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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2004

OR

For the transition period from                      to                     .

Commission file number 1-14045

LASALLE HOTEL PROPERTIES

(Exact name of registrant as specified in its charter)

301/941-1500

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

The aggregate market value of the 27,620,843 common shares of beneficial interest held by non-affiliates of the Registrant was approximately $682.2 million based on the closing price on the New York Stock Exchange for such common shares of beneficial interest on of June 30, 2004.

Number of the Registrant’s common shares of beneficial interest outstanding as of February 15, 2005: 29,888,333.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its 2005 Annual Meeting of Shareholders to be held on or about April 21, 2005 are incorporated by reference in Part III of this report.

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LASALLE HOTEL PROPERTIES

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This Annual Report on Form 10-K, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement, for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to, the risk factors discussed in this Annual Report on Form 10-K. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

The “Company” means LaSalle Hotel Properties, a Maryland real estate investment trust, and one or more of its subsidiaries (including LaSalle Hotel Operating Partnership, L.P. (the “Operating Partnership”) and LaSalle Hotel Lessee, Inc. (“LHL”)), or, as the context may require, LaSalle Hotel Properties only or the Operating Partnership only.

PART I

General

The Company was organized as a Maryland real estate investment trust on January 15, 1998 to buy, own and lease primarily upscale and luxury full-service hotels located in convention, resort and major urban business markets. As of December 31, 2004, the Company owned interests in 19 hotels with approximately 6,300 rooms/suites located in ten states and the District of Columbia. Independent hotel operators manage the hotels. The Company is a self-managed and self-administered real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Code”). A REIT is a legal entity that holds real estate interests, and that may reduce its federal taxable income to the extent it distributes taxable dividends to its shareholders.

Substantially all of the Company’s assets are held by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P. The Company is the sole general partner of the operating partnership with an approximate 98.7% ownership interest at December 31, 2004. The remaining 1.3% is held by limited partners who hold 383,090 limited partnership units. Limited partnership units are redeemable for cash or, at the option of the Company, for a like number of common shares of beneficial interest, par value $0.01 per share, of the Company. The hotels are leased under participating leases that provide for rental payments equal to the greater of (i) base rent or (ii) participating rent based on fixed percentages of gross hotel revenues.

The Company’s principal offices are located at 3 Bethesda Metro Center, Suite 1200, Bethesda, MD 20814. The Company’s website is www.lasallehotels.com. The Company makes available on its website free of charge its filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports.

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Strategies and Objectives

The Company’s primary objectives are to provide a stable stream of income to its shareholders through increases in distributable cash flow and to increase long-term total returns to shareholders through appreciation in the value of its common shares of beneficial interest. To achieve these objectives, the Company seeks to:

The Company seeks to achieve revenue growth principally through:

The Company intends to acquire additional hotels in targeted markets, consistent with the growth strategies outlined above and which may:

The Company seeks to grow through strategic relationships with premier, internationally recognized hotel operating companies including: Westin Hotels and Resorts, Sheraton Hotels and Resorts Worldwide, Inc., Crestline Hotels & Resorts, Inc., Outrigger Lodging Services, Noble House Hotels and Resorts, Hyatt Hotels Corporation, Kimpton Hotel & Restaurant Group, L.L.C., Benchmark Hospitality, White Lodging Services Corporation, Davidson Hotel Company and Sandcastle Resorts & Hotels. The Company believes that having multiple independent operators creates a network that will generate acquisition opportunities. In addition, the Company believes its acquisition capabilities are enhanced by its considerable experience, resources and relationships in the hotel industry specifically and the real estate industry generally.

Hotel Acquisitions

The Company acquired ten upscale and luxury full-service hotels in connection with its initial public offering. The Company has since sold five of these hotels. In addition to continuing to hold five hotels acquired in connection with its IPO, the Company has acquired the following hotel interests:

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Additionally, subsequent to December 31,2004, the Company acquired the following hotel interests:

Recent Developments

On January 6, 2005, the Company acquired a 100% interest in the Hilton San Diego Gaslamp Quarter, a 282-room upscale full-service hotel located in the Gaslamp historic district in downtown San Diego, California, for $85.0 million. The source of the funding for the acquisition was the Company’s senior unsecured bank facility. The property is leased to LHL, and Davidson Hotel Company was retained to manage the property.

On January 10, 2005, the Company acquired a 100% interest in the Grafton on Sunset, a 108-room, upscale full-service hotel located in West Hollywood, California, for $25.5 million. The source of the funding for the acquisition was the Company’s senior unsecured bank facility. The property is leased to LHL, and Outrigger Lodging Services was retained to manage the property.

Hotel Dipositions

In September 2004, the Company sold the Omaha Marriott for a net sale proceeds of approximately $28.6 million because the hotel was no longer considered consistent with the Company’s long-term portfolio strategy. The Company has since redeployed these net proceeds in markets that it believes exhibit stronger fundamentals.

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Hotel Renovations

The Company believes that its regular program of capital improvements at the hotels, including replacement and refurbishment of furniture, fixtures and equipment, helps maintain and enhance its competitiveness and maximizes revenue growth under the participating leases. During the year ended December 31, 2004, the Company invested approximately $37.2 million on renovations and additional capital improvements at the hotels. The Company plans to invest approximately $55.0 million on renovations and additional capital improvements at its hotel properties during 2005. As of December 31, 2004, purchase orders and letters of commitment totaling approximately $15.0 million had been issued for renovations at the hotels. The Company has committed to these projects and anticipates making similar arrangements with the existing hotels or any future hotels that it may acquire. Any unexpended amounts will remain the property of the Company upon termination of the participating leases.

Tax Status

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a result, the Company generally is not subject to corporate income tax on that portion of its net income that is currently distributed to shareholders. A REIT is subject to a number of highly technical and complex organizational and operational requirements, including requirements with respect to the nature of its gross income and assets and a requirement that it currently distribute at least 90% of its taxable income. The Company may, however, be subject to certain state and local taxes on its income and property.

Effective January 1, 2001, the Company elected to operate its wholly-owned subsidiary, LaSalle Hotel Lessee, Inc. (“LHL”), as provided for under the REIT Modernization Act as a taxable-REIT subsidiary. Accordingly, LHL is required to pay income taxes at the applicable rates.

Seasonality

The hotels’ operations historically have been seasonal. The hotels maintain higher occupancy rates during the second and third quarters. The Seaview Marriott Resort and Spa and Lansdowne Resort, which generate a portion of their revenues from golf-related business, have revenues that fluctuate according to the season and the weather. These seasonality patterns can be expected to cause fluctuations in the Company’s quarterly lease revenue under the participating leases with third-party lessees and hotel operating revenue from LHL.

Competition

The hotel industry is highly competitive. Each of the hotels is located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular area could have a material adverse effect on occupancy, average daily rate and room revenue per available room of the Company’s current hotels or at hotels acquired in the future. The Company may be competing for investment opportunities with entities that have substantially greater financial resources than the Company. These entities may generally be able to accept more risk than the Company can prudently manage, including risks with respect to the creditworthiness of a hotel operator or the geographic proximity of its investments. Competition may generally reduce the number of suitable investment opportunities offered to the Company and increase the bargaining power of property owners seeking to sell.

Environmental Matters

In connection with the ownership of hotels, the Company is subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in such property. Such laws often impose liability without regard to whether the owner

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or operator knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the owner’s ability to borrow using such property as collateral. Furthermore, a person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports such substance to or from such property, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. The costs of remediation or removal of such substances may be substantial, and the presence of such substances may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership of hotels the Company may be potentially liable for such costs.

