility, as amended, contains several restrictive financial covenants (as defined in the 2003 Credit Facility), which include the following:

•

maximum net debt to EBITDA (total leverage) ratio of 5.30 times in 2004, decreasing to 4.50 times by 2007;

•

minimum interest coverage ratio of 2.10 times in 2004, increasing to 2.40 times by 2007;

•

minimum fixed charge coverage ratio of 1.35 times in 2004, increasing to 1.55 times by 2007; and

•

minimum consolidated tangible net worth of $700 million.

     In addition to the financial covenants, the 2003 Credit Facility also includes limitations on capital expenditures, asset sales, secured debt, certain investments, common stock dividends, and debt and share repurchases. We were in compliance with the covenants contained in the 2003 Credit Facility at September 30, 2004.

9. Commitments and Contingencies

     In January 2002, KSL Desert Resorts, Inc. filed a legal action in the United States District Court for the Central District of California (the “Court”) against LQ Corporation, et al. (No. CV-02-007 RT (SGLx)). The plaintiff, which uses the name “La Quinta Resort & Club” for a destination resort and country club located in La Quinta, California, claims that LQ Corporation has infringed its alleged trademark rights, among other allegations, notwithstanding our “incontestable” federal trademark registrations of the mark “La Quinta” and other marks including the mark “La Quinta” for hotel and motel services. The plaintiff seeks an injunction to prevent La Quinta, our agents, servants, employees, and our attorneys from using the mark “La Quinta” in Palm Springs, in the Coachella Valley, or throughout the United States. The plaintiff also seeks to cancel our federal trademark registrations that include the phrase “La Quinta” and to require destruction of any items under our control, which include the phrase “La Quinta.” In October 2002, the defendants filed

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an answer denying the material allegations in the complaint and asserting several affirmative defenses, including defenses alleging that the plaintiff is estopped from asserting its actions. The defendants also filed counterclaims seeking to cancel plaintiff’s federal trademark registrations using the “La Quinta” name for its destination resort and club. During settlement negotiations, the parties had reached apparent tentative settlement agreements, but those efforts have failed to result in a final and binding agreement. The action remains in the pretrial stage and the Court has entered a scheduling order setting discovery and other deadlines. If the dispute cannot be settled or resolved, we intend to vigorously defend the complaint and pursue our counterclaims. We cannot currently estimate the potential loss and/or range of potential loss from this matter.

     We are party to certain claims involving healthcare facilities formerly owned by LQ Properties that were leased to and operated by third-party operators. Although we required our third-party operators to maintain insurance coverage insuring LQ Properties’ interests in the facilities as well as their own, this insurance coverage may not be adequate to fully protect us. We have been notified that one of the companies providing such insurance coverage, Reliance Insurance Company, was ordered into liquidation in October 2001. Although we cannot predict what effect the liquidation of Reliance Insurance Company will have on pending claims, we do not consider our ultimate liability with respect to any one of these claims or lawsuits, as well as any other uninsured claim or lawsuit involving healthcare facilities formerly owned by LQ Properties that were leased to and operated by third-party operators, to be material in relation to our consolidated financial condition or operations.

     In addition, we are party to a number of other claims and lawsuits arising out of the normal course of business relating to our lodging operations. We regularly evaluate our ultimate liability and attendant costs with respect to these claims and lawsuits. We do not consider our ultimate liability with respect to any single claim or lawsuit to be material in relation to our consolidated financial condition or operations.

     Under certain franchise agreements or joint venture agreements, we have committed to provide certain incentive payments, loans, reimbursements, rebates and other payments, to help defray the costs of construction, marketing and other costs associated with opening and operating a La Quinta hotel. Our obligation to fund these commitments is contingent upon certain conditions set forth in the respective franchise or joint venture agreements. At September 30, 2004, we had approximately $9.0 million in outstanding commitments of financial assistance to various franchisees, of which approximately $6.2 million had been funded and approximately $2.4 million had been repaid by franchisees or amortized. The unamortized balance of amounts funded or payable on incentive payments of approximately $4.5 million is included in Other Non-current Assets. A liability for franchise related rebates of approximately $0.6 million is included in accrued expenses and other current liabilities. These agreements generally require that, in the event the franchise relationship is terminated, the franchisee either repay the outstanding loan balance or unamortized portion of the incentive payment, or transfer to us any equipment, computer or other property purchased by the franchisee with the incentive payment.

