SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the Fiscal Year Ended December 31, 2004

For the transition period from _______________ to _______________

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

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

     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 þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants’ 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. o

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

     As of June 30, 2004, the last business day of the registrants most recently completed second fiscal quarter, the aggregate market value of the registrants’ voting and non-voting common equity held by non-affiliates was approximately $1.5 billion based upon the closing price of $8.40 on the New York Stock Exchange composite tape on that date.

     As of February 28, 2005, La Quinta Corporation had 181.3 million shares of common stock outstanding (excluding 9.4 million shares held by La Quinta Properties, Inc.) and La Quinta Properties, Inc. had 100,000 shares of class A common stock and 181.3 million shares of class B common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of La Quinta Corporation’s definitive proxy statement for the 2005 annual meeting of shareholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K, are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

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About This Joint Annual Report

     This joint annual report on Form 10-K, which we sometimes refer to as this Joint Annual Report, is filed by 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, or 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, or NYSE. Accordingly, this Joint Annual 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 Annual 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,” “companies,” “La Quinta” or “the La Quinta Companies” refers to LQ Corporation, LQ Properties and their respective subsidiaries, collectively. The terms “paired shares” and “paired common shares” mean the shares of common stock, par value $0.01 per share, of LQ Corporation that are attached to and trade as a single unit with the shares of class B common stock, par value $0.01 per share, of LQ Properties. On January 2, 2002, LQ Corporation and LQ Properties completed a legal and tax reorganization (the “Reorganization”), which is described in this Joint Annual Report. Prior to the Reorganization, the common stock of LQ Corporation was paired and traded as a unit with the common stock of LQ Properties. Unless otherwise indicated in this Joint Annual Report, all information with respect to paired shares, or paired common shares, prior to January 2, 2002 means the common stock of LQ Corporation that was paired and traded as a unit with the common stock of LQ Properties.

     In September 2004, we acquired substantially all the assets of the limited service lodging division of The Marcus Corporation (the “Acquisition”), including 90 Baymont Inn & Suites (including one management contract), seven Woodfield Suites and one Budgetel Inn. In addition, we acquired all the trade rights associated with the Baymont, Woodfield Suites and Budgetel brands, and the Baymont franchise system of 87 hotels. In December 2004, we acquired three additional hotels that have been or will be converted to our brands. Unless otherwise noted, all financial and operational information in this Joint Annual Report includes the acquired properties and their results of operations from the dates of acquisition.

Forward-Looking Statements

     Certain statements in this Joint Annual 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, 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 Annual Report, including without limitation, “Items 1 and 2—Description of Our Business and Our Properties,” including specifically under the section “Our Strategy,” and “Item 7—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 Annual Report. Our forward-

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looking statements are subject to a number of risks and uncertainties, which could cause actual results or the timing of events to differ materially from those described in the forward-looking statements.

     We have included a discussion of some of these risks and uncertainties in this Joint Annual Report within Items 1 and 2 under the section “Description of Our Business and Our Properties—Certain Factors You Should Consider About Our Companies, Our Businesses and Our Securities.” The risks and uncertainties described in that section 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 and 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 Inn & Suites and Woodfield Suites into our operations), as well as risks and uncertainties related to our industry, the economy, weather conditions, the aftermath of U.S. military action in Iraq, the possibility of further terrorist attacks on the U.S. and global affairs. We have discussed these risks and uncertainties in detail in that section and encourage you to read them 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 Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or other changes.

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PART I

ITEMS 1 AND 2.               DESCRIPTION OF OUR BUSINESS AND OUR PROPERTIES

General

     La Quinta is one of the largest owner/operators of limited service hotels in the United States. We provide clean and comfortable guest rooms at affordable prices in convenient locations. We own and operate hotels under our La Quinta, Baymont, Woodfield Suites and Budgetel brands. In addition, we franchise our La Quinta and Baymont brands to independent owner/operators. Our trade names and trademarks include La Quinta®, La Quinta Inns®, La Quinta Inn & Suites®, Baymont®, Baymont Inn & Suites®, Woodfield®, Woodfield Suites®, Budgetel®, Returns® and Guest Ovations®. As of December 31, 2004, our system of owned, managed and franchised hotels contained 592 hotels, representing approximately 65,000 rooms located across the U.S. and 50 rooms in Canada. As of December 31, 2004, we owned and operated 374 hotels, representing approximately 46,000 rooms, and our franchisees operated 218 hotels, representing approximately 19,000 rooms (including one managed Baymont Inn & Suites representing 97 rooms), under our brands.

     We strive to design hotels that attract both business and leisure travelers seeking consistently clean and comfortable rooms that generally are comparable to those of mid-priced, full service hotels, but at lower average room rates. We believe that by generally not providing full service, management-intensive facilities and services, such as in-house restaurants, cocktail lounges or room service, that typically carry high fixed costs and produce low margins, we are able to deliver a product that satisfies our customers’ needs and price expectations, while also permitting us to focus on the high-margin nature of our business of renting clean and comfortable hotel rooms to our guests.

Organizational Structure

     La Quinta Corporation and its Subsidiaries. LQ Corporation was incorporated in the state of Delaware on August 23, 1979. LQ Corporation operates and manages hotel properties that its subsidiaries own or that it leases from its other controlled subsidiaries, including LQ Properties. In addition, our franchising programs are operated through subsidiaries of LQ Corporation. The common stock of LQ Corporation and the class B common stock of LQ Properties are attached and trade together and may be held or transferred only in units consisting of one LQ Corporation common share and one LQ Properties class B common share.

     La Quinta Properties and its Subsidiaries. LQ Properties, a controlled subsidiary of LQ Corporation, is a self-administered real estate investment trust, or REIT, that was incorporated in the state of Delaware on August 23, 1979. Most of our company owned hotels are owned by LQ Properties or one or more of its direct and indirect subsidiaries. Due to certain tax laws restricting REITs from deriving revenues directly from the operations of hotels, our hotel properties are leased to a subsidiary of LQ Corporation.

Availability of Reports

     The La Quinta Companies maintain a website at www.LQ.com. We make available, free of charge, on this website our joint annual reports on Form 10-K, joint quarterly reports on Form 10-Q, joint 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, or the Exchange Act, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC. The La Quinta Companies’ reports filed with, or furnished to, the SEC are also

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available on the SEC’s website at www.sec.gov. The information on our website is not part of or incorporated by reference in this Joint Annual Report.

Our Strategy

     We focus on providing consistently clean and comfortable guest rooms in convenient locations at affordable prices. Our objective is to increase our cash flow and profitability by growing our brands and expanding our distribution. Our growth strategy includes improving the profitability of our existing company owned hotels, furthering the expansion of our La Quinta and Baymont brands through franchising, and investing a portion of our available capital in the lodging business, including but not limited to, the acquisition of other lodging assets and/or brands.

     Improving the Profitability of our Existing Company Owned Hotels. We expect to increase our cash flow through increases in profit contributions from company owned hotels, primarily by improving our RevPAR. We believe that as the U.S. economy continues to improve and the specific markets in which we operate continue to improve we will be able to benefit from increases in demand for hotel rooms. In addition, we have made and continue to make significant investments in our sales force, loyalty program and electronic distribution channels. We also believe improvements made to our properties through capital investments, and our continuing efforts to increase guest satisfaction, will allow us to enhance our RevPAR. In the first quarter of 2005, we anticipate completing the integration of all Baymont and other hotels acquired in the third quarter of 2004 onto our technology platform, including our property management and reservations systems, which we believe over time will allow us to improve revenue performance for those hotels.

     Furthering the Expansion of our La Quinta and Baymont Brands through Franchising. We plan to expand our franchising programs by capitalizing on the value of the La Quinta and Baymont brands. Our franchising programs are focused on developing relationships with experienced hotel owners who will develop and operate new hotels or convert existing hotels to the La Quinta or Baymont brand. We believe that this strategy will allow us to continue to expand our geographic coverage without requiring significant capital investment, resulting in increased revenues and profitability. We actively monitor our franchisees in order to maintain consistent quality across the entire chain. By increasing the proportion of our franchise revenues, we anticipate increasing our return on assets.

     Investing a Portion of our Available Capital in the Lodging Business. We may consider investing a portion of our available capital to pursue acquisitions of other lodging assets and/or brands, developing new hotels and redeveloping certain of our existing properties.

	•	Acquiring Other Lodging Assets and/or Brands. To expand our lodging business, we may seek opportunistic acquisitions of other lodging assets and/or brands. On September 3, 2004, we acquired substantially all of the assets of The Marcus Corporation’s limited service lodging division, which we refer to in this Joint Annual Report as the Acquisition. In addition, on December 9, 2004, we acquired three additional hotels that have been or will be converted to our brands. We will continue to seek acquisition opportunities. Acquisition opportunities will be evaluated on a number of factors, including price, the potential target’s strategic fit, future profitability and geographic and product distribution.
	•	Developing New Hotels. Our current development strategy is focused on locating a select number of highly visible properties in key strategic locations, such as central business districts of major cities, areas near major airports and popular vacation destinations with high barriers to entry. We may enter into joint ventures with experienced hotel developers for these projects. We believe that this approach to development, often used in full service hotel projects, will allow us to reduce the overall levels of our capital requirements and the level of development risk while we

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		expand our distribution. Alternatively, we may invest our capital and maintain full ownership of these projects.
	•	Redeveloping Existing Locations. Several of our older hotels are situated in locations that have experienced increased business activities around the hotel sites over a period of years. We believe that we have the opportunity to redevelop a select number of these locations with new hotel properties that will produce stronger operating results than the existing facilities. We have completed redevelopment of four such La Quinta hotels in Dallas, Irving and San Antonio, Texas, and plan to begin redevelopment of another La Quinta hotel in Arlington, Texas.
	•	Rebranding Existing Hotels. To enhance the distribution and positioning of our brands, several opportunities exist to rebrand our existing company owned hotels. Baymont has a strong presence in the midwestern section of the U.S., while La Quinta has a strong presence in the southwest and southeast. Some existing company owned Baymont hotels may be rebranded La Quinta. Likewise, some existing company owned La Quinta hotels may be rebranded Baymont.

Our Competitive Strengths

     We believe that we benefit from certain competitive strengths that assist us in implementing our business objectives and strategies, including:

     Significant Brand Awareness. We believe the La Quinta and Baymont brands have achieved significant brand awareness. We believe that this brand awareness, as well as our reputation for affordable prices, quality and value, has earned our hotels a strong following of loyal guests. We recognize our loyal returning guests through our customer loyalty program, which provides guests with an expedited reservation and check-in process, as well as rewards for frequent stays. We believe that our brands’ identities provide us with an advantage over independent hotel operators and certain other limited service chains. Together with our operational expertise, this brand awareness enhances the performance of existing and newly constructed or acquired hotel properties.

     Experienced Management Team. Our management has substantial experience in the lodging industry. On average, each member of our senior management team has over 25 years of experience in lodging and lodging related industries and is supported by operational and administrative vice presidents with an average of over ten years of experience in these industries.

     Operational Expertise. We are an experienced owner/operator of limited service hotels with significant operational expertise. Our operations are structured so that each company owned property is operated as an individual profit center by a general manager who oversees all day-to-day guest relations and other operating activities and implements rate, occupancy and cost containment strategies. We believe this direct accountability reduces operating costs while creating incentives to maximize RevPAR, guest satisfaction and operating margins by adapting room rates to prevailing market conditions at our company owned hotels. At the same time, our hotel operations enjoy the benefit of centralized corporate services, accounting and reservations functions.

     Capital Structure. We believe that our strong balance sheet provides us with a competitive advantage over other more highly leveraged companies. In addition to maintaining one of the lowest leverage levels in the industry, we had no floating rate debt at December 31, 2004, and do not have any mortgage debt. The weighted average maturity of our debt at December 31, 2004 was approximately five years. In addition, at December 31, 2004, we had no borrowings (other than $20 million in outstanding letters of credit) on our $150 million revolving line of credit.

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     Strong Infrastructure. We believe we have a strong corporate infrastructure to support our existing hotels as well as new hotels that may be added to our system. Centralized corporate services include marketing, sales, finance, accounting, treasury, tax, information systems, construction and design, purchasing, legal, risk management, human resources and training. We promote and operate our own central reservation system and toll-free numbers to accept room reservations for our hotels. In addition, we operate our own websites, which accept room reservations and provide our guests with information about our company, our brands, our hotels and special promotions. We also participate in third party websites that accept room reservations for our hotels. We employ a direct sales force which conducts sales programs for our brands to develop and cultivate guests from existing national and local clients and potential clients.