The Company believes that its hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material adverse effect on the Company. The Company has not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of its present properties.

Employees

The Company had 23 employees as of February 15, 2005. All persons employed in the day-to-day operations of the hotels are employees of the management companies engaged by the lessees to operate such hotels.

Additional Information

The Company has made available copies of the charters of its board committees, its code of ethics and conduct, its corporate governance guidelines and its whistleblower policy on its website at www.lasallehotels.com. Copies of these documents are available in print to any shareholder who requests them. Requests should be sent to LaSalle Hotel Properties, 3 Bethesda Metro Center, Suite 1200, Bethesda, Maryland, 20814. Attn: Hans S. Weger, Corporate Secretary.

Risk Factors

Additional Factors that May Affect Future Results

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that it may currently deem immaterial also may impair its business operations. If any of the following risks occur, the Company’s business, financial condition, operating results and cash flows could be materially adversely affected.

The Company’s return on its hotels depends upon the ability of the lessees and the hotel operators to operate and manage the hotels

To maintain its status as a REIT, the Company is not permitted to operate any of its hotels. As a result, the Company is unable to directly implement strategic business decisions with respect to the operation and marketing of its hotels, such as decisions with respect to the setting of room rates, repositioning of a hotel, food and beverage prices and certain similar matters. Although it consults with the lessees and hotel operators with respect to strategic business plans, the lessees and hotel operators are under no obligation to implement any of the Company’s recommendations with respect to such matters.

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The Company’s performance and its ability to make distributions on its capital shares are subject to risks associated with the hotel industry

Competition for Guests, Increases in Operating Costs, Dependence on Travel and Economic Conditions Could Adversely Affect the Company’s Cash Flow.    The hotels are subject to all operating risks common to the hotel industry. These risks include:

These factors could adversely affect the ability of the lessees to generate revenues and to make rental payments to the Company.

Unexpected Capital Expenditures Could Adversely Affect the Company’s Cash Flow.    Hotels require ongoing renovations and other capital improvements, including periodic replacement or refurbishment of furniture, fixtures and equipment. Under the terms of its leases, the Company is obligated to pay the cost of certain capital expenditures at the hotels and to pay for periodic replacement or refurbishment of furniture, fixtures and equipment. If capital expenditures exceed expectations, there can be no assurance that sufficient sources of financing will be available to fund such expenditures. In addition, the Company may acquire hotels in the future that require significant renovation. Renovation of hotels involves numerous risks, including the possibility of environmental problems, construction cost overruns and delays, the impact on current demand, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from other hotels.

The Company’s obligation to comply with financial covenants in its senior unsecured bank facility and mortgages on some of its hotel properties could restrict its range of operating activities

The Company has a senior unsecured bank facility with a syndicate of banks, which provides for a maximum borrowing of up to $300.0 million. The senior unsecured bank facility matures on December 31, 2006 and has a one-year extension option. Funding for the new unsecured bank facility occurred on August 30, 2004, at which time it replaced the Company’s prior senior unsecured bank facility. The senior unsecured bank facility contains certain financial covenants relating to debt service coverage, minimum tangible net worth and total funded indebtedness.

The Company’s bank facility contains financial covenants that could restrict its ability to incur additional indebtedness or make distributions on its common shares. The senior unsecured bank facility contains certain financial covenants relating to debt service coverage, net worth and total funded indebtedness; it also contains financial covenants that, assuming no continuing defaults, allow the Company to make shareholder distributions which, when combined with the distributions to shareholders in the three immediately preceding fiscal quarters, do not exceed the greater of (i) funds from operations from the preceding four-quarter rolling period or (ii) the greater of (a) the amount of distributions required for the Company to maintain its status as a REIT or (b) the amount required to ensure that the Company will avoid imposition of an excise tax for failure to make certain

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minimum distributions on a calendar-year basis. Availability under the bank facility may be reduced by hotel financing that the Company obtains outside the bank facility. Pursuant to the bank facility, the amount of outside financing is limited to specified levels. If the Company is unable to borrow under the bank facility, it could adversely affect the Company’s financial condition.

The Company’s wholly-owned subsidiary, LHL, has a senior unsecured bank facility with U.S Bank National Association, which provides for a maximum borrowing of up to $25.0 million. The senior unsecured bank facility matures on December 31, 2006. The senior unsecured bank facility contains certain financial covenants relating to debt service coverage, minimum tangible net worth and total funded indebtedness.

The Sheraton Bloomington Hotel Minneapolis South, Westin City Center Dallas, Le Montrose Suite Hotel, San Diego Paradise Point Resort, Indianapolis Marriott Downtown and Hilton Alexandria Old Town are each mortgaged to secure payment of indebtedness aggregating approximately $211.8 million as of December 31, 2004. The Harborside Hyatt Conference Center & Hotel is mortgaged to secure payment of principal and interest on bonds with an aggregate par value of approximately $42.5 million. In addition, the joint venture that owns the Chicago Marriott Downtown in which the Company holds a non-controlling 9.9% ownership interest is mortgaged to secure payment of indebtedness of $140.0 million. The Company’s prorate share of the loan is approximately $13.9 million. If the Company is unable to meet mortgage payments, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company. From time to time, the Company may mortgage additional hotels to secure payment of additional indebtedness.

The Company’s performance is subject to real estate industry conditions and the terms of our leases

Because Real Estate Investments Are Illiquid, the Company May Not Be Able to Sell Hotels When Desired.    Real estate investments generally cannot be sold quickly. The Company may not be able to vary its portfolio promptly in response to economic or other conditions. In addition, provisions of the Code limit a REIT’s ability to sell properties in some situations when it may be economically advantageous to do so.

Liability for Environmental Matters Could Adversely Affect the Company’s Financial Condition.    As an owner of real property, the Company is subject to various federal, state and local laws and regulations relating to the protection of the environment that may require a current or previous owner of real estate to investigate and clean-up hazardous or toxic substances at a property. These laws often impose such liability without regard to whether the owner knew of or caused the presence of the contaminants, and liability is not limited under the enactments and could exceed the value of the property and/or the aggregate assets of the owner. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the clean-up costs of the substances at a disposal or treatment facility, whether or not such facility is owned or operated by the person. Even if more than one person were responsible for the contamination, each person covered by the environmental laws may be held responsible for the entire amount of clean-up costs incurred.

Environmental laws also govern the presence, maintenance and removal of asbestos-containing materials. These laws impose liability for release of asbestos-containing materials into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials. In connection with ownership (direct or indirect) of its hotels, the Company may be considered an owner or operator of properties with asbestos-containing materials. Having arranged for the disposal or treatment of contaminants, the Company may be potentially liable for removal, remediation and other costs, including governmental fines and injuries to persons and property.

The Costs of Compliance with the Americans with Disabilities Act Could Adversely Affect the Company’s Cash Flow.    Under the Americans with Disabilities Act of 1990, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. A determination that the

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Company is not in compliance with the Americans with Disabilities Act of 1990 could result in imposition of fines or an award of damages to private litigants.