     We have provided a letter of credit in connection with a 1995 healthcare transaction, which guarantees the payment of certain industrial revenue bonds aggregating approximately $4.5 million that is the obligation of an unrelated third party. During 2004, we have continued to provide standby letters of credit under our 2003 Credit Facility for the benefit of the trustee of the bonds in the amount of $4.7 million (consisting of $4.5 million of principal and $0.2 million of interest). As part of the agreement to provide a letter of credit, the unrelated third party has provided La Quinta with collateral in all property and equipment of the related healthcare facility currently estimated to have a fair value of approximately $0.5 million. The hurricanes which devastated much of the State of Florida during the three months ended September 30, 2004 damaged the healthcare facility to the extent that it may no longer be able to continue operations. It is probable that La Quinta will be required to perform under the obligation as the unrelated third party may not be able to meet the obligations of the facility as they become due. At September 30, 2004, La Quinta was carrying a liability of approximately $4.2 million in connection with the obligation. This liability is included in accrued expenses and other current liabilities at September 30, 2004.

10. Shareholders’ Equity

     During each of the nine months ended September 30, 2004 and 2003, LQ Properties paid dividends of $13.5 million on its Preferred Stock.

     During the nine months ended September 30, 2004 and 2003, LQ Properties paid dividends of $190 million and $30 million, respectively, to the sole holder of its class A common stock, LQ Corporation. In addition, its consolidated subsidiary, La Quinta Worldwide, LLC (“LQ Worldwide”), made periodic proportional distributions to LQ Corporation,

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which holds a 40.6% interest in LQ Worldwide, totaling approximately $2.7 million and $3.5 million during the nine months ended September 30, 2004 and 2003, respectively.

11. Other (Income) Expense

     For the three and nine month periods ended September 30, 2004 and 2003, other (income) expense consisted of the following:

12. Income Taxes

     LQ Properties has elected to be taxed as a REIT under the Internal Revenue Code and believes it has met all the requirements for qualification as such. Accordingly, LQ Properties will generally not be subject to federal income taxes on amounts distributed to shareholders, including LQ Corporation, provided it distributes annually at least 90 percent of its REIT taxable income (determined without regard to its dividends paid deduction and by excluding net capital gain) and meets certain other requirements for qualifying as a REIT. Generally no provision for federal income taxes is

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believed necessary in the financial statements of LQ Properties except for certain transactions resulting in capital gains that may require federal tax provisions and for subsidiaries taxable as C-corporations. LQ Properties utilizes taxable REIT subsidiaries to hold certain assets that LQ Properties could not hold directly. LQ Properties has accrued and paid federal and state income taxes on the earnings of such subsidiaries.

     LQ Corporation’s income tax benefit is based on reported earnings before income taxes, adjusted to give effect to the income tax consequences to LQ Corporation of any amounts attributable to minority interests. Deferred income taxes reflect the temporary differences between assets and liabilities recognized for financial reporting and such amounts recognized for tax purposes, which requires recognition of deferred tax assets and liabilities. Deferred income taxes include amounts attributable to LQ Properties, as those differences will affect amounts currently or ultimately required to be distributed by LQ Properties to LQ Corporation as taxable dividends.

     As of December 31, 2003, our total federal net operating loss (“NOL”) carryforwards were approximately $459.5 million, of which approximately $178.4 million is available to LQ Properties and its taxable REIT subsidiaries. As of December 31, 2003, our total capital loss carryforwards were approximately $28.6 million and our federal tax credit carryforwards (primarily alternative minimum tax credit carryforwards available only to LQ Properties) were approximately $5.9 million. A valuation allowance of approximately $27.8 million has been provided with respect to deferred tax assets related to certain net operating loss carryforwards, capital loss carryforwards and tax credit carryforwards for which realization of the benefit is not reasonably assured.