Our Brands

     The La Quinta brand was founded in San Antonio, Texas in 1968. Our focus has always been to provide guests with clean and comfortable guest rooms in convenient locations at affordable prices. We were a pioneer in developing a successful niche in the lodging industry between budget motels and full service hotels. In September 2004, we acquired the Baymont brand. Baymont was founded in 1974 as Budgetel. In 1999, after redeveloping Budgetel’s hotel exterior, guest room design and amenity package, the brand name was changed to Baymont to reflect the upgraded image and product offering.

La Quinta Inns and La Quinta Inn & Suites

     La Quinta Inns generally feature spacious rooms with double or king beds; 25-inch televisions with expanded cable, movies on-demand and Nintendo®; dataport telephones with voicemail and free local calls; hair dryers, coffee makers, irons and ironing boards; desks with well-lit workspaces; and comfortable recliners. La Quinta Inns also generally feature complimentary continental breakfast and swimming pools. Our guests typically have convenient access to food service at nearby freestanding restaurants, which include many national chains. We have an ownership interest in approximately 90 buildings that are adjacent to our hotel properties, which we generally lease to third party restaurant operators.

     La Quinta Inn & Suites generally feature the same amenities as our Inns as well as two-room suites, which offer separate sitting and sleeping areas, sleeper sofas and two televisions. Additional amenities generally include: guest laundry facilities; fitness centers; meeting space for up to 70 people; heated swimming pools with spa and gazebo seating; and complimentary expanded continental breakfast, USA Today® newspapers, and high-speed Internet access. Selected Inn & Suites also generally offer business king rooms, which feature: pillow-top mattresses; microwaves and refrigerators; cordless and speaker telephones; and oversized desks with built-in data ports and ergonomic chairs.

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Baymont Inn & Suites

     Baymont Inn & Suites generally feature spacious rooms with double or king beds; 25-inch televisions with standard local and cable channels; coffee makers, irons, ironing boards and hair dryers; dataport telephones with voicemail; and complimentary continental breakfast and local calls. Selected Baymont Inn & Suites feature swimming pools, fitness centers, guest laundry, meeting space and upgraded rooms that include soft down pillows, pillow-top mattresses, oversized work desks with ergonomic chairs and complimentary bottled water.

Other Brands

     As of December 31, 2004, we owned and/or operated seven Woodfield Suites, containing 889 one or two room suites. Woodfield Suites are all-suites hotels featuring, on average, 50% more room space than traditional hotel rooms. Woodfield Suites generally feature suites with double or king beds; 32-inch televisions with expanded cable channels; coffee makers, irons, ironing boards, hair dryers, kitchenettes and bathroom amenities; swimming pools; children’s play areas; meeting rooms; and exercise rooms. Woodfield Suites also offer complimentary breakfast, evening cocktail receptions and high-speed Internet access.

     We also own and operate one Budgetel Inn containing 83 rooms and two additional hotels acquired in December 2004 containing a total of 269 rooms. We intend to convert these two acquired hotels to our brands during 2005.

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     The following table summarizes our key operating statistics for the past five years:

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Our Properties

     As of December 31, 2004, we owned and operated 374 hotels, representing approximately 46,000 rooms in 35 states. All of our company owned hotels are owned by our controlled subsidiary LQ Properties (or one or more of its direct and indirect subsidiaries), other than 17 hotel properties that are owned by other subsidiaries of LQ Corporation, and two hotel properties in which third parties own less than a controlling interest.

     Generally, each of our hotel properties, including the land, related easements and rights, buildings, improvements, furniture, fixtures and equipment, is leased to a subsidiary of LQ Corporation pursuant to an intercompany lease agreement. These lease agreements, which have initial terms of four, five or six years, provide for rent payments by the lessee equal to a percentage of the gross revenues from the hotel facilities (29% for Baymont branded hotels and 36% for La Quinta branded hotels) and require the lessor to pay property taxes and insurance and fund certain capital expenditures. The lessee also is required to provide for all repairs, replacements and alterations to the leased property that are not considered capital additions or material structural work, as defined in the lease agreements.

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     The table below sets forth the number of facilities and rooms as of December 31, 2004 for our company owned La Quinta and Baymont branded hotels. We also own one Woodfield Suites in each of the states of Colorado, Illinois, Ohio, and Texas, as well as three in Wisconsin, totaling 889 rooms. We also own two hotels in Massachusetts that will be converted to our brands during 2005 and one Budgetel in Wisconsin; for a total of 352 rooms.

     We believe that all our hotel properties are well constructed, maintained and are attractively landscaped to enhance their appearance. To maintain the overall quality of our hotels, each hotel undergoes refurbishment and capital improvements as needed. In addition to regular operating maintenance, major capital refurbishing has generally been provided at intervals of five to seven years,

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based on an annual review of the condition of each hotel. Each hotel also undergoes a regular maintenance program whereby each room is deep cleaned every quarter. During the years ended December 31, 2004 and 2003, we spent approximately $31.9 million and $33.4 million, respectively, in capital improvements and renovations to our existing hotels. In total, we have invested approximately $240.9 million in capital improvements and renovations to our existing hotels during the last five years.

     To maintain our reputation for consistency and quality, we anticipate that, from time to time, we will sell certain hotels that no longer meet the standards of the La Quinta and Baymont brands. For example, during the years ended December 31, 2004 and 2003, we sold two and eight of our hotels for gross proceeds of approximately $3.5 million and $20 million, respectively. In January 2005, 16 hotels, with an aggregate net book value of approximately $33.8 million at December 31, 2004, were reclassified as held for sale. We have begun actively marketing these hotels. Additionally, one hotel that is subject to full condemnation, having a net book value of approximately $1.6 million at December 31, 2004, was reclassified as held for sale in January 2005.

Our Operations

     Our corporate headquarters is located in Irving, Texas. Centralized corporate services include marketing, sales, finance, treasury, tax, information systems, construction and design, purchasing, legal, risk management, human resources and training. Accounting and reservations functions are centralized in our service centers located in San Antonio, Texas. We have organized our hotel operations into 23 regions. Management for each region, located within each region and reporting to our senior management, is responsible for the service, cleanliness and profitability of the hotels in that region.

     Each company owned hotel is operated as an individual profit center, generally with an on-site general manager who oversees all day-to-day operations. Our general managers focus their attention on ensuring friendly guest service, maintaining clean and comfortable guest rooms and achieving profitable operations. Their responsibilities also include recruiting, training and supervising the hotel’s staff. A typical hotel has approximately 20-25 employees, including the general manager, housekeepers, laundry attendants, maintenance staff, front desk guest service representatives and a night auditor.

     Our general managers receive a five-week training program that emphasizes operations, hospitality, rate management, legal and risk management issues, interviewing, employee relations, training and budgeting prior to assuming responsibility for a hotel. We also utilize assistant managers to support the general managers at certain properties, which provides a pool of experienced candidates to fill open general manager positions as needed. In addition, we recently introduced an online training system for our general managers and other hotel employees to provide consistent and effective orientation, training and testing across our brands.

     We use target-driven operational budgets prepared by our general managers that are implemented after review with our senior management. The hotel general managers, regional managers, revenue managers and senior management continually review our room rates so that they can be appropriately adapted to prevailing market conditions at each hotel. Each general manager can earn financial incentives based upon achieving favorable results in comparison to revenue and profit budgets and upon achieving targeted goals in guest satisfaction surveys for their respective property. We believe this incentive program increases our general managers’ focus on operating efficient, well-maintained and profitable hotels.

     Our guest satisfaction is monitored through a number of initiatives. Guest satisfaction surveys, conducted by an independent market research company, provide customer feedback on each of our hotels. In addition, we operate a quality assurance department, staffed by former hotel managers, who inspect hotels for adherence to quality standards and who train hotel staff on methods to improve product

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quality. Regional managers also inspect hotels to monitor quality standards. Financial incentives reward our general managers for improvements in our guest satisfaction levels.

Our Franchising Programs

     In the fall of 2000, we initiated a program to license the use of our La Quinta brand through franchising. In September 2004, we acquired the Baymont franchising program in connection with the Acquisition. Our franchising activities include both franchising newly constructed hotel properties and conversion of existing hotel properties meeting our brand standards. We currently operate our franchising programs through La Quinta Franchising, LLC and Baymont Franchising LLC, wholly owned subsidiaries of La Quinta Inns, Inc. In 2004, we launched our La Quinta franchising program website, www.laquintafranchise.com. We expect to launch a similar website for our Baymont franchising program in 2005.

Franchising Sales

     As of December 31, 2004, we employed 13 franchise sales personnel located throughout the U.S. who market our franchise programs to qualified applicants. We believe that hotel owners and operators choose to become a franchisee of a lodging brand based primarily on the perceived value and quality of that brand and the franchisor’s services, and the extent to which affiliation with that franchisor may increase the franchisee’s profitability. Because a significant portion of the costs of owning and operating a hotel are generally fixed, increases in revenues generated by affiliation with a franchise lodging chain can improve a hotel’s financial performance. We offer our franchisees our well-known La Quinta and Baymont brands, as well as reservation, national advertising, training and systems related services. We have added 125 franchised hotels to the La Quinta system since launching our franchise program in the fall of 2000, including a net increase of 29 hotels in 2004. We also added six Baymont franchised hotels to the Baymont system since acquiring the Baymont franchising program in September 2004. We anticipate that most new franchised La Quinta hotels will be newly built properties and most new franchised Baymont hotels will be conversions of hotels currently operating under other brands.

Franchising Agreements and Fees

     A prospective franchisee is required to pay us a refundable application fee of $5,000 when an application is made for a La Quinta or Baymont franchise. We evaluate franchise applicants on the basis of their hotel operating experience and ability, financial resources strength and credit history, among other factors. Upon execution of a franchise agreement, approved franchise applicants pay us an affiliation fee, which generally is $25,000 for Baymont Inn & Suites hotels, $40,000 for La Quinta Inns hotels and $45,000 for La Quinta Inn & Suites hotels. The $5,000 application fee can be used as a credit toward the affiliation fee. Approved franchise applicants are granted rights (subject to the terms of their franchise agreement) to operate their hotel under the La Quinta Inns, La Quinta Inn & Suites or Baymont Inn & Suites brand name, obtain reservations through our central reservation system and use our hotel designs, operating systems and procedures, among other rights.

     Our La Quinta franchise agreements and those Baymont franchise agreements executed after the Acquisition generally require a franchisee to pay a royalty fee of 4.0% of gross room revenues (as defined in the franchise agreement) during the first two years of operating under our brands and 4.5% of gross room revenues for all periods thereafter. After the first two years, a franchisee can receive a rebate of 0.5% of gross room revenues if, in any calendar year, the franchised hotel achieves superior results in guest satisfaction as measured by a survey conducted by an independent market research firm. In addition to royalty fees, a franchisee generally pays, as a percentage of gross room revenues, a marketing fund contribution fee of 2.5% for national advertising and other promotional efforts and a reservation fee of

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2.0% to support the cost of reservation services provided to the hotels. Franchisees also pay us other fees, such as fees to compensate for computer software usage, training programs and participation in our loyalty programs. The Baymont franchise agreements predating the Acquisition generally provide for a royalty fee of 4.0% of gross room revenues (as defined in the franchise agreement), a marketing fund fee of 2.0% of such revenues for national advertising promotional efforts and a reservation fee of 1.0% of such revenues.

     Our franchise agreements generally have an initial term of 20 years. We have the right to terminate a franchise agreement if a franchisee fails to meet our quality standards or fulfill other contractual obligations. Except under Baymont franchise agreements predating the Acquisition, the franchisee generally has a right to terminate the agreement on the tenth and fifteenth anniversary of the opening date of the franchised hotel and, if the hotel was converted from a competing brand, additionally on the fifth such anniversary. The Baymont franchise agreements predating the Acquisition generally provide that the franchisee has a right to terminate the agreement on the fifth anniversary of opening a converted Baymont franchised hotel and on the tenth anniversary of opening a new construction Baymont franchised hotel. The franchisee may also terminate the agreement if the hotel is not meeting predetermined occupancy levels. Any such termination may, under certain circumstances, require payment of specified termination fees to La Quinta. Some of the Baymont franchise agreements predating the Acquisition include territorial restrictions or a right of first refusal. Our La Quinta franchise agreements and those Baymont franchise agreements executed after the Acquisition include certain territorial restrictions that may limit new La Quinta or Baymont franchised hotels, respectively, within a designated geographic area.