Certain Leases and Management Agreements May Constrain the Company from Acting in the Best Interests of Shareholders or Require it to Make Certain Payments.    The Harborside Hyatt Conference Center & Hotel, the San Diego Paradise Point Resort, Indianapolis Marriott Downtown and one of two golf courses, the Pines, at Seaview Marriott Resort and Spa are each subject to a ground lease with a third-party lessor. The ground leases for the Indianapolis Marriott Downtown and the Pines golf course at Seaview Marriott Resort and Spa are each for one dollar per year. In order for the Company to sell any of these hotels or to assign its leasehold interest in any of these ground leases, it must first obtain the consent of the relevant third-party lessor. The Sheraton Bloomington Hotel Minneapolis South is also subject to a ground lease with a third-party lessor; third-party lessor consent is required to assign the leasehold interest unless the assignment is in conjunction with the sale of the hotel. Accordingly, if the Company determines that the sale of any of these hotels or the assignment of its leasehold interest in any of these ground leases is in the best interest of its shareholders, the Company may be prevented from completing such a transaction if it is unable to obtain the required consent from the relevant lessor.

In some instances, the Company may be required to obtain the consent of the hotel operator or franchisor prior to selling the hotel. Typically, such consent is only required in connection with certain proposed sales, such as if the proposed purchaser is engaged in the operation of a competing hotel or does not meet certain minimum financial requirements. Hotels where operator approval of certain sales may be required include the Chicago Marriott Downtown and Harborside Hyatt Conference Center & Hotel.

The Westin City Center Dallas is a unit of a commercial condominium complex and is subject to a right of first refusal in favor of the owner of the remaining condominium units. The Hilton San Diego Gaslamp Quarter is a unit of a commercial condominium complex and is not subject to a right of first refusal by the owner of the remaining condominium units. In addition, the Company is subject to certain rights of first refusal or similar rights with respect to the following hotels: Hotel Viking, LaGuardia Airport Marriott, Seaview Marriott Resort and Spa and Indianapolis Marriott Downtown. Similarly, the operator of the D.C. Collection hotels has a right of first offer and a right of first refusal, excluding the Hotel George, if any of the hotels is sold other than through a public bidding process. Finally, the Company is subject to franchisor’s certain rights of first offer with respect to the Hilton Alexandria Old Town.

If the Company determines to terminate a lease with a third-party lessee (other than in connection with a default by such lessee), it may be required to pay a termination fee calculated based upon the value of the lease.

Increases in interest rates may increase our interest expense

As of December 31, 2004, approximately $56.4 million of aggregate indebtedness (21.0% of total indebtedness) was subject to variable interest rates. The aggregate indebtedness balance includes the Company’s $13.9 million pro rata portion of indebtedness relating to the Company’s joint venture investment in the Chicago Marriott Downtown hotel. An increase in interest rates could increase the Company’s interest expense and reduce its cash flow and its ability to make distributions to shareholders and to service its indebtedness.

Failure to qualify as a REIT would be costly

The Company has operated (and intends to so operate in the future) so as to qualify as a REIT under the Code beginning with its taxable year ended December 31, 1998. Although management believes that the Company is organized and operated in a manner to so qualify, no assurance can be given that the Company will qualify or remain qualified as a REIT.

If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Moreover,

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unless entitled to relief under certain statutory provisions, the Company also will be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. This treatment would cause the Company to incur additional tax liabilities and would significantly impair the Company’s ability to service indebtedness, and reduce the amount of cash available to make new investments or to make distributions on its common shares of beneficial interest and preferred shares.

Property ownership through partnerships and joint ventures could limit the Company’s control of those investments

Partnership or joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that its co-investors might become bankrupt, might at any time have different interests or goals from those of the Company, and may take action contrary to the Company’s instructions, requests, policies or objectives, including its policy with respect to maintaining its qualification as a REIT. Other risks of joint venture investments include an impasse on decisions, such as a sale, because neither the Company’s co-investors nor the Company would have full control over the partnership or joint venture. There is no limitation under the Company’s organizational documents as to the amount of funds that may be invested in partnerships or joint ventures.

Tax consequences upon a sale or refinancing of properties may result in conflicts of interest

Holders of units of limited partnership interest in the operating partnership or co-investors in properties not owned entirely by the Company may suffer different and more adverse tax consequences than the Company upon the sale or refinancing of properties. The Company may have different objectives from these co-investors and unitholders regarding the appropriate pricing and timing of any sale or refinancing of these properties. While the Company, as the sole general partner of the operating partnership, has the exclusive authority as to whether and on what terms to sell or refinance each property owned solely by the operating partnership, some of its trustees who have interests in units of limited partnership may seek to influence the Company not to sell or refinance the properties, even though such a sale might otherwise be financially advantageous to it, or may seek to influence the Company to refinance a property with a higher level of debt.

The Company may not have enough insurance

The Company carries comprehensive liability, fire, flood, earthquake, extended coverage and business interruption policies that insure it against losses with policy specifications and insurance limits that the Company believes are reasonable. There are certain types of losses that management may decide not to insure against since the cost of insuring is not economical. The Company may suffer losses that exceed its insurance coverage. Further, market conditions, changes in building codes and ordinances or other factors such as environmental laws may make it too expensive to repair or replace a property that has been damaged or destroyed, even if covered by insurance.

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Hotel Properties

At December 31, 2004, the Company owned interests in the following 19 hotel properties:

Sheraton Bloomington Hotel Minneapolis South.    Sheraton Bloomington Hotel Minneapolis South is an upscale full-service convention hotel located at the intersection of Interstate 494 and Highway 100, approximately 15 minutes from the Minneapolis/St. Paul International Airport, and five miles from the Mall of America. The hotel is currently leased to LHL and operated by Starwood Hotels & Resorts, Worldwide, Inc.

Westin City Center Dallas.    Westin City Center Dallas is an upscale full-service convention-oriented hotel located in downtown Dallas, approximately 25 minutes from the Dallas/Fort Worth International Airport, in the heart of the city’s arts and financial districts. The hotel is conveniently located near the Dallas Convention Center, four stops away on the Dallas light rail system, with a DART station adjacent to the hotel. The hotel is leased to LHL and operated by Starwood Hotels & Resorts Worldwide, Inc.

Seaview Marriott Resort and Spa.    Seaview Marriott Resort and Spa is a AAA Four-Diamond rated luxury golf resort and conference center located on Reeds Bay, approximately nine miles north of Atlantic City, New Jersey. The hotel is leased to LHL and operated by Marriott International, Inc.

Le Montrose Suite Hotel.    Le Montrose Suite Hotel is a five-story, luxury full-service hotel located in West Hollywood, California, two blocks east of Beverly Hills and one block south of the “Sunset Strip.” The hotel is within walking distance of many of the area’s finest restaurants, retail shops and nightclubs. The hotel attracts short and long-term guests and small groups primarily from the recording, film and design industries. The hotel is leased to and operated by Outrigger Lodging Services.

LaGuardia Airport Marriott.    LaGuardia Airport Marriott is an upscale full-service urban/major business hotel located directly across from New York’s LaGuardia Airport. The hotel is five minutes from Shea Stadium and the USTA National Tennis Center and 20 minutes from Manhattan. The hotel is leased to LHL and operated by Marriott International, Inc.

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San Diego Paradise Point Resort.    San Diego Paradise Point Resort is a luxury resort that lies on 44 acres and has nearly one mile of beachfront. The hotel is located in the heart of Mission Bay on Vacation Island, a 4,600-acre aquatic park in southwest San Diego County. The resort is 15 minutes away from the San Diego International Airport and convenient to many major San Diego tourist attractions including Sea World, Old Town, downtown San Diego, the San Diego Convention Center, Qualcomm Stadium and the San Diego Zoo. The hotel is subject to a 50-year ground lease with the city of San Diego, which expires in June 2049. The hotel is leased to and operated by WestGroup San Diego Associates, Ltd., an affiliate of Noble House Hotels and Resorts.