     LQ Corporation’s income tax benefit consisted of the following:

13. Earnings Per Share

     Earnings per share (“EPS”) for the companies is computed as follows:

     Options to purchase 0.2 million and 2.0 million paired shares at prices ranging from $8.13 to $16.06 and $5.40 to $16.06 were outstanding during the three months ended September 30, 2004 and 2003, respectively, but were not included in the computation of diluted EPS because the options’ exercise prices were equal to or greater than the average market price of the paired shares and because the inclusion would result in an antidilutive effect in periods where a loss

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was incurred. The options, which expire on dates ranging from December 2008 to October 2009, were still outstanding at September 30, 2004.

     In addition, options to purchase 12.2 million and 10.5 million paired shares (weighted average effect of 3.8 million and 1.8 million shares for the three months ended September 30, 2004 and 2003, respectively) at prices ranging from $1.94 to $7.85 and $1.94 to $5.38 were outstanding during the three months ended September 30, 2004 and 2003, respectively, and were not included in the computation of diluted EPS because their inclusion would result in an antidilutive per share amount as the companies reported a loss from continuing operations for the three months ended September 30, 2004 and 2003.

     Options to purchase 0.3 million and 6.0 million paired shares at prices ranging from $7.68 to $16.06 and $4.42 to $16.06 were outstanding during the nine months ended September 30, 2004 and 2003, respectively, but were not included in the computation of diluted EPS because the options’ exercise prices were equal to or greater than the average market price of the paired shares and because the inclusion would result in an antidilutive effect in periods where a loss was incurred. The options, which expire on dates ranging from December 2008 to March 2014, were still outstanding at September 30, 2004.

     In addition, options to purchase 12.1 million and 6.4 million paired shares (weighted average effect of 3.6 million and 0.8 million shares for the nine months ended September 30, 2004 and 2003, respectively) at prices ranging from $1.94 to $7.51 and $1.94 to $4.35 were outstanding during the nine months ended September 30, 2004 and 2003, respectively, and were not included in the computation of diluted EPS because their inclusion would result in an antidilutive per share amount as the companies reported a loss from continuing operations for the nine months ended September 30, 2004 and 2003.

14. Transactions between LQ Properties and LQ Corporation

     LQ Corporation leases hotel facilities from LQ Properties and its subsidiaries. The hotel facility lease agreements, as modified, between LQ Corporation and LQ Properties were for a five-year term, which expired in July 2003. These leases were amended to extend the term through December 31, 2003. The modified lease agreements provided for a percentage rent payment in an amount equal to 40% of the gross revenues from the hotel facilities and required LQ Properties to pay property taxes and insurance and to fund certain capital expenditures.

     New lease agreements were entered into effective January 1, 2004. These agreements have substantially the same terms as the previous lease agreements other than a decrease in the percentage rent rate to 36% and differing initial terms of four, five or six years. At December 31, 2003, LQ Corporation owed LQ Properties $85.9 million related to these leases. During the three months ended September 30, 2004, LQ Corporation paid LQ Properties the amount in its entirety. Rent expense for the three months ended September 30, 2004 and 2003, was approximately $51.7 million and $53.0 million, respectively, and approximately $144.8 million and $148.7 million for the nine months ended September 30, 2004 and 2003, respectively. The companies believe that the intercompany leases conformed with normal business practices at the time they were entered into and were consistent with leases entered into on an arm’s-length basis. At the time of the Acquisition, LQ Properties and a subsidiary of LQ Corporation entered into leases for the Baymont properties owned by LQ Properties with substantially the same terms and conditions as the existing La Quinta leases, except that the rent payments are 29% of the gross room revenues provided by the Baymont properties.

     A subsidiary of LQ Corporation also had a royalty arrangement with a subsidiary of LQ Properties for the use of the La Quinta brand name. The royalty agreement expired on July 17, 2003 and automatically renewed for an additional five-year term. The royalty agreement was amended, effective January 1, 2004, to reduce the royalty rate to 1.5% of gross revenue, as defined in the royalty agreement. Royalty expense for the three months ended September 30, 2004 and 2003 was approximately $2.1 million and $3.4 million, respectively, and approximately $6.0 million and $9.4 million for the nine months ended September 30, 2004 and 2003, respectively.

     During the nine months ended September 30, 2004 and 2003, LQ Properties paid dividends of $190 million and $30 million, respectively, to the sole holder of its class A common stock, LQ Corporation. LQ Corporation used the dividends received in 2004 to pay accrued interest and the entire balance, as of July 31, 2004, of the revolving note payable to LQ Properties and to pay off in its entirety the deferred rent receivable. LQ Corporation used the dividends received in 2003 and other sources to pay accrued interest and a portion of the principal balance of a revolving note payable to LQ Properties.