Franchising Operations Support

     A typical franchised hotel consists of approximately 80 rooms. Before a franchised hotel opens, we inspect the hotel to confirm that it meets our quality specifications. Once a franchised hotel opens, we strive to provide continued sales support and operational assistance. Each franchised hotel must adhere to the same rigorous brand standards of design, maintenance and customer service as a company owned hotel and is inspected by a franchise service director and our quality assurance department to assure that the franchised hotel adheres to our brand standards. As of December 31, 2004, we employed seven franchise service directors to assist franchisees with pre-opening and ongoing business issues.

Financial Assistance to New Franchisees

     We do not presently have a company-funded financial assistance program for franchisees. However, on occasion we have provided, and at our discretion may occasionally provide, franchisees with various forms of financing or other financial incentives upon varying terms, depending upon 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 providing financial assistance.

Our Sales & Marketing

     Our Sales and Marketing operations can be segmented into five functional areas: direct sales, loyalty program, marketing, central reservations and global distribution systems and Internet.

     Direct Sales. As of December 31, 2004, we employed a direct sales force consisting of approximately 100 members, which has increased from 45 sales representatives in mid-2002. The direct sales force consists of 16 national sales representatives who call on companies that have a significant number of individuals traveling in the regions in which we operate and need a high volume of room-nights. National sales representatives also seek to increase room sales through the inclusion of our hotels

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in approved or preferred lodging lists of corporate travel managers and travel agencies operating on a national basis. We also form and continue to seek alliances with national travel and consumer organizations, such as AAA and AARP, and offer special rates or promotions to such organizations’ customers. In addition to the national effort, approximately 84 of our sales managers are based in our local markets. These sales managers call on local businesses, governmental agencies, hospitals and other organizations that can provide room-nights for our hotels.

     Loyalty Program. In September 2002, we introduced our enhanced Returns customer loyalty program, designed to reward current members and help entice new members. As part of the Acquisition, we acquired rights to the Baymont Guest Ovations loyalty program, which we expect to combine with our Returns program in April 2005. The combined Returns program will allow members to earn points that can be redeemed for the following benefits: airline miles/credits with American Airlines® AAdvantage®, Delta Sky Miles®, Continental OnePass®, Southwest Airlines Rapid Rewards®, Midwest Miles and Northwest Airlines WorldPerks®; gift certificates to national retailers and restaurants; sporting event tickets; entertainment and amusement park tickets; and special resort travel packages, in addition to free room-nights at our hotels. Returns members are classified as Silver, Gold or Elite based on frequency of stay and are able to earn more points and receive additional amenities at each progressive level. Our Returns program helps expedite the reservation and check-in process and improve administrative efficiency of our reservation agents and front desk staff by providing a personal profile of each Returns member. This profile includes information such as mailing address, room type preference and preferred method of payment that we use to market directly to Returns members.

     Marketing. We promote our brands through national, regional and local marketing. We advertise our brands in print through newspapers and magazines, online through the Internet and on national cable and local network television. We also conduct direct marketing to potential and former guests, including Returns members. Our marketing is primarily supported through our La Quinta and Baymont national advertising fund programs, to which our company owned and franchised hotels contribute.

     Central Reservations and Global Distribution Systems. We promote and operate our own central reservation system, as well as toll-free numbers to accept reservations. Our reservation system provides reservation agents with information about hotel locations, available rooms and prices in order to assist customers in reserving rooms. Our reservations agents are trained in telephone sales techniques. Through our computer network, we continually update the number of rooms sold at each hotel property to maximize the sale of available rooms through either the individual hotel or the reservation center. We market our reservation services to travel agents and corporate travel planners who may access our reservation system through four global distribution systems (airline reservation systems). We also have specialized reservation agents for large group sales, motor coach sales and special service bookings.

     Internet. We provide customers with the ability to shop and reserve rooms on the Internet through our brand websites, www.LQ.com, www.baymontinns.com and www.woodfieldsuites.com. Each site provides customers with real-time information on hotel and location descriptions, amenities, special promotions, rates and availability. Hotel photographs are prominently displayed on the hotel information pages along with dynamic maps and driving directions, information on nearby attractions and local weather information. Multiple search options are offered, including searches by city, attraction, zip code and trip routing from origin or destination. In addition to our proprietary brand websites, we distribute our lodging product via third party travel websites.

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Our Information Systems

Our information systems support our operations, reservations, sales and marketing, financial reporting and management reporting functions. During 2004, we continued to enhance our information systems’ capabilities with the following improvements:

	•	redesign and enhancement of various features of www.LQ.com, including faster and easier searches for available rooms and reservations;
	•	integration of new electronic booking channels;
	•	enhancement of systems for data warehousing;
	•	expansion of complimentary high-speed Internet access for guests at most of our hotels;
	•	launched an online orientation, training and testing program for hotel and corporate employees;
	•	began integration of acquired Baymont and other acquired hotel systems with La Quinta systems; and
	•	expansion of our systems to handle multiple brands, countries and currencies, increased bandwidth and added faster servers to process a higher volume of transactions.

     We currently anticipate the following improvements in 2005:

	•	completion of the implementation of new accounting and financial systems, which we began in 2004;
	•	migration to a faster and more resilient platform for running our booking and financial systems; and
	•	completion of installation of La Quinta’s systems at all company owned and franchised Baymont hotels.

Our Trademarks

     “La Quinta,” “La Quinta Inns,” “La Quinta Inn & Suites,” “Baymont,” “Baymont Inn & Suites,” “Woodfield,” “Woodfield Suites,” “Budgetel,” “Returns,” “Guest Ovations” and our other associated proprietary trademarks are our registered trademarks. Our material trademarks are registered with the U.S. Patent and Trademark Office for hotel and motel services. In addition, we have registered certain of our trademarks for hotel and motel services with the appropriate governmental agencies in certain foreign jurisdictions. We consider all of these trademarks and the associated name recognition to be important to our business.

     Our Employees

     As a service-oriented business, our employees are important to our success. Recruiting for general managers and corporate employees is coordinated through our corporate human resources department. All hotel employees, including hourly employees, receive training when hired as well as ongoing training to improve their skills. We recently introduced an online training system to provide consistent and effective orientation, training and testing across our brands. Prior to assuming responsibility for a hotel, our general managers participate in a five-week training program that emphasizes operations, hospitality, rate management, legal and risk management issues, interviewing, employee relations, training and budgeting.

     We provide all of our full-time employees and their families, including hourly hotel employees, the opportunity to participate in a benefits package, which includes health, dental, and vision coverage. We

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believe these benefits provide a competitive advantage in recruiting hourly hotel employees, as most limited service hotels do not provide benefits for their hourly employees. Our salaried employees are also able to earn financial incentives based on achieving targeted goals, such as RevPAR, profitability, franchise contribution and personal development goals. In addition, recognition programs have been established to acknowledge our employees’ outstanding service and achievement. We believe our scale and size also provide career opportunities for our employees to advance within the organization.

     As of December 31, 2004, we employed approximately 9,130 employees, of whom approximately 8,200 are hourly employees. Of these employees, approximately 350 were employed at our corporate headquarters and approximately 320 were employed at our support centers, of whom approximately 230 work at our reservation center. Our employees are not currently represented by labor unions and we have never experienced an organized work stoppage. We believe that ongoing labor relations with our employees are good.

Our Reorganization

     Over the last five years, we have undergone significant financial and strategic changes. In January 2000, we began a strategy of divesting our non-lodging real estate assets in order to focus on our lodging business. As a result of that change in strategy, we replaced substantially all of our senior management with executives who have, on average, over 25 years of experience in lodging and lodging-related industries. Over the last five years, our management has improved the operations of our lodging assets, including increasing RevPAR, reducing hotel level costs and introducing our franchising programs. From 2000 through 2002, we also sold approximately $1.8 billion of our non-lodging assets, applying the proceeds from these sales to reduce our outstanding indebtedness, thereby strengthening our balance sheet.

     On January 2, 2002, we completed the reorganization of our companies whereby LQ Properties became a subsidiary controlled by LQ Corporation while continuing its status as a REIT. As a result of this Reorganization, each share of common stock of LQ Corporation is now attached to and trades as a single unit with a share of LQ Properties’ class B common stock. The Reorganization was accounted for as a reorganization of two companies under common control with no revaluation of the assets and liabilities of the two companies. We implemented the Reorganization in response to federal tax legislation which made it difficult for us to maintain our former status as a “grandfathered” paired share REIT while pursuing our objective to improve, expand and diversify our lodging real estate assets and lodging business as a whole.

Our Other Businesses

     In December 2003, we completed the sale of TeleMatrix, Inc., a non-strategic business that provided telephone equipment and software to the lodging and telecommunications industries, for net proceeds of approximately $6.0 million. The results of TeleMatrix are included in discontinued operations prior to 2004.

     As of December 31, 2004, LQ Properties held approximately $26.2 million in mortgage loan receivables, secured by first mortgage liens on the underlying real estate and personal property of the mortgagor, a healthcare provider company. The interest rate on these mortgage loans is LIBOR plus 1% per annum on the outstanding balances, with a maturity date in August 2008.

Lodging Industry and Competition

     As of December 31, 2004, there were over 4.5 million hotel rooms in the U.S., according to Smith Travel Research. Of these rooms, approximately 66% were affiliated with a brand while the remaining

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approximately 34% were independent and not brand-affiliated. The hotel industry is highly fragmented, with no one entity controlling a majority of hotel rooms in the U.S.

     Hotels compete on the basis of product, amenities, price and service. Smith Travel Research segments hotels by price and service levels. Price is often a function of the product type and amenities offered. Full service hotels offer food and beverage outlets such as restaurants, lounges and room service; meeting, banquet and convention facilities; and concierge and luggage service. Full service hotel brands range from luxury hotels (such as Ritz-Carlton and Four Seasons) to upper upscale hotels (such as Hilton and Marriott) to upscale hotels (such as Courtyard by Marriott and Radisson) to midscale with food and beverage hotels (such as Holiday Inn and Ramada Inn). According to Smith Travel Research, as of December 31, 2004, these full service branded hotels accounted for approximately 1.6 million hotel rooms. Limited service hotels do not offer many of the full service facilities, such as restaurants, lounges and banquet rooms, focusing primarily on renting hotel rooms. Limited service hotel brands range from midscale without food and beverage hotels (such as Hampton Inn and Fairfield Inn) to economy hotels (such as Red Roof Inn and Motel 6). La Quinta and Baymont are limited service hotel brands that compete primarily against other limited service hotels in both the midscale without food and beverage and economy segments. Because each market is unique, however, some of our hotels also compete against full service hotels. According to Smith Travel Research, as of December 31, 2004, these limited service branded hotels accounted for approximately 1.4 million hotel rooms.

     The U.S. lodging industry is generally segmented into three different operating structures: real estate ownership, management and franchise. Some companies employ only one component while other companies employ a combination of operating structures.

	•	Real estate companies own the underlying hotel assets. Profitability is determined after deducting operating and financing costs from revenues as well as deducting fees to management companies and franchise companies, if any.
	•	Management companies operate hotels, with responsibility for management, maintenance, human resources, accounting and sales, and typically are paid a percentage of a hotel’s total revenues and earn incentive fees based on the hotel’s revenue and/or profit targets.
	•	Franchise companies grant rights to hotels to license a brand and participate in the brand’s central reservation system, advertising and other programs, and typically are paid a percentage of a hotel’s total revenues.

     La Quinta derives its revenue by owning hotels, operating hotels for third party owners and franchising its brands to independent owner/operators. As of December 31, 2004, we owned and operated 374 hotels (including 15 hotels located on land that we lease all or part of from third parties), representing approximately 46,000 rooms, and our franchisees operated 218 hotels, representing approximately 19,000 rooms (including one managed Baymont Inn & Suites representing 97 rooms), under our brands. We also offer reservation, national advertising, training and systems related services to our franchisees.

     We believe the hotel industry, as a whole, is in the midst of a recovery following a pronounced downturn that occurred over the three-year period from 2001-2003. The downturn was primarily due to a decrease in demand as a result of a slowing U.S. economy, the terrorist attacks on September 11, 2001, the conflict in Iraq and ongoing global security concerns. Business and leisure travel slowed considerably as companies reduced corporate travel and leisure travelers cancelled or delayed trips. Toward the end of 2003, however, year-over-year changes in revenue per available room, or RevPAR, turned positive for the industry. We believe the recovery has been, and we expect it to be, primarily driven by increased demand for hotel rooms which is outpacing new supply growth. Based on data provided by Smith Travel

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Research, RevPAR for the total U.S. lodging industry experienced a year-over-year increase of 0.4% and 7.8% in 2003 and 2004, respectively.

Seasonality

     The lodging industry is seasonal in nature. The periods during which our lodging properties experience higher revenues vary from property to property, depending principally upon location. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. We expect this seasonality will 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, profit margins and net earnings from quarter to quarter.