Harborside Hyatt Conference Center & Hotel.    Harborside Hyatt Conference Center & Hotel is a full-service luxury conference and airport hotel located adjacent to Boston’s Logan International Airport along the Boston waterfront. The property features 19,000 square feet of meeting space and is directly across Boston Harbor from Boston’s central business district. The hotel is located next to the Ted Williams Tunnel, providing convenient access to downtown Boston and the new Boston Convention Center. The property is subject to a long-term ground lease with the Massachusetts Port Authority, Logan International Airport’s owner and operating authority, which expires September 14, 2030. The hotel is leased to LHL and operated by Hyatt Corporation pursuant to a long-term incentive-based management agreement.

Hotel Viking.    Hotel Viking is a full-service upscale resort located on Bellevue Avenue in Newport, Rhode Island. The hotel offers 29,000 square feet of meeting space, a restaurant, lounge, a rooftop bar and a full-service spa. The property also includes the Trinity Parish House and the fully restored Kay Chapel, both adjacent to the hotel. The hotel is leased to LHL and is operated by Noble House Hotels and Resorts.

Chicago Marriott Downtown.    Chicago Marriott Downtown is a full-service, upscale convention hotel located at the intersection of North Michigan Avenue and Ohio Street on downtown Chicago’s world-famous “Magnificent Mile.” The property has over 60,000 square feet of meeting space, five food and beverage outlets, a health club and sports center, a business center and a gift shop. The Chicago Marriott Downtown has superb visibility and allows guests convenient access to a variety of attractions. A world-renowned shopping destination, the “Magnificent Mile” is home to such retailers as Neiman Marcus, Saks Fifth Avenue, Nordstrom, Marshall Fields and Niketown. The Company, through the Operating Partnership, owns a non-controlling 9.9% equity interest in the Chicago Marriott Downtown. The hotel is leased to Chicago 540 Lessee, Inc., in which the Company also owns a non-controlling 9.9% equity interest. The hotel is operated by Marriott International, Inc.

D.C. Collection.    The D.C. Collection comprises five full-service hotels located in Washington, D.C., with a total of 635 guestrooms. Each hotel features large guestrooms or suites. The Company renovated and repositioned four of the hotels as full-service, upscale, unique, independent hotels: the Topaz Hotel, the Hotel Rouge, the Hotel Madera and the Hotel Helix. The Company leases each of these hotels to wholly-owned subsidiaries of LHL. The San Francisco, California-based Kimpton Hotel & Restaurant Group, L.L.C., operates all five of these hotels.

Topaz Hotel.    The Topaz Hotel is a full-service hotel with an exotic “East-meets-West” theme. The hotel is conveniently located on Embassy Row in downtown Washington, D.C. It is within walking distance of the central business district, minutes from the monuments and museums, and less than two blocks from Dupont Circle and the Metro. The hotel features a bar/restaurant.

Hotel Rouge.    Hotel Rouge is a full-service hotel with a “playful, interactive, glamorous” theme. Located on Scott Circle in Washington, D.C., the hotel is five blocks from the White House and just minutes from the business district. The hotel features a bar/restaurant.

Hotel Madera.    Hotel Madera is a full-service hotel with a “cosmopolitan comfort” theme. The Hotel Madera is located on the westside of downtown Washington, D.C., and near many of the area’s attractions. The hotel features a restaurant, Firefly, a modern American bistro.

Hotel Helix.    Hotel Helix is a full-service hotel with a “pop-art” theme. The Hotel Helix is located just a few blocks from the new 2.3 million square-foot Washington Convention Center. The hotel is located four blocks from Dupont Circle in close proximity to most of the major downtown tourist attractions. The hotel features a bar/restaurant.

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Hotel George.    The Hotel George, a luxury urban hotel, is situated within three blocks of the U.S. Capitol Building and is centrally located to numerous leisure and corporate demand generators such as Union Station, The White House, the Mall and the Smithsonian. The hotel is minutes away from the new 2.3 million square-foot Washington Convention Center and the revitalized Capitol Hill and Chinatown neighborhoods. The hotel features the award-winning restaurant Bistro Bis.

Holiday Inn on the Hill.    Holiday Inn on the Hill is an upscale full-service hotel located on Capitol Hill in Washington, D.C. The property is the closest hotel to the U.S. Capitol Building. The hotel offers a first class amenity package, including 10,000 square feet of newly renovated meeting space, a full-service restaurant and bar and a roof-top swimming pool. The hotel is minutes away from the 2.3 million square-foot Washington Convention Center. The hotel is leased to a wholly-owned subsidiary of LHL, and operated by Crestline Hotels & Resorts, Inc.

Lansdowne Resort.    Lansdowne Resort is a AAA Four-Diamond luxury full-service golf resort and conference center located in Lansdowne, Virginia. The 296-room resort is located on 556 acres and features an 18-hole championship golf course designed by award-winning architect Robert Trent Jones, Jr. A second 18-hole championship golf course, designed by Greg Norman, nine-hole executive course, resort pool and a clubhouse are currently under development and are scheduled for completion by mid-2005. The resort is leased to a wholly-owned subsidiary of LHL and operated by Benchmark Hospitality.

Indianapolis Marriott Downtown.    Indianapolis Marriott Downtown is a AAA Four-Diamond rated, full-service convention hotel centrally located in the heart of Indianapolis’s business and leisure district. The property is physically connected, via a temperature-controlled skywalk, to the 1.9 million square foot Indiana Convention Center/RCA Dome. The property has over 38,000 square feet of meeting space, including a 21,000 square foot ballroom, two restaurants, an upscale fitness center and an indoor swimming pool. The hotel is subject to a 100–year ground lease with the city of Indianapolis, which expires on June 23, 2099. The hotel is leased to LHL, and is operated by White Lodging Services Corporation.

Hilton Alexandria Old Town.    Hilton Alexandria Old Town is an upscale full-service hotel located in the heart of historic downtown Alexandria. The property was built in 2000 and includes approximately 8,000 square feet of meeting space, including a 3,800 square-foot ballroom, an upscale restaurant, fitness center, an indoor swimming pool and an on-site parking facility. The property is situated in the center of the City of Alexandria, on Old Town’s main street and directly adjacent to the King Street Metro Station. The hotel is leased to LHL, and is operated by Sandcastle Resorts & Hotels.

Chaminade Resort and Conference Center.    The Chaminade is a AAA Four-Diamond resort and executive conference center located on a 288-acre bluff overlooking the northern end of Monterey Bay, approximately 30 miles south of San Jose and 75 miles south of San Francisco. The property opened in 1985 and features twelve meeting rooms encompassing approximately 12,000 square feet of meeting space, state-of-the-art audio-visual and teleconferencing facilities, three upscale restaurants, a newly renovated spa, a fitness center and other resort amenities. The hotel is leased to LHL, and is operated by Benchmark Hospitality.