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     Minority interest distributions to LQ Corporation from a subsidiary of LQ Properties were $2.7 million and $3.5 million for the nine months ended September 30, 2004 and 2003, respectively.

     LQ Corporation provides certain management services to LQ Properties primarily related to executive management, general tax preparation, consulting, legal, accounting and certain aspects of human resources. LQ Properties compensates LQ Corporation for the direct costs of providing such services.

15. Subsequent Events

     On October 29, 2004, we sold a parcel of land in Des Plaines, IL near the Chicago O’Hare airport for approximately $3.7 million to Harp Des Plaines, LLC, an affiliate of a developer that plans to build a new 206-room La Quinta Inn & Suites on the land. We anticipate that this hotel will be a franchised property managed by us upon its opening in late fall of 2005. Additionally, a subsidiary of LQ Corporation agreed to provide a revolving line of credit, guaranteed by LQ Corporation (collectively, the “Credit Commitment”), to Harp Des Plaines, LLC for a maximum amount of $2.5 million to fund certain recurring debt service payments in the event of operating shortfalls after the construction of the hotel is completed. The Credit Commitment expires five years after the hotel opens.

     On November 5, 2004, we amended the 2003 Credit Facility to reduce the interest rates and certain letter of credit fees by 0.5% per annum and the commitment fees on the unused portion of the facility. The new maximum interest rate for LIBOR-based loans will be LIBOR + 2.5% and the new maximum commitment fee will be 0.5%. The second amendment also modifies certain provisions related to refinancing indebtedness to give us more flexibility with respect to repayment of existing indebtedness.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     You should read the following discussion together with the financial statements and related notes included elsewhere in this Joint Quarterly Report. The results discussed below are not necessarily indicative of the results to be expected in future periods. This discussion contains forward-looking statements based on current expectations, which involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors. You should read the discussion about forward-looking statements in this Joint Quarterly Report under the heading “Forward-Looking Statements.” That section will also direct you to our Joint Annual Report on Form 10-K filed with the SEC on March 15, 2004, our Joint Registration Statement on Form S-4 filed with the SEC on September 29, 2004, and other risks described from time to time in our annual, quarterly and current reports filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or other changes, including those described in our Joint Annual Report on Form 10-K and our Joint Registration Statement on Form S-4.

Overview

     We are a leading limited-service lodging company providing clean and comfortable rooms at affordable prices in convenient locations. We strive to design hotels that attract both business and leisure travelers seeking quality rooms that are generally comparable to those of mid-price, full service hotels, but at lower average room rates. We are one of the largest owner/operators of limited-service hotels in the United States. We earn revenue primarily by owning and operating hotels.

     In September 2004, LQ Corporation purchased substantially all the assets of the limited service lodging division of The Marcus Corporation (the “Acquisition”), for a total purchase price of approximately $419.2 million, including estimated transaction costs and net working capital adjustments. As of September 30, 2004, approximately $44.2 million of the total purchase price is being held in escrow pending completion of certain transfer requirements. The Acquisition included 90 Baymont Inns & Suites (including one management contract), seven Woodfield Suites and one Budgetel Inn, plus all of the trade rights associated with the Baymont, Woodfield Suites and Budgetel brands, and the Baymont franchise system of 87 hotels. These 185 hotels are located across 33 states, with approximately half the hotels in the Midwestern region of the United States. As of September 30, 2004, we owned and/or operated 371 hotels representing approximately 45,900 rooms in 35 states.

     In addition to owning and operating our hotel properties, we also earn revenue by licensing the use of our proprietary La Quinta and Baymont brand names in return for royalty and other fees through franchise agreements with franchisees. As of September 30, 2004, our franchisees operated 196 hotels, representing over 17,100 rooms in 32 states under our brands. In addition to our two consolidated joint ventures, we currently manage one hotel under a management agreement with a third party. We also earn interest income on approximately $26.2 million of healthcare related investments held at September 30, 2004.