Environmental Matters

     Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of investigation, removal or remediation of such substances may be substantial. Additionally, the presence of hazardous or toxic substances, or the failure to properly remediate these substances, may adversely affect an owner’s ability to sell or rent the property or to borrow using the property as collateral. Persons or entities arranging for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of a release of substances at a disposal treatment facility, whether or not the facility is owned or operated by that person or entity. Certain environmental laws impose liability for release of asbestos containing materials, or ACMs, into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, we may be considered an owner or operator or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, be potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons or property.

     We have retained independent environmental consultants in the past to conduct or update Phase I environmental assessments (which generally do not involve invasive techniques such as soil or groundwater sampling) and asbestos surveys with respect to certain of our properties. To date, these environmental assessments have not revealed any environmental conditions that we believe will have a material adverse effect on our business, assets or results of operations; however, Phase I assessments do not necessarily reveal the existence or extent of all environmental conditions, liabilities or compliance concerns at our properties. Where appropriate, on a property-by-property basis, these consultants also have conducted additional testing, including sampling for asbestos, for soil contamination where underground storage tanks are or were located, and for contamination of underground water. However, even though these environmental assessments have been conducted, there is still the risk that the environmental assessments and updates did not identify all potential environmental liabilities because either a prior owner created a material environmental condition that is not known to us or the independent consultants preparing the assessments did not discover the condition. Further, new environmental liabilities may have developed since the environmental assessments were conducted.

     We are aware that certain of our hotel properties are adjacent to gasoline stations that may put these properties at risk for soil and groundwater contamination from these neighboring properties. In addition, one of our hotel properties is located on a “Superfund Site” as designated by the Environmental Protection Agency, or EPA. Currently, we are not aware of any contamination to this property and have not been required by the EPA to take any actions. We have received a notification from the EPA

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regarding a parcel of land we acquired in 1998 for hotel development purposes, which is presently under contract for sale. Discussions are underway regarding potential requirements for remediation of subsurface vermiculite deposits in connection with site development. We do not believe that the cost of this remediation, if it is ultimately required, will be material. Our lodging properties also are cleaned and maintained using various chemicals and cleaning agents, some of which may be environmentally sensitive or hazardous. We generally maintain these chemicals and cleaning agents in appropriate containers to protect against environmental hazards.

     The presence of mold at some of our properties has required us to undertake remediation in the past to remove the mold from the affected properties. We have spent over $3.6 million related to remediating mold issues at one new construction hotel property and we are seeking reimbursement from our contractors and other third parties of this and other amounts. We may incur additional remediation costs in the future as a result of the existence of mold in our other properties, if any. See “Certain Factors You Should Consider About Our Companies, Our Businesses and Our Securities — Risks Associated With Our Investment in Real Estate” for additional risks associated with the presence of mold.

     Although we have incurred and expect to incur remediation and other environmental costs during the ordinary course of operations, we anticipate that such costs will not have a material adverse effect on our financial condition or results of operations.

Franchising Regulation

     The Federal Trade Commission (the “FTC”) and various states regulate the sale of franchises. The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration. A number of states in which our franchises operate require registration or disclosure in connection with franchise offers and sales. In addition, several states have “franchise relationship laws” or “business opportunity laws” that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While our franchising operations have not been materially adversely affected by such regulation, we cannot predict the effect of future regulation or legislation.

Distribution, Investment and Other Policies

     The following is a discussion of our investment policies and our policies with respect to other activities, including financing matters. These policies may be amended or revised from time to time at the discretion of our boards of directors without notice to, or a vote of, the holders of our paired shares.

Distribution Policy

     In order to qualify for the beneficial tax treatment accorded to REITs, LQ Properties generally is required each year to distribute to its preferred and common shareholders at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and by excluding any net taxable gain. In connection with our Reorganization in January 2002, LQ Properties’ shareholders approved the terms of LQ Properties’ class B common stock. These terms provide that dividends will not be paid on the class B common stock prior to 2005, when holders of class B common stock may begin to receive, on a quarterly basis, a dividend of up to $0.10 per share per annum, in preference to, or prior to, the payment of any dividends on the class A common stock in each quarter. Dividends on the class B common stock are not mandatory and will be payable only if and when declared by the LQ Properties board of directors. We do not currently anticipate paying any dividends on LQ Properties’ class B common stock or the LQ Corporation common stock in 2005. See “Item 5 — Market for Our Common

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Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities — Our Common Stock - Dividends.”

Investment Policies

     Investments in Real Estate or Interests in Real Estate. Our focus is the lodging business. Our investment objectives are to increase profits from our company owned hotels, grow our franchising programs and appropriately invest our available capital in select projects. We may also use our cash flow, in combination with other sources of capital, to pursue acquisitions of lodging properties, companies and/or brands. Where appropriate, we may sell certain of our hotels.

     Investments in Real Estate Mortgages. Although we have done so in the past, consistent with our focus on the lodging business, we do not anticipate engaging in any significant investments in mortgages. However, we may, at our discretion, invest in mortgages, deeds of trust and other similar interests. As of December 31, 2004, LQ Properties held approximately $26.2 million in mortgage loan receivables.

     Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers. We may invest, subject to, in the case of LQ Properties, the gross income and asset tests necessary for REIT qualification, in securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. Further, in addition to our two joint ventures, we may acquire and develop hotel properties through joint ventures with third parties. We may acquire all or substantially all of the securities or assets of other REITs, other lodging entities or similar entities where such acquisitions would be consistent with our investment policies.

     Although we have no formal policy setting forth the criteria that we will follow with regard to the purchase of securities of or interests in persons primarily engaged in real estate activities, we consider the following when evaluating an investment in limited liability companies and joint ventures holding one or more franchised properties: the adequacy of our risk-adjusted return on such investment; the credit history of the entity; and whether the property is located in a strategic or high profile location such as a vacation destination, major airport or central business district. With regard to investments in public or private companies, we consider whether we are able to acquire a controlling interest (with the intention of fully integrating such acquisition into La Quinta); the adequacy of risk-adjusted returns; whether there is a strategic fit with our business objectives; our ability to realize synergies; and the risks associated with integration.

     Other than the criteria described above, we have no formal policy with regard to engaging in the purchase and sale (or turnover) of investments. Rather, subject to the gross income and asset tests in the case of LQ Properties, we will make investment decisions on a case-by-case basis.

Financing Policies

     We do not have a policy limiting the amount of indebtedness we may incur other than complying with our debt covenants. The organizational documents of LQ Corporation and LQ Properties currently do not contain any restrictions on incurring debt. However, our senior credit facility, which matures in April 2007, and the indentures pursuant to which we issued certain notes impose limitations on the incurrence of indebtedness. We may from time to time reduce our outstanding indebtedness by repurchasing a portion of our outstanding notes, subject to the restrictions imposed by our senior credit facility and the terms of our outstanding indebtedness.

     We expect to provide financing for new investments through a combination of long-term and short-term financing, including debt, equity and cash. We also anticipate funding new investments through internally generated cash flow and the sale of selected assets. We may obtain long-term financing

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through the issuance of equity securities, long-term secured or unsecured notes, convertible debentures and the assumption or issuance of mortgage notes. We may obtain short-term financing through the use of our senior credit facility, which may be replaced with long-term financing as appropriate. From time to time, we may utilize interest rate swaps to manage any variable interest rate exposure.

Lending Policies

     We do not have a policy limiting our ability to make loans to other persons other than complying with our debt covenants. We may make loans to joint ventures in which we participate. Although we presently do not have a formal company-funded financial assistance program for franchisees, we may, at our discretion, offer financial assistance to our franchisees upon varying terms. Currently, under certain franchise agreements, we are committed to providing financial assistance including, but not limited to, loans, reimbursements, rebates, credits and other incentive payments, to help defray the costs of construction and other costs associated with opening and operating a La Quinta or Baymont hotel.

Policies with Respect to Other Activities

     Our boards of directors have the authority, without further shareholder approval, to issue additional authorized shares of common stock and preferred stock or otherwise raise capital through the issuance of senior securities. Existing shareholders do not have any preemptive right to shares of common stock or other shares of our capital stock issued in any offering and any offering might cause a dilution of a shareholder’s investment in us. Although we do not have any current plans to do so, we may in the future issue common stock in connection with acquisitions. Subject to restrictions set forth in our senior credit facility and indentures, we may repurchase or otherwise reacquire our paired shares. We have not engaged in trading, underwriting or agency distribution or sales of securities of other issuers. Our policies with respect to the activities described above may be reviewed or modified or amended from time to time by our boards of directors without a vote of our shareholders.

Reporting Policies

     We are subject to the information reporting requirements of the SEC. Pursuant to those requirements, we file periodic reports, proxy statements and other information, including audited financial statements, with the SEC.

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Certain Factors You Should Consider About Our Companies,
Our Businesses and Our Securities

     Presented below are certain factors that we believe are material to our shareholders. You should be aware that there are various risks, including those described below that in the future and, in some cases, already do, materially affect us and our business, financial condition and results of operations. You should carefully consider these factors. This section includes or refers to certain forward-looking statements. You should read the explanation of the qualifications and limitations on such forward-looking statements in this Joint Annual Report under the section “Forward-Looking Statements.”

Risks Associated with our Industry

Our strategic focus on our lodging business exposes our investors to risks common in this industry that may adversely affect an investment in our securities, including a number of risks that could have an adverse effect on our business.

     Our economic performance, and consequently the market value of our securities, are subject to the risk that our hotel properties may not generate sufficient revenues to operate profitably and provide cash flow sufficient to pay operating expenses and fund debt service obligations. Also, our cash flow from operations, together with our ability to attract additional capital, may be insufficient to fund needed capital expenditures. The following factors, common in the lodging industry, may adversely affect the revenues generated by, or expenses incurred by, our hotel properties:

	•	changes in the national, regional and local general economic climate, including the severity and duration of an economic downturn;
	•	weather conditions;
	•	competition from comparable hotels, many of which have greater marketing and financial resources than us;
	•	the desirability of particular locations;
	•	the quality, philosophy and performance of our lodging facility managers and supervisors;
	•	changes in product preferences;
	•	decreases in the demand for our lodging facilities as a result of technological developments;
	•	availability of qualified labor;
	•	changes in room rates to meet market conditions or to stimulate demand;
	•	increases in our operating costs;
	•	capability of our management information systems;
	•	the need for capital to reinvest in order to periodically repair and upgrade our lodging facilities;
	•	sudden changes in travel patterns caused by factors such as terrorist attacks and U.S. military actions;
	•	increases in travel expenses that reduce business and leisure travel; and
	•	fluctuating and seasonal demands of business travelers and tourism and the relationship, generally, between supply of and demand for hotel rooms (an oversupply of hotel properties or a reduction in demand for hotel rooms).

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Failure of the lodging industry to continue to improve could adversely affect lodging demand, which in turn could materially impact our operating results and limit our ability to achieve our long-term growth strategies.

     Our business strategy is focused in the lodging industry, and we cannot assure you that lodging industry fundamentals will continue to improve. Economic slowdown and world events outside our control, such as terrorism, have already adversely affected the lodging industry in the recent past and if these events reoccur, they may adversely affect the lodging industry in the future. In the event conditions in the lodging industry do not continue to improve as we expect, our ability to execute our business strategies could be adversely affected, which, in turn, could materially impact our operating results and limit our ability to achieve our long-term growth strategies.

We operate in a very competitive market, which may limit our operating margins, diminish our market share and reduce our earnings.

     Our hotels generally operate in markets that contain numerous competitors, including a wide range of lodging facilities offering full service, limited service and all-suite lodging options to the public. The continued success of our hotels will be substantially dependent upon our ability to compete in such areas at affordable and competitive room rates, quality of accommodations, name recognition, service levels and convenience of locations. Additionally, an increasing supply of hotel rooms in our market segment, and consolidations in the lodging industry generally, have resulted in the creation of several large, multi-branded hotel chains with diversified operations, which has increased competition for guests in the markets in which our hotels operate. Moreover, full service hotels may lower their rates to a level comparable to those of limited service hotels such as ours that, in turn, may further increase competitive pressure in our markets. In the future, competing hotels may provide greater competition for guests than currently exists in our markets and new hotels may enter our markets. All of these competitive factors may limit our operating margins, diminish our market share and reduce our earnings.

Our business and operations are subject to extensive federal, state and local legislation and other governmental regulation which could result in increased operating costs and reduce our earnings.

     Our lodging business is subject to extensive federal, state and local regulation, including building and zoning requirements, all of which can prevent, delay, make uneconomical or significantly increase the cost of developing additional lodging facilities. In addition, our lodging business and hotel operators are subject to laws governing their relationship with employees, including minimum wage and overtime payment requirements, rules pertaining to working conditions, work permit requirements and discrimination and other claims. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees will increase operating costs and, in turn, could reduce our earnings.