Participating Leases and Management Agreements

The Company is subject to participating leases with third-party lessees and, through LHL, management agreements. For hotels leased to third-party lessees, the Company earns the greater of (i) base rent or (ii) participating rent based on fixed percentages of gross hotel revenues pursuant to the respective participating lease. For hotels leased to third-party lessees, the Company is responsible for the payment of real estate taxes, ground rent, if any, certain insurance, maintaining a reserve for future capital expenditures and payment of agreed upon capital expenditures. The terms of these third-party participating leases have expirations between 2008 and 2009. For hotels leased by LHL, the Company, through LHL, earns all hotel revenues and is responsible for all hotel expenses, including base management fees and incentive management fees, if any, pursuant to the terms of the respective management agreement. The terms of the leases with LHL have expirations between 2008 and 2011.

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The nature of the operations of the hotels exposes them to the risk of claims and litigation in the normal course of their business. Although the outcome of these matters cannot be determined, management does not expect the ultimate resolution of these matters to have a material adverse effect on the financial position, operations or liquidity of the hotels.

Litigation

The Company has engaged Starwood Hotels & Resorts Worldwide, Inc. to manage and operate its Dallas hotel under the Westin brand affiliation. Meridien Hotels, Inc. (“Meridien”) affiliates had been operating the Dallas property as a wrongful holdover tenant, until the Westin brand conversion occurred on July 14, 2003 under court order.

On December 20, 2002, affiliates of Meridien abandoned the Company’s New Orleans hotel. The Company entered into a lease with a wholly-owned subsidiary of LHL and an interim management agreement with Interstate Hotels & Resorts, Inc., and re-named the hotel the New Orleans Grande Hotel. The New Orleans property thereafter was sold on April 21, 2003 for $92.5 million.

In connection with the termination of the Meridien affiliates at these hotels, the Company is currently in litigation with Meridien and related affiliates. The Company believes its sole potential obligation in connection with the termination of the leases is to pay fair market value of the leases, if any. With respect to the Dallas hotel, the Company has obtained a judgment from the court that Meridien defaulted and that Meridien is not entitled to the payment of fair market value. With respect to the New Orleans hotel, the issue of default by the lessee, among other claims, is currently in trial. Arbitration of the fair market value of the New Orleans lease commenced in October 2002. On December 19, 2002, the arbitration panel determined that Meridien was entitled to an award of approximately $5.7 million in connection with the New Orleans property, subject to adjustment (reduction) by the courts to account for Meridien’s holdover. In order to dispute the arbitration decision, the Company was required to post a $7.8 million surety bond, which was secured by $5.9 million of restricted cash. The Company successfully challenged the award on appeal, and the dispute has been remanded to the trial court. Meridien’s request for rehearing was denied on March 31, 2004, and Meridien did not petition to the Louisiana Supreme Court. In June 2004, the $7.8 million surety bond was released and the $5.9 million restricted cash securing it was returned to the Company.

In 2002 the Company recognized a net $2.5 million contingent lease termination expense and reversed previously deferred assets and liabilities related to the termination of both the New Orleans property and Dallas property leases and recorded a corresponding contingent liability included in accounts payable and accrued expenses in the accompanying consolidated financial statements. The Company believes, however, it is owed holdover rent per the lease terms due to Meridien’s failure to vacate the properties as required under the leases. The contingent lease termination expense was therefore net of the holdover rent the Company believes it is entitled to for both properties. In the first, second and third quarters of 2003, the Company adjusted this liability by additional holdover rent of $395, $380 and $52, respectively, that it believes it is entitled to for the Dallas property. These amounts were recorded as other income in the accompanying consolidated financial statements. The contingent lease termination expense recognized cumulatively since 2002 is comprised of (dollars in thousands):

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In September 2004, after evaluating the ongoing Meridien litigation, the Company accrued additional net legal fees of $850 due to litigation timeline changes in order to conclude this matter. As a result, the net contingent lease termination liability has a balance of approximately $2.0 million as of December 31, 2004, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. Based on the claims the Company has against Meridien, the Company is and will continue to challenge Meridien’s claim that it is entitled to the payment of fair market value, and will continue to seek reimbursement of legal fees and damages. These amounts may exceed or otherwise may be used to offset any amounts potentially owed to Meridien, and therefore ultimately may offset or otherwise reduce any contingent lease termination expense. Additionally, the Company cannot provide any assurances that the holdover rents will be collectible or that the amounts due will not be greater than the recorded contingent lease termination expense.

The Company maintained a lien on Meridien’s security deposit on both disputed properties with an aggregate value of approximately $3.3 million, in accordance with the lease agreements. The security deposits were liquidated in May 2003 with the proceeds used to partially satisfy Meridien’s outstanding obligations, including certain working capital notes and outstanding base rent.

Meridien also has sued the Company and one of the Company’s officers alleging that certain actions taken in anticipation of re-branding the Dallas and New Orleans hotels under the Westin brand affiliation constituted unfair trade practices, false advertising, trademark infringement, trademark dilution and tortious interference. The Company intends to vigorously challenge Meridien’s claims if and when this matter gets set for trial.

The Company does not believe that the amount of any fees or damages it may be required to pay on any of the litigation related to Meridien will have a material adverse effect on the Company’s financial condition or results of operations, taken as a whole. The Company’s management has discussed this contingency and the related accounting treatment with the audit committee of its Board of Trustees.

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

There were no matters submitted to a vote of the Company’s shareholders during the fourth quarter of the year covered by this Annual Report on Form 10-K.

Part II

Market Information

The common shares of the Company began trading on the New York Stock Exchange on April 24, 1998 under the symbol “LHO.” The following table sets forth for the periods indicated the high and low sale prices per common share and the cash distributions declared per share:

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The closing price for the Company’s common shares, as reported by the New York Stock Exchange on December 31, 2004, was $31.83 per share.

Shareholder Information

As of February 15, 2005, there were 143 record holders of the Company’s common shares of beneficial interest, including shares held in “street name” by nominees who are record holders, and approximately 7,000 beneficial holders.

In order to comply with certain requirements related to qualification of the Company as a REIT, the Company’s Amended and Restated Declaration of Trust limits the number of common shares of beneficial interest and preferred shares that may be owned by any single person or affiliated group to 9.8% of the outstanding common shares of beneficial interest and preferred shares, except for T. Rowe Price Associates, Inc., which was granted a waiver and may own up to 13.0% of the Company’s outstanding common shares of beneficial interest and preferred shares.

Distribution Information

In 2004, the Company paid $0.90 per common share in distributions, of which 89.2% represented ordinary income and 10.8% represented unrecaptured Sec. 1250 gain for tax purposes. These distributions were paid monthly to the Company’s common shareholders and unitholders at a level of $0.07 and $0.08 per common share and limited partnership unit for the months of January 2004 through June 2004 and July 2004 through December 2004, respectively.

The declaration of distributions by the Company is in the sole discretion of the Company’s Board of Trustees, and depends on the actual cash flow of the Company, its financial condition, capital expenditure requirements for the Company’s hotels, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Trustees deems relevant.

Operating Partnership Units

The operating partnership issued 3,181,723 units of limited partnership interest on April 29, 1998 (inception), in conjunction with the initial public offering. The following is a summary of unit activity since inception:

Holders of units of limited partnership interest receive distributions per unit in the same manner as distributions on a per common share basis to the common shareholders of beneficial interest.

The following tables set forth selected historical operating and financial data for the Company. The selected historical operating and financial data for the Company for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 have been derived from the historical financial statements of the Company. The following selected financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all of the financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

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LASALLE HOTEL PROPERTIES

Selected Historical Operating and Financial Data

(Unaudited, dollars in thousands, except share data)

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The White Paper on FFO approved by NAREIT in April 2002 defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from debt restructuring, sales of properties and items classified by GAAP as extraordinary, plus real estate-related depreciation and amortization (excluding amortization of deferred finance costs) and after comparable adjustments for the Company’s portion of these items related to unconsolidated entities and joint ventures. The Company computes FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently from the Company.