     We believe we can continue to improve our business by focusing on: (1) improving the profitability of our existing company owned hotels; (2) furthering the expansion of our La Quinta and Baymont brands through franchising; (3) investing a portion of our available capital to acquire additional lodging properties and/or brands, developing new hotels, redeveloping existing locations and rebranding existing locations; and (4) continuing to monitor our portfolio of properties for potential sale candidates.

Key Indicators of Financial Condition and Operating Performance

     We use a variety of financial and other information in monitoring the financial condition and operating performance of our business. Some of this information is financial information that is prepared in accordance with generally accepted accounting principles (“GAAP”), while other information may be financial information not prepared in accordance with GAAP. Our management also uses other information that may not be financial in nature, including statistical information and comparative data. Our management uses this information to measure the performance of individual lodging properties, groups of lodging properties within a geographic region and/or our business as a whole. Historical information is periodically compared against our internal budgets as well as against industry-wide information. We use this information for planning and monitoring our business, as well as in determining employee compensation.

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Operating Statistics

     Guest Satisfaction. Guest satisfaction scores are an important indicator of how our products and services are being received and viewed by our customers. We have focused our efforts over the past several years at increasing guest satisfaction scores as we believe guest satisfaction is a driver of repeat and referral business that leads to increased revenue. Guest satisfaction scores are monitored through a number of initiatives, including surveys conducted by an independent market research company. We believe that high levels of guest satisfaction are important to maintaining and growing our brands’ reputation and recognition.

     Average Daily Rate (“ADR”), Occupancy Percentage and Revenue per Available Room (“RevPAR”). Room revenue comprises approximately 94% of our revenues and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms. RevPAR, which is another important statistic for monitoring operating performance at the individual property level and across our business as a whole, is the result of the combined impact of ADR and occupancy. RevPAR performance by product is evaluated on an absolute basis with comparison to budgeted and prior period performance, as well as on a company wide and regional basis. Additionally, RevPAR performance is compared and tracked against industry data for our defined competitive set within each local market as aggregated by Smith Travel Research.

     We believe our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel levels and new hotel construction by our competitors, as well as the pricing strategies of our full service lodging competitors. Our ADR, occupancy percentage and/or RevPAR performance is also impacted by factors specific to La Quinta including our guest satisfaction scores, our choice of locations for our hotels, the expenditures that we incur to maintain and improve our hotel properties and the quality of the benefits that we offer our guests, such as our frequent traveler programs. Our available room supply is impacted by our access to capital and the expenditures that we incur to develop or acquire new hotels as well as the sale of existing hotels by us.

     Inn Operating Contribution (“IOC”). IOC is a non-GAAP measure of an individual hotel property’s level of profitability before fixed costs. IOC focuses on revenues and expenses that management considers to be controllable components of the hotel property level operations. As part of IOC, we track and manage our cost per rented room as a measure of the variable cost to sell a room night.

     Franchise Monitoring. We also monitor and track the number of franchise units opened and the overall growth in franchise revenues to measure the performance of our brands, as well as our franchise program, which we believe is important to increasing our presence in key geographic markets, as well as in entering additional geographic markets. In addition, our management uses ADR, occupancy percentage, RevPAR and guest satisfaction scores to monitor franchisee operating performance.

Adjusted Earnings before Interest, Taxes, Depreciation and Amortization

     We use a variety of measures at the corporate level in order to monitor the performance of our business as a whole. Some of these measures are prepared in accordance with GAAP, while others, such as adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) are non-GAAP measures. We use Adjusted EBITDA as a supplemental measure of performance because we believe it gives us a more complete understanding of our financial condition and operating results. We use this metric to calculate various financial ratios and to measure our performance, and we believe some debt and equity investors also utilize this metric for similar purposes. Adjusted EBITDA includes adjustments for non-cash income or expenses such as depreciation, amortization and other non-cash items. Adjusted EBITDA is also adjusted for discontinued operations, income taxes, interest expense, net and minority interest (which includes the preferred stock dividends of LQ Properties), as well as certain cash income or expense that we believe otherwise distort the comparability of the measure. Adjusted EBITDA is intended to show unleveraged, pre-tax operating results. This is one of the measures we use to set management and executive incentive compensation. Adjusted EBITDA is not intended to represent any measure of performance in accordance with GAAP, and our calculation and use of this measure may differ from our competitors. This non-GAAP measure should not be used in isolation or as a substitute for a measure of performance or liquidity prepared in accordance with GAAP.