     We may also incur significant costs complying with other statutes and regulations, such as the Americans with Disabilities Act, the Exchange Act reporting requirements and regulations of the NYSE. Our hotel properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines by the federal government or damage awards to private litigants. For example, if pursuant to the Americans with Disabilities Act we are required to make substantial alterations to, and capital expenditures for, our hotel properties, including removal of access barriers, it could increase our expenditures and, in turn, could reduce our earnings. However, we do not know whether existing requirements will change or whether compliance with future requirements will include significant unanticipated expenditures that will adversely affect our cash flow and results of operations.

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We may utilize joint venture partnerships, over which we may have limited control, for hotel acquisitions and/or development.

     We may acquire and/or develop hotel properties through joint ventures with third parties. We currently have two joint ventures that are consolidated with our financial statements. Our share of the aggregate revenue of these two joint ventures was approximately $2.3 million, $2.1 million and $2.4 million for the years ended December 31, 2004, 2003 and 2002, respectively. Furthermore, at December 31, 2004 and 2003, our share of the assets held by these two joint ventures aggregated approximately $7.5 million and $7.8 million, respectively. Joint venturers often share control over the operation of the joint venture assets. Actions by a joint venturer could subject such assets to additional risks, including:

	•	our joint venturers might have economic or business interests or goals that are inconsistent with our interests or goals;
	•	our joint venturers may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; and
	•	our joint venturers could go bankrupt, leaving us liable for their share of joint venture liabilities.

     All of the foregoing could diminish our market share and reduce our earnings.

     Although we generally will seek to maintain sufficient control of any joint venture to permit our objectives to be achieved, we might not be able to take action without the approval of our joint venturers. Also, our joint venturers could take actions binding on the joint venture without our consent.

Our failure to obtain and maintain proper insurance on our hotel properties and our business could have a material adverse effect on us.

     We are responsible for insuring our hotel properties as well as for obtaining the appropriate insurance coverage to reasonably protect our interests in the ordinary course of business. Additionally, each of our leases and loans typically specifies that comprehensive insurance be maintained on each of our hotel properties, including liability, fire and extended coverage. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, which may be uninsurable or not economically insurable. We will use our discretion in determining amounts, coverage limits, deductibility provisions of insurance and the appropriateness of self-insuring, with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. The events of September 11, 2001 and their aftermath have made it difficult to obtain certain types of insurance coverage and caused insurance costs to increase. We may not be able to obtain or renew insurance policies or, if we are able to obtain or renew our coverage, it may be at a significantly higher cost than our historic experience. As a result, we may carry insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment and, also, may result in certain losses being totally uninsured. Inflation, changes in building codes, zoning or other land use ordinances, environmental considerations, lender imposed restrictions and other factors also might make it not feasible for us to use insurance proceeds to replace the property after it has been damaged or destroyed. Under such circumstances, the insurance proceeds, if any, that we receive might not be adequate to restore our economic position with respect to such property.

     In addition, insurance coverage for our hotel properties and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are

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characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.

Risks Related to Our Business

Our hotel properties are geographically concentrated, which exposes our business to the effects of regional events and occurrences.

     Our hotels currently are concentrated in the midwestern, western and southern regions of the U.S. Specifically, at December 31, 2004, approximately 33% of our company owned rooms were located in ten markets. These ten markets were: Dallas/Ft. Worth, Houston, San Antonio, Denver, Austin, Chicago, New Orleans, Atlanta, Orlando and Phoenix. As a result, our hotel properties are subject to the effects of adverse economic and competitive conditions and trends in these regions and markets and we will face a greater risk of a negative impact on our revenues in the event these areas are more severely impacted by adverse economic and competitive conditions than other areas in the U.S. The concentration of hotel properties in one region or a limited number of markets may expose us to risks of adverse economic developments that are greater than if our portfolio were more geographically diverse. These economic developments include regional economic downturns, significant increases in the number of our competitors’ properties in these markets and potentially higher local property, sales and income taxes in the geographic markets in which we are concentrated. In addition, our hotel properties are subject to the effects of adverse weather conditions, such as winter storms, hurricanes and tornados, which have in the past caused damage such as flooding and other damage to our hotel properties in specific geographic locations, including in our top ten markets. Depending on the severity of these adverse weather conditions, the damage to our hotel properties could require us to close all or substantially all of our hotel properties in one or more markets for a period of time while the necessary repairs and renovations, as applicable, are undertaken.

We may be unsuccessful in increasing our cash flow from our company owned hotels.

We may not be successful in our strategy of increasing cash flow through increased profit contributions from our company owned hotels due to the following factors:

	•	we may be unsuccessful in controlling costs;
	•	demand may not increase for our hotel rooms;
	•	we may not be successful in attracting new corporate business and leisure travel customers; and
	•	our marketing and sales efforts may not result in increasing our RevPAR.

     All of these factors could impede our strategies to increase our cash flow, which could increase our operating costs and reduce our earnings.

We must successfully compete for franchisees or our franchising programs will not develop into a meaningful component of our business.

     We may not be successful in our strategy of increasing our revenues through the growth of our franchising programs. The lodging business is a heavily franchised industry. While the La Quinta brand has been in existence since 1968, we only introduced the La Quinta franchising program in the fall of 2000 and added the Baymont brand franchising program in September 2004. Some of our competitors may have substantially greater marketing and financial resources, greater brand distribution and/or greater financial incentives than we do. We must still compete successfully against these other lodging competitors in order to successfully grow our franchising programs and develop them into a long-term meaningful

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component of our business that enhances our profitability. If we are unsuccessful in our efforts to increase our revenues through the growth of our franchise programs, it could diminish our market share and reduce our earnings and cash flow.

Our franchising programs depend upon third party owners/operators who may not fulfill their franchising obligations, including failing to make timely payments to us and failing to maintain quality control over the use of the La Quinta and Baymont brands.

     The success of our franchise programs is dependent upon the manner in which our franchisees adhere to their respective franchise agreements and operating standards, which include:

	•	timely payment of royalties and other fees;
	•	ongoing capital expenditures and maintenance; and
	•	proper usage and protection of the La Quinta and Baymont brands and related trademarks.

     In addition, while we have contractual controls over each franchisee, we do not have control over the day-to-day operations of franchisees. As a result, third party franchisees may not appropriately use and protect our brands, which may decrease their value or expose them to legal challenges.

Our strategy of developing and redeveloping lodging properties may not generate the economic returns we expect.

     Our strategy includes current and future development and redevelopment activities. These activities are subject to risks because, among other reasons:

	•	we may be unable to proceed with the development and redevelopment of properties if we cannot obtain financing upon terms that are favorable to us or at all;
	•	we might not find appropriate, strategically located properties at commercially reasonable prices;
	•	our redevelopment efforts may not achieve the desired operating results;
	•	developed properties may not meet stipulated minimum returns; or
	•	we may be unable to obtain, or may be delayed in obtaining, required building permits and authorizations.

     In addition, we may from time to time experience shortages of materials or qualified trades people or substantial increases in the cost of certain construction materials or labor. This may result in longer than normal construction and remodeling periods, loss of revenues and increased costs.

     Furthermore, we generally rely heavily on local contractors, who may be inadequately capitalized or understaffed. The inability or failure of one or more local contractors to perform its obligations may result in construction or remodeling delays, increased costs and loss of revenues. As a result, we may not increase our revenues or generate expected cash flows from the development or redevelopment of lodging properties.

We may be unsuccessful in identifying and completing acquisition opportunities for other lodging properties, lodging companies and/or brands, which would limit our ability to implement our long-term growth strategies and may result in significant costs that may not be allocated to successful acquisitions.

     We compete with other lodging and leisure companies for potential lodging properties, lodging companies and/or brand acquisition opportunities. Some of these competitors may have substantially

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greater financial resources than we do and may be able to pay more to acquire properties than we are able to pay. These entities may be able to assume more risk than we choose to manage, including risks of a company’s creditworthiness, brand identification or geographic location. Competition may generally reduce the number of acquisition opportunities that we believe are suitable. In addition, competition for properties may increase the cost of acquiring lodging properties, lodging companies and/or brands.

     We also may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions that we are subsequently unable to complete. These significant costs could materially impact our operating results, as they would generally be expensed in the time period during which they are incurred. In addition, our management’s attention to acquisitions that we subsequently do not complete would divert their attention from our business, as well as other potential growth opportunities, which could materially impact our operating results and limit our ability to achieve our long-term growth strategies.

We may incur a variety of costs in making acquisitions and never realize the anticipated benefits.

     If appropriate opportunities become available, we might attempt to acquire additional lodging properties, lodging companies and/or brands that we believe fit our asset and operating profiles. Currently, however, we are not a party to any material definitive acquisition agreements. If we pursue any additional acquisition opportunities, the process of negotiating the acquisition and integrating an acquired lodging property, lodging company and/or brand might result in operating difficulties and substantial expenditures and might require significant management attention that would otherwise be available for the ongoing development of our business. Moreover, we might never realize the anticipated benefits of any acquisitions. Future acquisitions could result in potentially dilutive issuances of equity securities, incurrence of debt, contingent liabilities or increased impairment or amortization expenses related to tangible and intangible assets.

Investment returns from our acquisition of other lodging properties, lodging companies and/or brands may be lower than anticipated.

     Even if we are able to successfully identify and acquire other lodging properties, lodging companies and/or brands, these new acquisitions may fail to perform as expected or we may be unable to make acquisitions on favorable terms. Additionally, we may underestimate the costs necessary to bring an acquired property up to the standards established for its intended market position or the costs to integrate an acquired lodging property, lodging company and/or brand with our existing operations. This can increase our operating costs and consequently reduce our earnings.

Integration of the Acquisition operations may be difficult and may lead to adverse effects.

     The success of the Acquisition will depend, in part, on our ability to realize the anticipated cost savings and growth opportunities from integrating the acquired limited service lodging business with our business. Our success in realizing these benefits and the timing of this realization depend upon the successful integration of the operations of the acquired business. The integration of a division of one company with and into another independent company is a complex, costly and time-consuming process. The difficulties of combining the operations of these companies include among others:

	•	coordinating sales, distribution and marketing functions;
	•	integrating information systems;
	•	preserving the important licensing, distribution, marketing, customer and other relationships of the acquired business;
	•	minimizing the diversion of management’s attention from ongoing business concerns;

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	•	preserving the business’ goodwill with its existing franchisees;
	•	coordinating geographically separate organizations; and
	•	successfully converting hotels from one brand to another brand.

     We may not accomplish this integration smoothly or successfully. The diversion of the attention of our management from our current operations to the integration effort and any difficulties encountered in combining operations could prevent us from realizing the full benefits anticipated to result from the Acquisition and adversely affect our other businesses.

We depend on our key personnel for the future success of our business and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business and implement our growth strategies, or could be negatively perceived in the capital markets.

     Our future success and our ability to manage future growth depend, in large part, upon the efforts and continued service of our senior management team. Although we have entered into an employment agreement with most of the members of our senior management team, there is no guarantee that they will remain employed with us. Our senior management team is particularly important to our future success due to their substantial experience in the lodging industry. On average, our senior management team members have over 25 years of experience in lodging and lodging related industries. It could be difficult for us to find replacements for our key personnel, as competition for such personnel is intense. The loss of services of one or more members of our senior management team could have an adverse effect on our ability to manage our business and implement our growth strategies. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our securities.

Changes in market conditions could adversely affect the market price of our securities.

     Similar to other securities, the market value of our securities depends, to a large extent, on various market conditions, which may change from time to time. Among the market conditions that may affect the market value of our securities are the following:

	•	the extent of investor interest in us;
	•	the attractiveness of our securities in comparison to other securities, including securities issued by other real estate based or lodging companies;
	•	our financial performance; and
	•	general stock and bond market conditions.

     The market value of our securities is based primarily upon the market’s perception of the lodging industry and our growth potential, including current and potential future earnings and cash flow, the value of our assets, including real estate and our brands, and our current debt levels. Additionally, if our future earnings are less than expected, it is likely that the market price of our securities will diminish.

Risks Related to Our Debt

The level of our indebtedness could adversely affect our financial health.

     As of December 31, 2004, we had a total indebtedness of approximately $925.6 million. Our indebtedness could have important consequences to holders of our securities. For example, it could:

•

increase our vulnerability to general adverse economic and industry conditions;

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	•	require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, marketing, franchising and development efforts and other general corporate purposes;
	•	limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
	•	place us at a competitive disadvantage compared to our competitors that have less debt; and
	•	limit our ability to borrow additional funds.