FFO does not represent cash generated from operating activities determined by GAAP and should not be considered as an alternative to net income, cash flow from operations or any other operating performance measure prescribed by GAAP. FFO is not a measure of the Company’s liquidity, nor is it indicative of funds

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available to fund the Company’s cash needs, including its ability to make cash distributions. FFO does not reflect cash expenditures for long-term assets and other items that have been and will be incurred. FFO may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or evaluation of the Company’s operating performance.

Forward-Looking Statements

This report, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to, the risk factors discussed in this Annual Report on Form 10-K. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview

In 2004, the overall economy and the travel industry, including lodging, gained momentum from the recovery that commenced in the second half of 2003. We believe the lodging industry is now in the beginning of a new, multi-year up-cycle, assuming a normal economic growth period. With a strong balance sheet and high quality hotel portfolio, the Company was able to take advantage of this environment, significantly increasing room revenue per available room (“RevPAR”), Funds from Operations (“FFO”), and earnings before interest, taxes, depreciation and amortization (“EBITDA”) at the hotel level. The Company’s revenues come primarily from hotel operating revenues from its hotels. Hotel operating revenues include room revenue, food and beverage revenue and other ancillary revenue such as golf revenue at our two golf resorts and telephone and parking revenue.

For 2004, we had net income of $10.7 million, or $0.39 per diluted share. FFO was $48.4 million, or $1.74 per diluted share/unit and EBITDA was $76.3 million. RevPAR was $103.49. We consider RevPAR and EBITDA to be key measures of the individual hotels’ performance. RevPAR for the total portfolio increased 9.1% for 2004. The RevPAR increase is attributable to an Average Daily Rate (“ADR”) increase of 4.0% to $152.31, while occupancy improved by 4.9% to 67.9% percent. EBITDA at the corporate level declined 12.5% due to the $36.7 million net gain on disposal of assets recognized in 2003. At the hotel level, EBITDA increased $7.4 million due to higher ADR and occupancy.

The Company continuously uses these measures to evaluate each hotel’s contribution toward reaching the Company’s goal of maintaining a reliable stream of income and moderate growth to shareholders. The Company invests in capital improvements throughout the portfolio to continue to positively impact the competitiveness of its hotels and positively impact their financial performance. The Company actively seeks to acquire new hotel properties that meet its investment criteria. However, due to a high level of competitive capital resources the Company continues to face significant competition for acquisitions that meet its investment criteria.

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Critical Accounting Policies

The consolidated financial statements include the accounts of the Company, the Operating Partnership, LHL and its consolidated subsidiaries and partnerships. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, management has utilized the information available including its past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. Included in the accompanying consolidated financial statements is an estimated contingent lease termination expense of $0.9 million and an immaterial amount for the years ended December 31, 2004 and 2003, respectively, related to the Company’s litigation with Meridien Hotels, Inc. (see Item 3. Legal Proceedings). Additionally, included in the accompanying consolidated financial statements is an estimated liability of $2.0 million related to the Company’s litigation with Meridien Hotels, Inc. (see Item 3. Legal Proceedings), an estimated allowance for doubtful accounts of $0.3 million and an estimated deferred tax asset of $14.5 million as of December 31, 2004. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.

It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from those estimates. In addition, other companies may determine these estimates differently, which may impact comparability of the Company’s results of operations to those of companies in similar businesses.

Revenue Recognition

For properties not leased by LHL, the Company recognizes lease revenue on an accrual basis pursuant to the terms of the respective participating leases. Base rent and participating rent are recognized based on quarterly thresholds, pursuant to the lease agreements. For properties leased by LHL, the Company recognizes hotel operating revenue on an accrual basis consistent with the hotel operations.

For the Lansdowne Resort, the Company defers golf membership fees and recognizes revenue over the average expected life of an active membership (currently six years) on a straight-line basis. Golf membership, health club and executive club annual dues are recognized as earned throughout the membership year.

Investment in Hotel Properties

Upon acquisition, the Company allocates the purchase price of assets to asset classes based on the fair value of the acquired real estate, furniture, fixtures and equipment and intangible assets. The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over an estimated useful life of 30 years for buildings and improvements and three to five years for furniture, fixtures and equipment. Renovations and/or replacements that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives.

The Company is required to make subjective assessments as to the useful lives of its properties for purposes of determining the amount of depreciation expense to reflect each year with respect to those properties. These assessments have a direct impact on the Company’s net income. Should the Company lengthen the expected useful life of particular assets, it would be depreciated over more years, and result in less depreciation expense and higher annual net income.

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The Company periodically reviews the carrying value of each hotel to determine if circumstances exist indicating impairment to the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel to reflect the hotel at fair value. These assessments have a direct impact on the Company’s net income, because making an impairment adjustment results in an immediate negative adjustment to net income. The Company does not believe that there are any facts or circumstances indicating impairment in its hotels.

In accordance with the provisions of Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” a hotel is considered held for sale when a contract for sale is entered into or when management has committed to a plan to sell an asset, the asset is actively marketed and sale is expected to occur within one year.

Stock-Based Compensation

The Company has applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the 1998 stock incentive and option plan. Accordingly, no compensation costs have been recognized for stock options granted to the Company’s employees. The Company has not issued any options since 2002. Under Accounting Principles Board Opinion No. 25, no compensation expense is recognized upon the granting of stock options when the exercise price of such options equals the market price of the underlying stock on the date of grant. The Company recognizes compensation cost pursuant to FAS 123 for restricted shares issued based upon the fair market value of the common stock at the grant date. Compensation cost is recognized on a straight-line basis over the vesting period. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 148 in the notes to its consolidated financial statements.

Comparison of the Year Ended December 31, 2004 to the Year Ended December 31, 2003

Hotel operating revenues

Hotel operating revenues from the hotels leased to LHL (16 hotels as of December 31, 2004), including room revenue, food and beverage revenue and other operating department revenues (which includes golf, telephone, parking and other ancillary revenues) increased approximately $95.6 million, from $166.2 million in 2003 to $261.8 million in 2004. This increase includes amounts that are not comparable year-over-year as follows:

The remaining increase of $17.8 million, or 10.7%, is attributable to increases in RevPAR and associated Food & Beverage and Other Revenue for our other properties leased to LHL. While ADR increased, the majority of the increase in RevPAR is attributable to higher occupancies from stronger business travel.

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Overall, travel levels improved in 2004, when the industry benefited from continued relatively strong leisure demand and significant increases in demand from business travelers. On a year-over-year basis, overall industry demand for hotel rooms significantly outpaced supply growth throughout the year, with occupancies up an average of 4.9% during 2004. With demand improving during 2004, we began to find it easier to achieve increased ADRs. Nevertheless, both the leisure traveler and the business traveler, group and transient, continue to be price sensitive, utilizing an aggressive negotiation posture and internet sites to shop for the lowest rates. Additionally, the business is more competitive now because transient guests tend to book their rooms closer to their time of stay than in the past, and transient rooms get priced lower than they otherwise would have been. Despite these rate challenges, many of our hotels experienced ADR increases during 2004, especially at our urban and convention hotels.