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La Quinta Corporation — Consolidated Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2004 and 2003

     Net loss increased by $2.7 million or $0.01 per diluted paired share and decreased $42.1 million or $0.33 per diluted paired share, to a net loss of $12.1 million or $0.07 per diluted paired share and $31.2 million or $0.18 per diluted paired share, for the three and nine months ended September 30, 2004, compared to a net loss of $9.4 million or $0.06 per diluted paired share and $73.3 million or $0.51 per diluted paired share, for the three and nine months ended September 30, 2003, respectively.

     The increase in net loss for the three months ended September 30, 2004 was primarily due to:

•

increase in direct lodging operations expense of approximately $6.6 million;

•

increase in general and administrative expense of approximately $2.0 million; and

•

increase in loss on early extinguishment of debt of approximately $21.4 million.

     The increase in net loss was partially offset by:

•

increase in lodging revenue of approximately $17.2 million;

•

increase in income tax benefit of approximately $6.3 million; and

•

decrease in discontinued operations, net of approximately $4.8 million.

     The decrease in net loss for the nine months ended September 30, 2004 was primarily due to:

•

increase in lodging revenue of approximately $40.8 million;

•

decrease in depreciation and amortization of approximately $3.6 million;

•

decrease in impairments of property and equipment of approximately $54.4 million;

•

increase in other (income) expense of approximately $3.2 million; and

•

decrease in discontinued operations, net of approximately $4.9 million.

     These improvements were partially offset by:

•

increase in direct lodging operations and other lodging expenses of approximately $19.8 million;

•

increase in general and administrative expense of approximately $4.8 million;

•

increase in loss on early extinguishment of debt of approximately $15.2 million; and

•

decrease in income tax benefit of approximately $24.3 million.

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     The following table summarizes statistical lodging data for the three and nine months ended September 30, 2004 and 2003:

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(2)		Excludes franchised operating statistics and statistics for three hotels reported in discontinued operations for the three and nine months ended September 30, 2003.
(3)		Comparable hotels for the three and nine months ended September 30, 2004 and 2003 excludes two hotels classified as held for sale, representing 250 rooms in aggregate.
(4)		Represents operating statistics from September 3, 2004 through September 30, 2004. N/A means “not available.”
(5)		Includes results from September 3, 2004 through September 30, 2004 for seven Woodfield Suites and one Budgetel property.
(6)		Represents available room-night count and room-nights sold in thousands.
(7)		Represents hotels open both years for the entire comparable three and nine month periods ended September 30, 2004 and 2003.

     The following table sets forth certain information regarding company owned La Quinta branded hotels in our top ten markets ranked by the number of rooms owned in each of these markets to total rooms owned in such hotels as of September 30, 2004. The market RevPAR performance data reflects RevPAR performance during the three and nine months ended September 30, 2004 for the companies’ defined competitive set (which includes La Quinta’s branded hotel RevPAR data) within each local market, as aggregated by Smith Travel Research. During the three and nine months ended September 30, 2004, the market RevPAR performance for the top ten markets increased 8% and 7%, respectively. The companies’ RevPAR performance in these top ten markets increased 5% and 9% during the three and nine months ended September 30, 2004, respectively. The companies’ RevPAR in these top ten markets grew at a rate slightly less than the market during the three months ended September 30, 2004 with the exception of Orlando and Phoenix, where we outperformed the market. We believe that our RevPAR performance in our top ten markets improved slightly less than the market due to the companies’ strong RevPAR performance during the three months ended September 30, 2003, when the companies’ RevPAR in these top ten markets increased 7% versus the market RevPAR increase of 2%. During the nine months ended September 30, 2004, the companies’ RevPAR increased faster than the market in these top ten markets. We believe that our RevPAR performance improved faster than that of the local market competitors during the nine months ended September 30, 2004 primarily due to the impact of our revenue initiatives that have resulted in higher demand from leisure travelers, increased volume from various Internet travel sites including our website, www.LQ.com, increased national sales revenue, growth in membership of our customer loyalty programs, our advertising and promotion incentives and improving guest satisfaction.