Our senior credit facility contains certain financial covenants that we may not meet and, if violated, could limit our ability to continue to borrow under, or extend the maturity date of, our senior credit facility and, under certain circumstances, could accelerate the amount due under our senior credit facility and result in the acceleration of all of our outstanding indebtedness.

     We depend upon our senior credit facility for a portion of our operating funds. Our senior credit facility, which matures in April 2007, subjects us to certain financial covenants, and includes restrictions on our ability to engage in certain activities. Our debt securities also contain financial covenants, restrictions and limitations on our ability to incur indebtedness. Several factors, including the economic downturn, terrorist attacks and their aftermath and the military action in Iraq and its aftermath, had an adverse effect on the lodging industry during 2001 through 2003. Additional terrorist attacks, acts of war or similar events could have further material adverse effects on the lodging industry. Accordingly, there is a risk that we may not meet one or more of these financial covenants if similar events occur in the future. If we violate or fail to comply with any of the financial or other covenants in the senior credit facility or debt securities, there may be a material adverse effect on us. Most notably, we may be unable to borrow additional funds under our senior credit facility and the outstanding debt under our senior credit facility and debt securities could become immediately due. If we are unable to satisfy a covenant under our senior credit facility, we would request a waiver or amendment from our bank group. If the lenders under our senior credit facility did not agree to such a waiver or amendment, an event of default thereunder would occur and the outstanding debt under our senior credit facility could become immediately due, which in turn could result in the acceleration of all of our outstanding indebtedness.

We may have to rely on external sources of capital to repay our debt and to pursue our strategic objectives and, if we are unable to access such external sources of capital, we may be delayed in implementing capital improvements or in pursuing our growth strategy, which could reduce our revenue or operating income.

     We may have to rely on third party sources of capital in order to repay our debt, fund capital expenditures and otherwise pursue our strategic objectives. These external sources of capital may or may not be available on favorable terms or at all. Our access to third party sources of capital depends upon a number of factors, including general market conditions, the market’s perception of our growth potential and risk characteristics of our underlying business operations, our overall debt levels, our current and potential future earnings and cash flow and the market price of our securities. Moreover, additional equity offerings may result in the substantial dilution of our shareholders’ interests and additional debt financings may further leverage us. If we are unable to access third party sources of capital on terms favorable to us, we may be delayed in implementing capital improvements or in pursuing our growth strategy, which could reduce our revenue or operating income.

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Rising interest rates would increase our interest costs and reduce our earnings.

     We may incur indebtedness that bears interest at variable rates. Accordingly, if we do incur such indebtedness and short-term interest rates increase, so will our interest costs, which would adversely affect our earnings, cash flow, ability to service debt and ability to re-invest in our operations. We may also incur indebtedness that bears interest at fixed rates. If future long-term rates increase prior to such debt issuance, our interest expense would be higher.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors, including those that are beyond our control, and if we are not able to raise or generate sufficient amounts of cash, we will not be able to pay our indebtedness.

     Our ability to make debt service payments, to refinance our indebtedness and fund planned capital expenditures, marketing, franchising and development activity will depend on our ability to generate cash in the future. Our ability to generate cash, to a certain extent, is, among other things, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

     If our business does not generate sufficient cash flow from operations or future borrowings are not available to us under our senior credit facility or otherwise in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before maturity. However, we may be unable to refinance any of our indebtedness, including our senior credit facility, on commercially reasonable terms or at all. In that case, we will not be able to repay our indebtedness. Our failure to make the required interest and principal payments on our indebtedness would result in an event of default under our senior credit facility, which may result in the acceleration of all of our outstanding indebtedness.

Risks Associated With Our Investment In Real Estate

Our business is subject to risks associated with real estate investments.

     Because we own hotels and own and lease other real property generally affiliated with or adjacent to our hotels, we are subject to the risks that generally relate to investments in real property. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, as well as the expenses incurred. In addition, a variety of other factors, many of which are beyond our control, affect income from properties and real estate values, including:

	•	changes in national economic conditions;
	•	changes in local economic conditions and neighborhood characteristics;
	•	changes in interest rates;
	•	changes in the availability, cost and terms of loans;
	•	the impact of present or future environmental legislation and compliance with environmental laws;
	•	the ongoing need for capital improvements, particularly in older structures;
	•	changes in other operating expenses;
	•	increases in the real property taxes that we pay;
	•	failure of our tenants to perform their obligations under their leases;
	•	adverse changes in governmental rules and fiscal policies;

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	•	condemnation and adverse changes in zoning laws;
	•	civil unrest, war or terrorist attacks;
	•	acts of God, including earthquakes, hurricanes, floods, winter storms and other natural disasters (that may result in uninsured losses); and
	•	other factors.

     Any of these factors could impact the amount of income earned and capital appreciation generated by a hotel property, as well as expenses incurred. For example, from time to time we evaluate our hotels to determine whether renovation or ongoing maintenance work is required. For the year ended December 31, 2004, we expended approximately $31.9 million for capital improvements related to our lodging properties and we expect to undertake more renovations in the future. Renovations to our hotels may be expensive and may require us to close all or a portion of the hotels to customers during such renovations. As a result, renovations may increase our expenses and reduce our cash flows and our revenues.

     Our other operating expenses are primarily comprised of property taxes and insurance expense. As a result of the Acquisition, we currently anticipate these expenses will increase in proportion to the number of hotels acquired in the Acquisition. The assessed values of some of the acquired properties may also be increased, resulting in higher property taxes in the future. Additionally, property taxes may increase as a result of changes in tax laws and insurance premiums may increase.

     We have leasing arrangements with various tenants who operate restaurants on our properties. The terms of these leases vary between one year and over fifteen years. For the year ended December 31, 2004, the leases generated approximately $4.7 million, or approximately 1% of our total revenues. If these leasing arrangements terminate, there is no guarantee that we will be able to enter into other arrangements on similar terms.

The illiquidity of real estate as an investment limits our ability to sell hotel properties quickly in response to market conditions.

     Real estate investments are relatively illiquid and, therefore, cannot be purchased or sold rapidly in response to changes in economic or other conditions. Buyers may not be identified quickly or be able to secure suitable financing to consummate a transaction or we may not be able to sell hotel properties on terms favorable to us. Furthermore, sales of certain appreciated hotel properties could generate material adverse tax consequences, which may affect our ability to sell hotel properties in response to market conditions and adversely affect our ability to generate cash flows.

We are subject to real property taxes, which are subject to significant changes by taxing authorities, which could increase our operating expenses.

     Our hotel properties are subject to real property taxes. The real property taxes may increase or decrease as property tax rates change and as the values of properties are assessed and reassessed by taxing authorities. Real property taxes may increase even if property level cash flows substantially decrease. As a result, increases in property taxes may increase our operating costs and decrease our net income.

Potential liability for environmental contamination could result in substantial costs or restrictions on the use of our hotel properties, which could decrease our revenue, increase our operating costs or increase our capital expenditures.

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     Environmental problems are possible and can be costly. It could be discovered that some of our properties are not in compliance with applicable environmental laws. Additionally, under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or responsibility, simply because of our current or past ownership or operation of those particular real estate properties. If unidentified environmental problems arise, we may have to make substantial payments, which could significantly increase our operating costs and reduce our earnings because:

	•	as owner or operator, we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination;
	•	environmental laws typically impose clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination;
	•	even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs; and
	•	governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs.

     These costs could be substantial and, in extreme cases, could exceed the value of the contaminated property. The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination may materially and adversely affect our ability to borrow against, sell or rent an affected property. In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination and, therefore, we could bear the costs of removing these liens.

The presence, maintenance and removal of asbestos in our hotel properties could result in fines and penalties.

     Environmental laws also govern the presence, maintenance and removal of asbestos. We have determined that some of our hotel properties have asbestos containing materials and we have taken appropriate action as and when necessary. Such laws require that, as owners or operators of buildings containing asbestos, we must:

	•	properly manage and maintain the asbestos;
	•	notify and train those who may come into contact with asbestos; and
	•	undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building.

     Such laws may impose fines and penalties on us if we fail to comply with these requirements and may allow third parties to seek recovery for personal injury associated with exposure to asbestos fibers, which could significantly increase our operating costs and reduce our earnings.

The existence of mold in our hotel properties could result in substantial costs or restrictions on the use of our properties.

     We have discovered that some of our hotel properties have problems with mold caused by excessive moisture, which accumulates in buildings or on building materials. Some molds are known to produce toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold can cause a variety of health effects and symptoms in certain individuals including allergic or other reactions.

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The presence of mold at some of our properties has required us to undertake a remediation program to remove the mold from the affected properties. With the exception of one hotel property, the cost of remediation to date has not been material. However, remediation costs may substantially increase if there is mold in our other properties, including in the properties acquired as part of the Acquisition, or if costs related to mold such as legal and insurance expense continue to increase rapidly, which could significantly increase our operating costs and reduce our earnings.

Risks Associated with LQ Properties and its Status as a REIT

Failure of LQ Properties to qualify as a REIT would cause it to be taxed as a corporation, which would expose us to serious tax consequences and could substantially reduce any funds available for payment of dividends to holders of class B common stock.

     If LQ Properties fails to qualify as a REIT for U.S. federal income tax purposes, it will be taxed as a corporation with the attendant consequences described below. While we intend to operate LQ Properties in a manner that will allow it to continue to qualify as a REIT, we cannot assure you that LQ Properties is qualified as such, or that it will remain qualified as such in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the “Code”), as to which there are only limited judicial and administrative interpretations, and involves the determination of facts and circumstances not entirely within our control. The complexity of the Code provisions governing REITs is greater in the case of a REIT that owns hotels and leases them to a corporation of which it is a subsidiary. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification.

     If LQ Properties fails to qualify as a REIT, we could face adverse tax consequences that could substantially reduce, or possibly eliminate, our available funds for, among other things, payment of dividends to holders of class B common stock for each of the years involved because LQ Properties:

	•	would not be allowed a deduction for any dividends paid to shareholders in computing its taxable income and would be subject to U.S. federal income tax at regular corporate rates;
	•	could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and
	•	unless entitled to relief under statutory provisions, could not elect to be subject to tax as a REIT for four taxable years following the year that it was disqualified.

LQ Properties is subject to some taxes even if it qualifies as a REIT.

     Even if LQ Properties qualifies as a REIT, it is subject to some federal, state and local taxes on its income and property. For example, LQ Properties pays taxes on certain undistributed income and is subject to a 100% tax on net income derived from “prohibited transactions.” LQ Properties may also be taxed on all or a portion of the gain recognized from the sale of lodging assets acquired from its predecessor as a result of the La Quinta merger (July 1998). LQ Properties is also subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by LQ Properties with respect to any calendar year are less than the sum of:

	•	85% of LQ Properties’ ordinary income for that year;
	•	95% of LQ Properties’ capital gain net income for that year; and
	•	100% of LQ Properties’ undistributed income from the prior year.

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     Additionally, LQ Properties’ income derived from properties located in some states may be subject to local taxes.

LQ Properties may need to borrow money in the future to meet its minimum distribution requirements and to continue to qualify as a REIT.

     LQ Properties’ ability to make distributions to shareholders could be adversely affected by increased debt service obligations if it needs to borrow money in the future in order to maintain its REIT qualification. For example, differences in timing between when LQ Properties receives income and when it has to pay expenses could require LQ Properties to borrow money to meet the minimum distribution requirements applicable to REITs. The incurrence of large expenses also could cause LQ Properties to need to borrow money to meet this requirement. LQ Properties might need to borrow money for these purposes even if we believe that market conditions are not favorable for such borrowings. However, there is no assurance that we will be able to obtain additional money or that we may borrow such money on favorable terms.

LQ Properties may lose or be restricted in its use of its net operating losses.

     As of December 31, 2004, LQ Properties and its taxable REIT subsidiaries had net operating loss (“NOL”) carryforwards of approximately $178.3 million, of which approximately $154.6 million is available to reduce amounts otherwise required to be distributed by LQ Properties to its shareholders to maintain its REIT status. LQ Properties’ ability to utilize those NOLs could be limited in the event that the Internal Revenue Service, or IRS, successfully challenges the calculation of the NOLs in prior years or if it does not generate sufficient income to be offset by the NOLs prior to the expiration of the NOLs. A reduction in LQ Properties’ NOLs would result in a corresponding increase in its REIT distribution requirements. It is possible that the amount of any under distribution for a taxable year could be corrected with a “deficiency dividend” as defined in Section 860 of the Code, however, interest may also be due to the IRS on the amount of this under distribution.