Participating lease revenue

Participating lease revenue from hotels leased to third-party lessees decreased $2.7 million from $21.3 million in 2003 to $18.6 million in 2004. Participating lease revenue includes (i) base rent and (ii) participating rent based on fixed percentages of gross hotel revenues pursuant to the respective participating lease. This decrease includes amounts that are not comparable year-over-year as follows:

The remaining decrease of $1.1 million, or 5.2%, is primarily a result of a decrease in RevPAR at San Diego Paradise Point Resort, which is leased to a third-party lessee. The lower RevPAR resulted from decreased occupancy and ADR from weak group and leisure demand and the difficult comparison to 2003’s first quarter that included the significant benefits to the San Diego Paradise Point Resort as a result of the Super Bowl held in San Diego.

Hotel operating expenses

Hotel operating expenses increased approximately $63.6 million from $123.1 million in 2003 to $186.7 million in 2004. This increase includes amounts that are not comparable year-over-year as follows:

The remaining increase of $10.8 million, or 8.8%, is a result of higher occupancies at the hotels as well as above inflation increases in payroll and related employee costs and benefits, sales and marketing, insurance and energy costs.

Depreciation and other amortization

Depreciation and other amortization expense increased by approximately $7.2 million from $31.7 million in 2003 to $38.9 million in 2004. This increase includes amounts that are not comparable year-over-year as follows:

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The remaining decrease of $1.3 million is due to certain furniture, fixture and equipment assets that were fully depreciated during 2003 and 2004.

Real estate taxes, personal property taxes, insurance and ground rent

Real estate taxes, personal property taxes, insurance and ground rent expenses increased approximately $2.5 million from $12.9 million in 2003 to $15.4 million in 2004. This increase includes amounts that are not comparable year-over-year as follows:

The remaining real estate taxes, personal property taxes, insurance and ground rent increased by a net approximate $0.3 million in 2004 for the remaining hotels.

General and administrative expenses

General and administrative expense increased approximately $1.1 million from $7.3 million in 2003 to $8.4 million in 2004, primarily as a result of increases in accounting fees, compliance costs and payroll-related expenses to executives and employees.

Interest expense

Interest expense increased by approximately $0.4 million from $12.7 million in 2003 to $13.1 million in 2004 due to an increase in the Company’s weighted average debt outstanding, offset by a decrease in the weighted average interest rate and an increase in capitalized interest. The Company’s weighted average debt outstanding related to continuing operations increased from $234.4 million in 2003 to $281.9 million in 2004, which includes increases from: (i) secured loan financing on the San Diego Paradise Point Resort in December 2003 of $65.0 million, the Indianapolis Marriott Downtown in February 2004 of $57.0 million, and the Hilton Alexandria Old Town in August 2004 of $34.4 million, (ii) additional borrowings to purchase Chaminade Resort and Conference Center in November 2004, (iii) additional borrowings under the Company’s bank facility to finance other capital improvements during 2004, and (iv) additional borrowings to purchase the Hotel George in September 2003, offset by: (v) a $29.1 million paydown in June 2003 on the Company’s bank facility with proceeds from the June 2003 common share offering, (vi) a $24.2 million net paydown in September 2003 on the Company’s bank facility with proceeds from the September 2003 Series B Preferred Share offering, (vii) a $50.0 million net paydown on the Company’s bank facility with proceeds from the November 2003 common stock offering, (viii) a $61.5 million net paydown on the Company’s bank facility with proceeds from the May 2004 common stock offering, (ix) pay-off of the mortgage secured by the Lansdowne Resort in February 2004, (x) an $8.0 million and $18.8 million paydown on the LHL Credit facility and the company’s bank facility, respectively, with proceeds from the sale of Omaha Marriott on September 15, 2004, (xi) a $54.9 million net

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paydown on the Company’s bank facility with proceeds from the November 2004 common stock offering and (xii) additional paydowns on the Company’s bank facility with operating cash flows. The Company’s weighted average interest rate related to continuing operations decreased from 5.3% in 2003 to 4.6% in 2004. Capitalized interest increased by approximately $0.5 million from $0.3 million in 2003 to $0.8 million in 2004, primarily due to 2004 capital expenditures related to the Lansdowne Resort development project.

Income taxes

Income tax benefit decreased approximately $2.1 million from $5.6 million in 2003 to $3.5 million in 2004. For 2004, the REIT incurred state and local income tax expense of approximately $0.4 million. LHL’s net loss before income tax benefit decreased by approximately $5.2 million from $14.9 million in 2003 to $9.7 million in 2004. Accordingly, for 2004, LHL recorded a federal income tax benefit of approximately $2.9 million (using an estimated tax rate of 30.8%) and a state and local tax benefit of approximately $1.0 million (using an estimated tax rate of 10.7%). The portion of LHL’s income tax benefit relating to the Omaha property, the New Orleans property and the Key West property has been reclassified to discontinued operations. The following table summarizes the income tax (benefit) expense (dollars in thousands):

As of December 31, 2004, the Company had a deferred tax asset of $14,500 primarily due to past and current year’s tax net operating losses. These loss carryforwards will expire in 2021 thru 2024 if not utilized by then. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.

Minority interest

Minority interest in the Operating Partnership represents the limited partners’ proportionate share of the equity in the Operating Partnership. Income is allocated to minority interest based on the weighted average percentage ownership throughout the year. At December 31, 2004, the aggregate weighted average partnership interest held by the limited partners in the Operating Partnership was approximately 1.52%. The following table summarizes the change in minority interest (dollars in thousands):

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Discontinued operations

Net income from discontinued operations is a result of the sale of the Omaha property, the Holiday Inn Beachside Resort property and the New Orleans property in September 2004, July 2003 and April 2003, respectively. Net income from discontinued operations decreased by approximately $32.6 million from $37.0 million in 2003 to $4.4 million in 2004. The following table summarizes net income from discontinued operations from 2004 and 2003 (dollars in thousands):

Distributions to preferred shareholders

Distributions to preferred shareholders increased $1.7 million from $10.8 million in 2003 to $12.5 million in 2004. The Series B Preferred Shares were issued on September 30, 2003. Distributions were paid for the Series B Preferred Shares for the entire first, second and third quarters of 2004, but there were no Series B Preferred Shares distributions in the first, second and third quarters of 2003. Distributions on the Series A Preferred Shares were paid for the full year in 2004 and 2003.

Comparison of the Year Ended December 31, 2003 to the Year Ended December 31, 2002

Hotel operating revenues

Hotel operating revenues from the hotels leased to LHL (13 hotels as of December 31, 2003), including room revenue, food and beverage revenue and other operating department revenues (which includes golf, telephone, parking and other ancillary revenues) increased approximately $31.1 million, from $135.1 million in 2002 to $166.2 million in 2003. This increase includes amounts that are not comparable year-over-year as follows:

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The remaining change is a decrease of $5.0 million, or 3.7%, and is attributable to a 2.8% decrease in RevPAR for our properties leased to LHL. While occupancies were up slightly, the decrease in RevPAR is primarily attributable to lower average daily room rates from weakness in primarily corporate transient demand.