     LQ Properties’ future use of NOLs for tax purposes could be substantially limited if an “ownership change,” as defined under Section 382 of the Code were to occur. To the extent the NOL carryforwards cannot be fully utilized under these limitations within the carryforward periods, the NOL carryforwards will expire unutilized. Accordingly, after any ownership change, LQ Properties’ ability to use its NOLs to reduce or offset taxable income would be substantially limited or not available under Section 382. In general, a company reaches the “ownership change” threshold if the “5% shareholders” increase their aggregate ownership interest in the company over a three-year testing period by more than 50 percentage points. The ownership interest is measured in terms of total market value of a company’s capital stock. LQ Properties is not aware of any acquisition of shares of its capital stock that has created an “ownership change” under Section 382. Since the change in ownership rules applicable to NOLs apply to shareholders owning 5% or more of the stock of a corporation, and the ownership limitations in LQ Properties’ charter apply only to interests in excess of 9.9%, it is possible to have an ownership change for purposes of limiting the use of LQ Properties’ NOLs.

     If LQ Properties is required to make taxable income distributions to its shareholders to satisfy required REIT distributions, all or a substantial portion of these distributions, if any, may require the borrowing of additional funds or be in the form of non-cash dividends. There can be no assurance that it will be able to borrow additional funds at that time or that such non-cash dividends would satisfy the REIT distribution requirements and, as such, it could lose its REIT status or may not be able to satisfy its obligations under the operative documents evidencing its debt.

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Risks Relating to an Investment in our Paired Common Shares

Provisions of our charters and bylaws could inhibit changes in control that could be beneficial to our shareholders.

     Certain provisions of our charters and bylaws may delay or prevent a change in control or other transactions that could provide our shareholders with a premium over the then-prevailing market price of their paired common shares or that might otherwise be in their best interest. In addition to staggered boards of directors, our charters generally prohibit ownership, directly, indirectly or beneficially, by any single shareholder of more than 9.9% of our equity stock. We refer to this limitation as the “ownership limit.” Our boards of directors may waive or modify the ownership limit with respect to one or more persons if they are satisfied that ownership in excess of this limit would not jeopardize LQ Properties’ status as a REIT for federal income tax purposes. Shares owned in violation of the ownership limit will be treated as “excess stock” and will be subject to loss of rights to distributions and voting and other penalties. The ownership limit may also have the effect of inhibiting or impeding a change in control. These restrictions on transferability and ownership also will not apply if our boards of directors determine that it is no longer in the best interest of LQ Properties to attempt to qualify, or to continue to qualify, as a REIT.

There is a possibility that there will be amendments to or elimination of the pairing arrangement, which may, in turn, impact LQ Properties’ status as a REIT.

     Each share of common stock of LQ Corporation is attached to and trades together with the class B common stock of LQ Properties. Under LQ Corporation’s and LQ Properties’ charters, the respective board of directors may modify or eliminate this pairing arrangement without the consent of its respective shareholders at any time if that board of directors no longer deems it in the best interests of LQ Corporation and LQ Properties, as the case may be, for their shares to continue to be attached and trade together. At this time, neither board of directors has determined the circumstances under which the pairing arrangement would be terminated. However, circumstances that the respective board might consider in making such a determination may include, for example, the enactment of legislation that would significantly reduce or eliminate the benefits of our current structure. With respect to such determination, the respective board of directors must fulfill at all times its respective fiduciary duties and, therefore, it is not possible to predict at this time the future circumstances wherein the respective board of directors would terminate the pairing arrangement.

     If the La Quinta boards of directors were to terminate the pairing arrangement, LQ Properties’ status as a REIT may also be terminated, subjecting its taxable income to federal taxation at regular corporate rates, which could reduce our earnings.

The class B common stock may be redeemed for nominal value at any time, subject to certain important limitations.

     LQ Properties may redeem the class B common stock for nominal value provided that the class B common stock remains paired with the common stock of LQ Corporation and that no additional shares of class B common stock are outstanding and unpaired. Although in form such redemption price is nominal, the redemption mechanic is designed to cause the holders of the class B common stock to transfer such stock to LQ Corporation as a capital contribution, with a corresponding increase in the value of their existing common stock of LQ Corporation. LQ Properties may exercise its redemption right at any time. Accordingly, the class B common stock could be redeemed before holders of the class B common stock receive any dividends.

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LQ Properties’ Board of Directors could terminate LQ Properties’ status as a REIT and LQ Properties’ taxable income would then be subject to federal income taxation resulting in an increase to its liabilities for taxes.

     LQ Properties’ board of directors could terminate LQ Properties’ status as a REIT without the consent of its shareholders. Under LQ Properties’ charter, the board of directors of LQ Properties may terminate its REIT status at any time if the board of directors no longer deems it in the best interests of LQ Properties to continue to qualify under the Code as a REIT. The board of directors of LQ Properties has not yet determined the circumstances under which LQ Properties’ status as a REIT would be terminated. However, circumstances that the board may consider in making such a determination may include, for example:

	•	the enactment of new legislation that would significantly reduce or eliminate the benefits of being a REIT; or
	•	LQ Properties no longer being able to satisfy the REIT requirements.

     With respect to this determination, the board of directors must fulfill at all times its fiduciary duties and, therefore, it is not possible to predict at this time the future circumstances wherein the board of directors would terminate LQ Properties’ status as a REIT.

     If LQ Properties’ REIT status is terminated, its taxable income will be subject to federal income taxation (including any applicable alternative minimum tax) at regular corporate rates. Although LQ Properties had, as of December 31, 2004, federal NOL carryforwards of approximately $178.3 million that may be available to reduce its taxable income, its liabilities for taxes would increase if it no longer qualifies as a REIT.

Because we do not currently pay dividends on our paired common shares, shareholders will primarily benefit from an investment in our paired common shares only if they appreciate in value.

     We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends on our paired common shares in 2005. As a result, the success of an investment in our paired common shares will depend substantially upon future appreciation. There is no guarantee that our paired common shares will appreciate in value or maintain their current value.

ITEM 3. LEGAL PROCEEDINGS

     Incorporated by reference to the description of legal proceedings in Note 15, “Commitments and Contingencies,” in the notes to the financial statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data.”

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

     None.

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ITEM 4A. OUR EXECUTIVE OFFICERS

     We have provided information about our executive officers in this Item 4A of this Joint Annual Report. We also encourage you to refer to LQ Corporation’s proxy statement for its 2005 annual meeting of shareholders, which will be filed with the SEC within 120 days following our fiscal year-end.

     The following information relative to LQ Corporation and LQ Properties’ executive officers is given as of March 1, 2005:

     Francis W. Cash, age 62, has been Chief Executive Officer and a director of LQ Corporation and LQ Properties since April 2000. He was named Chairman of the Board of Directors of LQ Corporation and LQ Properties in September 2004. Mr. Cash also served as President of LQ Corporation and LQ Properties from April 2000 until February 2005 and as the Treasurer of LQ Corporation from April 2000 until June 2000. Mr. Cash was the Chairman of the Board, Chief Executive Officer, President and a director of Mariner Post-Acute Network, Inc., a health care service provider, from September 1999 until March 2000. From 1995 to 1999, Mr. Cash served as President and Chief Executive Officer of Red Roof Inns, Inc., a lodging company. He also served as Chairman of the Board of Red Roof Inns from 1996 to 1999. Prior to his service at Red Roof Inns, Mr. Cash served as President, Chief Operating Officer and a director of NovaCare, Inc., a provider of physical rehabilitation services, from 1992 to 1995. Prior to that, Mr. Cash served in a number of senior executive positions for 18 years at Marriott International, Inc., a lodging and services company, including President of Marriott Service Group. Mr. Cash is a director of Schneider National Inc., a provider of transportation, logistics and related services, and a member of the Board of Trustees of Southern Virginia University.

     David L. Rea, age 44, has been President and Chief Operating Officer of LQ Corporation and LQ Properties since February 2005. He previously served as Executive Vice President and Chief Financial Officer of LQ Corporation and LQ Properties from June 2000 until February 2005. Mr. Rea also served

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as the Treasurer of LQ Corporation and of LQ Properties from June 2000 to January 2002. Prior to joining La Quinta, Mr. Rea served as Chief Financial Officer of the start-up e-commerce company, SingleSourceIT.com. Prior to that, he was with Red Roof Inns, Inc. from 1996 through 1999, where he served in various roles, including Executive Vice President, Chief Financial Officer and Treasurer. From 1995 through 1996, he served as Vice President of Finance at DeBartolo Realty Corporation. From 1986 through 1995, Mr. Rea held various investment management related positions with T. Rowe Price Associates, an investment firm.

     Wayne B. Goldberg, age 44, has been Executive Vice President of Operations of LQ Corporation since February 2005 and previously served as Senior Vice President of Operations of LQ Corporation from October 2001 to February 2005. Prior to that, Mr. Goldberg was Group Vice President of Operations from July 2000 to October 2001. Prior to joining LQ Corporation, Mr. Goldberg was Chief Operating Officer for Bridge Street Accommodations, a lodging company, and spent over 22 years at Red Roof Inns, Inc. serving in various roles, including: Group Vice President, District Vice President, Regional Manager, Area Manager and General Manager.

     Rufus K. Schriber, age 60, has been Executive Vice President, Sales and Marketing of LQ Corporation since September 2003. Prior thereto, he served as the Executive Vice President of Marketing and Brand Positioning since November 2002. From May 2000 through October 2002, Mr. Schriber served as a marketing consultant with the consulting firm Still Pond Enterprises, Inc. Prior to that time, he spent 15 years serving in various positions, including Executive Vice President, Marketing and Brand Management, at Marriott International, Inc., a lodging and services company.

     A. Brent Spaeth, age 54, has been Executive Vice President, Corporate Administration, of LQ Corporation since February 2005 and previously served as Senior Vice President of Human Resources and Administration of LQ Corporation from October 2001 to February 2005. Prior to that, Mr. Spaeth was Group Vice President of Operations from August 2000 to October 2001. Mr. Spaeth has been with LQ Corporation since 1989. He has served in various roles including Regional Vice President and Divisional Vice President at La Quinta. He formerly held various property and regional operations positions with Drury Industries, Inc., and Mid-America Hotels, each a lodging company.

     Alan L. Tallis, age 58, has been Executive Vice President and Chief Development Officer of LQ Corporation and LQ Properties since July 2000. He previously served in various executive positions with LQ Corporation from 1980 to 1992. Prior to returning to LQ Corporation in 2000, Mr. Tallis served as Executive Vice President-Development and General Counsel of Red Roof Inns, Inc. and Managing Director of Tallis & Associates, a consulting firm.

     Sandra K. Michel, age 47, has been Senior Vice President and General Counsel of LQ Corporation since December 2001 and Secretary of LQ Corporation since January 2002. Ms. Michel also serves as Senior Vice President, General Counsel and Secretary of LQ Properties. Prior to joining La Quinta, Ms. Michel served as General Counsel and Secretary of Sunterra Corporation, a vacation ownership (timeshare) company, from June 2000 through April 2001 and Deputy General Counsel and Assistant Secretary from August 1999 through June 2000. Prior to that, Ms. Michel served as Senior Counsel to W.R. Grace & Co. from 1991 to 1999, assuming the role of Assistant Secretary in 1998. Ms. Michel was an attorney in private practice with nationally recognized firms from 1980 through 1991.

     A. John Novak, age 52, has been Senior Vice President and Chief Information Officer of LQ Corporation since January 2001. Prior to joining LQ Corporation, Mr. Novak was Senior Vice President and Chief Information Officer for Resort Condominiums International (RCI), a vacation (timeshare) exchange organization, beginning in April 1999. He served as Vice President of Lodging Property Systems for Marriott International from 1996 to 1999. Mr. Novak also served as Vice President of

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Resorts and Sales Systems for Walt Disney World Company, an entertainment company, from 1990 until 1996.

     Noel E. Ferguson, age 54, has been Vice President, Human Resources, for LQ Corporation since October 2003. From May 2002 until October 2003, he served as a human resources consultant for LQ Corporation. Prior to joining LQ Corporation, Mr. Ferguson was self-employed from 1996 to October 2003, focusing on human resources consulting and entrepreneurial ventures. From 1985 to 1996, he served in various positions for Marriott International, Inc. and its subsidiaries and successor companies, including as Senior Vice President, Human Resources and Quality Programs, for Host Marriott Services Corporation. In June 2000, a privately-held limited liability company, operating a restaurant and brew pub, for which Mr. Ferguson was a managing member, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. In September 2002, as a result of claims related to his personal guarantee of certain obligations of that company, Mr. Ferguson also filed for protection under the U.S. Bankruptcy Code.