Overall, travel levels improved in the second and third quarters, when the industry benefited from relatively strong leisure demand. Compared to leisure travel, business travel continued to be weak. On a year-over-year basis, overall industry demand for hotel rooms significantly outpaced supply growth throughout the year, with occupancies up an average of 2.6% in 2003. The current marketplace is still unbalanced, however, with supply high and occupancies relatively low. While demand improved during 2003, reflecting the early stage of an industry recovery, increasing and/or maintaining room rates remains a challenge. Both the leisure traveler and the business traveler, group and transient, continue to be price sensitive, utilizing an aggressive negotiation posture and internet sites to shop for the lowest rates. Additionally, the business is more competitive now because transient guests tend to book their rooms closer to their time of stay than in the past, and transient rooms get priced lower than they otherwise would have been. Many of the Company’s hotels experienced ADR declines during 2003, especially at the convention-oriented and urban-oriented hotels. Nevertheless, the Company is seeing meaningful improvements industry-wide in the way the internet is utilized. These changes can be expected to improve rates obtained through the use of third-party and hotel or brand-specific internet sites, as well as lower distribution costs.

Participating lease revenue

Participating lease revenue from hotels leased to third-party lessees (two hotels) decreased $0.6 million from $21.9 million in 2002 to $21.3 million in 2003. Participating lease revenue includes (i) base rent and (ii) participating rent based on fixed percentages of hotel revenues pursuant to the respective participating lease. This decrease includes amounts that are not comparable year-over-year as follows:

The remaining change is an increase of $1.1 million, or 5.0%, and is a result of an increase in RevPAR at the hotels leased to third-party lessees. The higher RevPAR resulted primarily from increased occupancy from strong leisure demand.

Hotel operating expenses

Hotel operating expenses increased approximately $25.9 million from $97.2 million in 2002 to $123.1 million in 2003. This increase includes amounts that are not comparable year-over-year as follows:

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The remaining change is a decrease of $0.2 million, or 0.2%, a result of cost savings initiatives at the hotels.

Maintaining hotel margins continued to be a challenge during 2003. The Company continued to see increases in payroll and related employee costs and benefits, insurance, energy and property taxes.

Depreciation and other amortization

Depreciation and other amortization expense increased by approximately $3.4 million from $28.3 million in 2002 to $31.7 million in 2003. This increase includes amounts that are not comparable year-over-year as follows:

The remaining change is a decrease of $0.5 million because certain assets were fully depreciated during 2003.

Real estate taxes, personal property taxes, insurance and ground rent

Real estate taxes, personal property taxes, insurance and ground rent expenses increased approximately $1.8 million from $11.1 million in 2002 to $12.9 million in 2003. This increase includes amounts that are not comparable year-over-year as follows:

The remaining increase of $1.2 million, or 10.8%, is a result of increased real estate tax rates and tax assessments and higher insurance premiums overall for the hotels and higher ground rent at the San Diego and Boston properties because of higher revenues and additional parking charges, respectively.

Property taxes were up 12.9% in 2003. With state and local budgets showing deficits, many state and local governments have increased real estate taxes. These rate increases have almost completely offset the success the Company has had getting reductions in property assessments, many of them through successful appeals. Property and casualty insurance, combined with general liability, were up 30.1% for 2003; although price increases have recently moderated significantly from much larger increases over the last two years.

General and administrative expenses

General and administrative expense increased approximately $0.9 million from $6.4 million in 2002 to $7.3 million in 2003, primarily as a result of increases in pursuit costs, trustee’s fees, legal and audit fees, technology expenses and payroll related expenses to executives and employees.

Interest expense

Interest expense increased by approximately $2.2 million from $10.5 million in 2002 to $12.7 million in 2003, due to an increase in the Company’s weighted average interest rate, an increase in the weighted average debt outstanding and a decrease in capitalized interest. The Company’s weighted average interest rate related to continuing operations increased from 5.0% in 2002 to 5.3% in 2003. The Company’s weighted average debt outstanding related to continuing operations increased from $209.9 million in 2002 to $234.4 million in 2003, which includes (i) an $81.9 million net paydown in March 2002 on the Company’s senior unsecured bank facility with proceeds from the March 2002 preferred share offering, (ii) a $29.1 million paydown in June 2003 on the Company’s bank facility with proceeds from the June 2003 common stock offering, (iii) a $24.2 million

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net paydown in September 2003 on the Company’s bank facility with proceeds from the September 2003 Series B Preferred Share offering, (iv) $50.0 million net paydown on the Company’s bank facility with proceeds from the November 2003 common stock offering, and (v) additional paydowns on the Company’s bank facility with operating cash flows, offset by: (vi) assumption of a $65.2 million mortgage loan (including a $2.4 million mortgage premium) in conjunction with the purchase of the Lansdowne Resort in June 2003, (vii) additional borrowings for renovations of the Hotel Madera, Hotel Helix, Holiday Inn on the Hill and Hotel Viking early in 2003, (viii) additional borrowings under the Company’s bank facility to finance other capital improvements during 2003 and (ix) additional borrowings to purchase the Hotel George in September 2003.

Impairment of investment in hotel property

Impairment of investment in hotel properties increased approximately $2.5 million from zero due to the Company’s management changing its intent from holding its investment in the Holiday Inn Beachside Resort to selling the property. As a result, the Company wrote down its investment in the Holiday Inn Beachside Resort by $2.5 million in June 2003, to its estimated fair value, net of estimated costs to sell. The hotel was sold in July 2003.

Lease termination, advisory transition and subsidiary purchase expense

Lease termination, advisory transition, subsidiary purchase and contingent lease termination expense decreased $2.5 million from $2.5 million for 2002, to less than $0.1 million for 2003. The 2002 amount consists of contingent expenses relating to terminating the Le Meridien New Orleans and Dallas leases.

Writedown of notes receivable

Writedown of notes receivable decreased approximately $0.2 million from $0.2 million for 2002 to zero for 2003. Writedown of notes receivable of $0.2 million in 2002 represents the adjustment to net realizable value of the furniture, fixtures and equipment notes receivable from the Dallas property based on the Company’s valuation estimate of furniture, fixtures and equipment that secure the loan.

Income taxes

Income tax benefit increased approximately $2.7 million from $2.9 million in 2002 to $5.6 million in 2003. For 2003, the REIT incurred state and local income tax expense of $0.5 million. LHL’s net loss before income tax benefit increased by approximately $7.4 million from $7.5 million in 2002 to $14.9 million in 2003. Accordingly, for 2003 LHL recorded a federal income tax benefit of approximately $4.7 million (using an estimated tax rate of 30.8%) and a state and local tax benefit of approximately $1.6 million (using an estimated tax rate of 10.7%). The portion of LHL’s income tax benefit relating to the Omaha property, the New Orleans property and the Key West property has been reclassified to discontinued operations. The following table summarizes the change in income tax benefit (dollars in thousands):

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As of December 31, 2003, the Company had a deferred tax asset of $10,424 primarily due to past and current year’s tax net operating losses. These loss carryforwards will expire in 2021 thru 2023 if not utilized by then. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required. The deferred tax asset is classified as non-current because the reversal in the subsequent year cannot be reasonably estimated.

Minority interest

Minority interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership. Income is allocated to minority interest based on the weighted average percentage ownership throughout the year. At December 31, 2003, the aggregate partnership interest held by the limited partners in the operating partnership was approximately 2.066%. The following table summarizes the change in minority interest (dollars in thousands):

Discontinued operations

Net income from discontinued operations is a result of the sale of the Omaha property, the Holiday Inn Beachside Resort property and the New Orleans property in September 2004, July 2003 and April 2003, respectively. Net income from discontinued operations increased by approximately $34.8 million from $2.2 million in 2002 to $37.0 million in 2003. The following table summarizes net income/(loss) from discontinued operations from 2003 and 2002 (dollars in thousands):