     Mark W. Osterberg, age 54, joined LQ Corporation as Vice President and Chief Accounting Officer in November 2004. Mr. Osterberg also serves as Vice President and Chief Accounting Officer of LQ Properties. Prior to joining LQ Corporation, from 2002 to 2004, Mr. Osterberg was a financial and business process consultant. From February to April 2004, Mr. Osterberg also served as Vice President and Comptroller for Kansas City Southern. During 2000 and 2001, he was Chief Financial Officer of Sun Country Airlines. Sun Country Airlines entered U.S. bankruptcy proceedings in January 2002. He served as Chief Financial Officer of Norton Motorcycles, a development stage enterprise, and its predecessor, from 1998 to 2000. From 1990 to 1998, Mr. Osterberg served as Vice President – Chief Accounting Officer for Northwest Airlines Corporation. From 1984 to 1989, he held various positions of increasing responsibility with Braniff, Inc., including Senior Vice President – Finance and Controller. Mr. Osterberg was also employed by Deloitte Haskins & Sells (now Deloitte & Touche LLP), an independent accounting firm, for nine years.

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PART II

ITEM 5. MARKET FOR OUR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock

     Market Information. The term “paired shares” means the shares of common stock, par value $0.01 per share, of LQ Corporation 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. Our paired shares trade on the NYSE under the symbol “LQI.” The following table sets forth, for the periods shown, the high and low sales prices for our paired shares, as reported on the NYSE Composite Tape:

     LQ Properties’ class A common stock currently is held by LQ Corporation and has never been publicly traded.

     Holders of Record. As of February 28, 2005, there were approximately 4,500 record holders of our paired shares and LQ Corporation was the only holder of LQ Properties’ class A common stock.

     Dividends. In order to qualify for the beneficial tax treatment accorded to REITs, LQ Properties is generally required each year to distribute to its preferred and common shareholders at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and by excluding any net capital gain. During 2004, LQ Properties paid $225 million in dividends to LQ Corporation, the sole holder of its class A common stock. In addition, its consolidated subsidiary, La Quinta Worldwide, LLC (“LQ Worldwide”), made periodic proportional distributions totaling approximately $3.6 million to LQ Corporation, which holds a 40.6% interest in LQ Worldwide. In connection with the Reorganization, LQ Properties’ shareholders approved the terms of LQ Properties’ class B common stock, which provide that no dividends will be paid on LQ Properties’ class B common stock prior to 2005. Commencing in 2005, LQ Properties may begin paying dividends on its class B common stock of up to $0.10 per share per annum in preference to payment of dividends on shares of its class A voting common stock that is presently held by LQ Corporation. There is not any requirement to pay dividends on LQ Properties class B common stock at any time and unpaid dividends on LQ Properties’ class B common stock do not accumulate from year-to-year. Future dividends may be declared at the discretion of our boards of directors and will depend upon cash flow, our financial condition, our capital requirements, the annual distribution requirements under the REIT provisions of the Code, and other factors that our boards of directors may deem relevant. We do not expect to pay any dividends on the class B common stock or the LQ Corporation common stock in 2005. Our boards of directors may modify our dividend policy from time to time. Distributions by us to the extent of our current earnings and profits for federal income tax purposes are generally taxable to shareholders as ordinary dividend income. Distributions in excess of earnings and profits are generally treated as non-taxable return of capital to the extent of a shareholder’s basis in the paired common shares. A return of capital distribution has the effect of deferring taxation until a shareholder’s sale of the paired common shares.

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Our Series A Preferred Stock

     Market Information. LQ Properties has 8.0 million depositary shares issued and outstanding (the “Series A Depositary Shares”). Each Series A Depositary Share represents one-tenth of a share of 9% Series A Cumulative Redeemable Preferred Stock, par value of $0.10 per share (“Series A Preferred Stock”). LQ Properties’ Series A Depositary Shares trade on the NYSE under the symbol “LQIPR.”

     The following table sets forth, for the periods shown, the high and low sales prices for the Series A Depositary Shares:

     Holders of Record. There were approximately 180 holders of record of LQ Properties’ Series A Depositary Shares as of February 28, 2005.

     Dividends. For the years ended December 31, 2004 and 2003, LQ Properties paid quarterly cash dividends to holders of its Series A Depositary Shares equal to $0.5625 per share, or $2.25 per share annually.

Issuer Purchases of Equity Securities

     The following table sets forth information regarding equity securities repurchased by us during the fourth quarter of 2004:

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ITEM 6. SELECTED FINANCIAL AND OTHER DATA

     The following tables set forth, among other information, selected financial information for LQ Corporation on a consolidated basis with its controlled subsidiary LQ Properties and LQ Properties on a consolidated basis. All significant intercompany balances and transactions have been eliminated in consolidation. This information is based on and should be read in conjunction with the information set forth in Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes thereto appearing elsewhere in this Joint Annual Report.

LA QUINTA CORPORATION

Selected Financial Information

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LA QUINTA PROPERTIES, INC.

Selected Financial Information

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     You should read the following discussion together with the financial statements and notes thereto appearing elsewhere in this Joint Annual Report. The results discussed below are not necessarily indicative of the results to be expected in any 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 sections of this Joint Annual Report under the section “Items 1 and 2—Description of Our Business and Our Properties—Certain Factors You Should Consider About Our Companies, Our Businesses and Our Securities.” 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 set forth in this Joint Annual Report.

Overview

     La Quinta is one of the largest owner/operators of limited service hotels in the United States. We strive to offer hotels that attract both business and leisure travelers seeking consistently clean and comfortable rooms that generally are comparable to those of mid-priced, full service hotels, but at lower average room rates. We believe that by generally not providing full service, management-intensive facilities and services, such as in-house restaurants, cocktail lounges or room service, that typically carry high fixed costs and produce low margins, we are able to deliver a product that satisfies our customers’ needs and price expectations, while also permitting us to focus on the higher-margin nature of our business of renting clean and comfortable hotel rooms to our guests.

     Over the last five years we have undergone significant financial and strategic changes. In January 2000, we began a strategy of divesting our non-lodging real estate assets in order to focus on our lodging business. As a result of that change in strategy, we replaced substantially all of our senior management with executives who have, on average, over 25 years of experience in lodging and lodging-related industries. Over the last five years our management has improved the operations of our lodging business, including increasing revenue per available room, or RevPAR, reducing hotel level costs and introducing our franchising program. From 2000 through 2002, we also sold approximately $1.8 billion of our non-lodging assets, applying the proceeds from these sales to reduce our outstanding indebtedness, thereby strengthening our balance sheet.

     On January 2, 2002, we completed the reorganization of our companies (the “Reorganization”), whereby LQ Properties became a subsidiary controlled by LQ Corporation while continuing its status as a real estate investment trust, or REIT. As a result of this Reorganization, each share of common stock of LQ Corporation is now attached to and trades as a single unit with a share of LQ Properties’ class B common stock. The Reorganization was accounted for as a reorganization of two companies under common control with no revaluation of the assets and liabilities of the two companies. We implemented the Reorganization in response to federal tax legislation which made it difficult for us to maintain our former status as a “grandfathered” paired share REIT while pursuing our objective to improve, expand and diversify our lodging real estate assets and lodging business as a whole.

     In September 2004, we acquired substantially all the assets of the limited service lodging division of The Marcus Corporation (the “Acquisition”), including 90 Baymont Inn & Suites (including one management contract), seven Woodfield Suites and one Budgetel Inn. In addition, we acquired all the trade rights associated with the Baymont, Woodfield Suites and Budgetel brands, and the Baymont franchise system of 87 hotels. In December 2004, we acquired three additional hotels that have been or will be converted to our brands.

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     La Quinta derives its revenue by owning and operating hotels under our proprietary La Quinta, Baymont, Woodfield Suites and Budgetel brands. In addition, we franchise our La Quinta and Baymont brands to independent owner/operators. Our trade names and trademarks include La Quinta®, La Quinta Inns®, La Quinta Inn & Suites®, Baymont®, Baymont Inn & Suites®, Woodfield®, Woodfield Suites®, Budgetel®, Returns®, and Guest Ovations®. As of December 31, 2004, our system of owned, managed and franchised hotels contained 592 hotels, representing approximately 65,000 rooms located across the U.S. and 50 rooms in Canada. As of December 31, 2004, we owned and operated 374 hotels, representing approximately 46,000 rooms, and our franchisees operated 218 hotels, representing approximately 19,000 rooms (including one managed Baymont Inn & Suites representing 97 rooms), under our brands.

     Our growth strategy includes improving the profitability of our existing company owned hotels, furthering the expansion of our La Quinta and Baymont brands through franchising, and investing a portion of our available capital in the lodging business including, but not limited to, the acquisition of other lodging assets and/or brands. We believe that we benefit from certain competitive strengths that assist us in implementing our growth strategy, including significant brand awareness, operational expertise, experienced management team, capital structure and strong infrastructure.

     We also believe the overall lodging industry environment today is positive. In 2001, the U.S. lodging industry experienced a substantial downturn as a result of a slowing national economy and the impact on the U.S. of the terrorist attacks on September 11, 2001, as well as the aftermath. Toward the end of 2003, however, year-over-year RevPAR changes turned positive for the industry as leisure travel began to increase. Based on data provided by Smith Travel Research, RevPAR in the U.S. lodging industry experienced a year-over-year increase of 7.8% in 2004, as leisure travel continued to increase and was accompanied by improvement in business travel.

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 accounting principles generally accepted in the U.S., or GAAP, while other information may be financial in nature and may not be 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 hotel properties, groups of hotel properties within a geographic region and/or our business as a whole. Historical information is periodically compared to 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.

Operating Statistics

     Average Daily Rate (“ADR”), Occupancy Percentage and RevPAR. Room revenue comprises approximately 93% 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 the result of the combined impact of ADR and occupancy, is another important statistic for monitoring operating performance at the individual hotel property level and across our business as a whole. RevPAR performance 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.

     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

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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 limited service and 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 customer loyalty program. Our available room supply is impacted by our access to third party financing, the amount we spend to develop or acquire hotels and our sale of existing hotels.

     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 offer a room night.

     Guest Satisfaction. Guest satisfaction scores are an important indicator of how our products and services are being received and viewed by our customers. 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.

     Franchise Monitoring. We also monitor and track the number of franchise units opened and the overall growth in our franchise revenues to measure the performance of our brands, as well as our franchise programs, which we believe are important to increase our presence in key geographic markets and enter 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 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, or 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 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 Years Ended December 31, 2004, December 31, 2003 and December 31, 2002

     Net loss was approximately $44.5 million or $0.25 per diluted common share, $83.8 million or $0.58 per diluted common share, and $507.8 million or $3.55 per diluted common share, for the years ended December 31, 2004, 2003 and 2002, respectively. Net loss decreased by $39.3 million or $0.33 per diluted common share, and by $424.0 million or $2.97 per diluted common share, in 2004 and 2003, respectively.

     The decrease in net loss in 2004 compared to 2003 was primarily due to:

	•	an increase in revenues from hotel operations of $71.9 million compared to 2003. Revenues attributed to hotels acquired during 2004 (the “Acquired Hotels”) were approximately $40.4 million; and
	•	a decrease in impairment of property and equipment of $46.3 million.

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     The decrease in net loss was partially offset by an increase in direct lodging operations expense of $38.4 million, an increase in loss on early extinguishment of debt of $15.0 million, and a decrease in income tax benefit of $25.7 million.

     The decrease in net loss in 2003 compared to 2002 was primarily due to:

	•	a charge of approximately $259.0 million (of which $10.6 million has been reclassified to discontinued operations for 2002) recorded in January 2002 as a cumulative effect of change in accounting principle to reflect an adjustment to goodwill as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”);
	•	a charge of approximately $8.0 million recorded in September 2002 (classified in discontinued operations for that year) to write off the balance of remaining goodwill of TeleMatrix, Inc., based on subsequent reviews of value due to declining results of that unit; and
	•	a charge of approximately $196.5 million recorded in January 2002 as a result of our Reorganization to establish the net deferred tax liability of La Quinta and recognize the future impact of temporary differences between book value and tax basis of lodging and healthcare assets and liabilities, including net operating loss (“NOL”) carryforwards of LQ Properties and LQ Corporation.

     The effect of these charges was partially offset by an increase in impairment of property and equipment costs of approximately $30.6 million in 2003 compared to 2002.

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     The following table summarizes statistical lodging data for the past three years:

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     Comparable hotels represent properties that have been open for at least two full years as of the two-year period ending date (“Comparable Hotels”). The following table summarizes Comparable Hotels data for the two-year period ended December 31, 2004 and the two-year period ended December 31, 2003: