Filed Pursuant to Rule 424(B)(3)
Registration Number 333-53984

SUPPLEMENT NO. 4 DATED MARCH 14, 2002

TO PROSPECTUS DATED APRIL 19, 2001

APPLE HOSPITALITY TWO, INC.

The following information supplements the prospectus of Apple Hospitality
Two, Inc. dated April 19, 2001 and is part of the prospectus. This Supplement
No. 4 updates the information presented in Supplement No. 3 and in Supplement
No. 2, which incorporated and replaced Supplement No. 1.

Prospective investors should carefully review the prospectus, Supplement No.
2, Supplement No. 3 and this Supplement.

TABLE OF CONTENTS

Status of the Offering............................................................... S-2
Recent Developments.................................................................. S-2
Selected Financial Data.............................................................. S-3
Management's Discussion and Analysis of Financial Condition and Results of Operations S-4
Index to Financial Statements........................................................ F-1

The prospectus, and each supplement, contains forward-looking statements
within the meaning of the federal securities laws, and such statements are
intended to be covered by the safe harbors created by those laws. These
forward-looking statements may involve our plans and objectives for future
operations, including future growth and availability of funds. These
forward-looking statements are based on current expectations, which are subject
to numerous risks and uncertainties. Assumptions relating to these statements
involve judgments with respect to, among other things, the continuation of our
offering of units, future economic, competitive and market conditions and
future business decisions, together with local, national and international
events (including, without limitation, acts of terrorism or war, and their
direct and indirect effects on travel and the economy). All of these matters
are difficult or impossible to predict accurately and many of them are beyond
our control. Although we believe the assumptions relating to the
forward-looking statements, and the statements themselves, are reasonable, any
of the assumptions could be inaccurate and, therefore, there can be no
assurance that these forward-looking statements will prove to be accurate. In
light of the significant uncertainties inherent in these forward-looking
statements, the inclusion of this information should not be regarded as a
representation by us or any other person that our objectives and plans, which
we consider to be reasonable, will be achieved.

S-1

STATUS OF THE OFFERING

We completed the minimum offering of units (consisting of one Common Share
and one Series A Preferred Share) at $9.50 per unit on May 1, 2001. We are
continuing the offering at $10 per unit in accordance with the prospectus.

As of March 8, 2002, we had closed on the following sales of units:

Proceeds Net of Selling
Number of Commissions and Marketing
Price Per Unit Units Sold Gross Proceeds Expense Allowance
-------------- ------------- -------------- -------------------------

$ 9.50..... 3,157,894.70 $ 30,000,000 $ 27,000,000
$10.00..... 12,837,222.00 128,372,220 115,534,998
------------- ------------ ------------
Total.. 15,995,116.70 $158,372,220 $142,534,998
============= ============ ============

RECENT DEVELOPMENTS

The presentation below contains updated information about us, including our
audited financial statements for 2001.

(Remainder of Page is Intentionally Blank)

S-2

SELECTED FINANCIAL DATA

Apple Hospitality Two, Inc.
January 17, 2001 to December 31, 2001

For the period
January 17, 2001
(initial capitalization)
through
December 31, 2001
- ------------------------

Revenues:
Suite revenue..................................... $ 10,022,272
Interest income and other revenue................. 2,419,499
-------------
Total revenue..................................... $ 12,441,771
Expenses:
Hotel expenses.................................... 5,624,836
Taxes, insurance and other........................ 552,734
General and administrative........................ 491,009
Depreciation...................................... 1,084,933
Interest.......................................... 1,371,540
-------------
Total expenses.................................... 9,125,052
-------------
Net income........................................ $ 3,316,719
=============
Per Share
Earnings per share - basic and diluted............ $ 0.52
Distributions to common shareholders.............. $ 0.75
Weighted-average common shares outstanding - basic 6,334,168

December 31, 2001
Balance Sheet Data ------------------------
Cash and cash equivalents......................... $ 15,468,841
Investment in hotels, net......................... $ 121,078,235
Total assets...................................... $ 178,381,287
Notes payable - secured........................... $ 52,874,346
Shareholders' equity.............................. $ 120,460,971
Other Data
Cash flow from:
Operating activities........................... $ 4,694,360
Investing activities........................... $(108,918,125)
Financing activities........................... $ 119,692,506
Number of hotels owned at end of period........... 10
Funds From Operations Calculation
Net income........................................ $ 3,316,719
Depreciation...................................... $ 1,084,933
Startup costs..................................... $ 1,600
Funds from operations (a)......................... $ 4,403,252
FFO per share..................................... $ 0.70

- --------
(a) Funds from operations (FFO) is defined as net income (computed in
accordance with generally accepted accounting principles--GAAP) excluding
gains and losses from sales of depreciable property, plus depreciation and
amortization. We consider FFO in evaluating property acquisitions and its
operating performance and believes that FFO should be considered along
with, but not as an alternative to, net income and cash flows as a measure
of our activities in accordance with GAAP and is not necessarily indicative
of cash available to fund cash needs.

S-3

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

General

Along with our subsidiaries, we were capitalized on January 17, 2001, with
our first investor closing commencing on May 1, 2001.

We leased to Apple Hospitality Management all hotel properties acquired. All
intercompany transactions including revenue and rental expenses between us and
Apple Hospitality Management are eliminated in consolidation.

Effective September 7, 2001, we acquired a limited partnership that, through
a subsidiary, Residence Inn III, LLC, owns 10 extended-stay hotels with 1,150
suites, located in 7 states. Each hotel operates as part of the Residence
Inn(R) by Marriott(R) franchise. The sellers were Crestline Capital Corporation
and certain subsidiaries. The purchase price was $119 million. The purchase
price was allocated entirely to tangible assets received, primarily hotel
properties, and liabilities assumed, accordingly, no goodwill was recorded as a
result of this transaction.

Residence Inn by Marriott, Inc., a wholly owned subsidiary of Marriott
International, Inc., manages our hotels under the terms of a management
agreement between Residence Inn and Apple Hospitality Management. Operations of
the hotels are recorded by Residence Inn based on a 13 period fiscal year,
which includes 28 days per period. We will continue to report on a calendar
year basis, but will incorporate hotel operations based on three 12 week
periods for quarters one, two, and three, and one 16 week period for quarter
four. This will take effect beginning with fiscal year 2002.

The purchase price, as subject to certain adjustments at closing, was paid
through a combination of transactions. In May 2001, we made a deposit of just
over $1 million, which was applied toward the purchase price at closing. On May
13, 2001, we provided a short-term secured loan to Crestline Capital
Corporation in the amount of $47 million, bearing interest at 12% per annum.
The loan amount, plus about $1.5 million in interest, also was applied toward
the purchase price. In addition, we made a cash payment of approximately $19.5
million at closing. To satisfy the remainder of the purchase price, we received
a credit at closing equal to the unpaid balance of a long-term loan that we
assumed, which totaled $53 million. (see note 3).

Residence Inn by Marriott, Inc. (the "manager"), a wholly-owned subsidiary
of Marriott International, Inc. ("Marriott"), manages the company's hotels
under the terms of a management agreement between the manager and the lessee.
Operations of the hotels are recorded by the manager based on a 13 period
fiscal year, which includes 28 days per period. The company will continue to
report on a calendar year basis, but will incorporate hotel operations based on
three 12 week periods for quarters one, two, and three, and one 16 week period
for quarter four. This will take effect beginning with fiscal year 2002.

No. of No. of
General location of hotel Suites General location of hotel Suites
------------------------- ------ ------------------------- ------

Montgomery, Alabama..... 94 Atlanta, Georgia....... 126
Bakersfield, California. 114 Boston, Massachusetts.. 130
Concord, California..... 126 Cincinnati, Ohio....... 118
San Ramon, California... 106 Dallas, Texas.......... 120
Meriden, Connecticut.... 106 Houston, Texas......... 110
-----
Total Suites........ 1,150
=====

Through our taxable REIT subsidiary, we hold the management agreement on the
hotels, which are operated as part of the Residence Inn(R) by Marriott(R)
franchise, and engage a third-party manager to operate the hotels. We

S-4

are externally advised and have contracted with Apple Suites Advisors, Inc. to
manage our day-to-day operations and make investment decisions. We have
contracted with Apple Suites Realty Group, Inc. to provide brokerage services
in connection with our hotel acquisitions. Apple Suites Advisors and Apple
Suites Realty are both owned by Mr. Glade Knight, our chairman.

Recent Events

The September 11, 2001 terrorist attack on the United States affected the
entire United States economy and had a direct impact on the travel and
hospitality industry. In the weeks immediately following the attacks, economic
uncertainty, disruption in air travel, and concerns over general safety
resulted in fewer travelers, and consequently, lower hotel occupancies and room
rates. For the period, September 8 through October 5, the Manager's period 10,
revenue per available room ("REVPAR"), for the properties, declined 16% versus
the prior year. On a monthly basis during the remainder of 2001, REVPAR has
gradually improved with declines compared to prior year of 12%, 8%, and 7%
respectively.

For the period September 7, 2001 through December 31, 2001, the portfolio of
hotels achieved occupancy of 76%, an average daily rate ("ADR") of $102, and
REVPAR of $78. According to a 2002 US Extended Stay Lodging Report, recently
published by the Highland Group, "Extended-stay hotels continue to outperform
the overall US hotel industry in the wake of deteriorating economic conditions
and the attacks of September 11/th/... the remarkable performance of this
segment in 2001 indicates a greater resilience to adverse conditions than the
overall US hotel industry."

Critical Accounting Policies

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

Capitalization Policy

We consider expenditures to be capital in nature based on the following
criteria: (1) For a single asset, the cost must be at least $300, including all
normal and necessary costs to place the asset in service, and the useful life
must be at least one year; (2) For group purchases of 10 or more identical
assets, the unit cost for each asset must be at least $50, with the aggregate
cost of the group purchase being at least $750, including all normal and
necessary costs to place the asset in service, and the useful life must be at
least one year; and (3) For major repairs to buildings, furniture, fixtures and
equipment, the repair must be at least $2,000, and the useful life of the asset
must be substantially extended. Capitalized expenditures for the period
September 7, 2001 through December 31, 2001 were $747,151.

Most repair costs are considered routine repair and replacement costs and
are expensed as incurred to hotel operating expenses. For the period September
7, 2001 through December 31, 2001, we incurred $280,361 in repair and
replacement expense.

Related Party Transactions

We have significant transactions with related parties. These transactions
cannot be construed to be arms length and the results of our operations may be
different if these transactions were conducted with non-related parties.

We have contracted with Apple Suites Realty to provide brokerage services
for the acquisition and disposition of our real estate assets. In accordance
with the contract, Apple Suites Realty is to be paid a fee of 2% of the
purchase price of any acquisitions or sale price of any dispositions of real
estate investments, subject to certain conditions. During 2001, Apple Suites
Realty earned $2,380,000, under the agreement.

S-5

We have contracted with Apple Suites Advisors to advise and provide
day-to-day management services for us and due-diligence services on
acquisitions. In accordance with the contract, we will pay Apple Suites
Advisors a fee equal to .1% to .25% of total equity contributions received by
us in addition to certain reimbursable expenses. During 2001, Apple Suites
Advisors earned $157,350 under this agreement.

Apple Suites Advisors holds a three-year contract for the monthly
maintenance and support of accounting software. During 2001, we reimbursed
Apple Suites Advisors for an upfront fee of $70,000 for the implementation of
this software, and we are reimbursing Apple Suites Advisors for a portion of
the monthly fee for the maintenance and support.

Apple Suites Realty and Apple Suites Advisors are 100% owned by Mr. Knight.
Apple Suites Realty and Apple Suites Advisors may purchase in the "best
efforts" offering up to 2.5% of the total number of our shares sold in the
"best efforts" offering.

Mr. Knight also serves as the Chairman and Chief Executive Officer of
Cornerstone, an apartment REIT, and Apple Suites, a hospitality REIT. During
2001, Cornerstone provided us with acquisition, offering related and other
services and was paid approximately $191,837. During 2001, Apple Suites
provided services and rental space to us and was paid approximately $190,010.

We issued 240,000 Series B preferred convertible shares, consisting of
202,500 shares to Mr. Knight, and a combined 37,500 Series B preferred
convertible shares to two other individuals. The Series B preferred convertible
shares were issued before the initial closing of the minimum offering of
$30,000,000 in our prior offering, in exchange for payment of $.10 per Series B
preferred convertible share, or an aggregate of $24,000. There will be no
dividend payable on the Series B preferred convertible shares. On liquidation,
the holders of the Series B preferred convertible shares will be entitled to a
liquidation payment of $10 per share before any distributions of liquidation
proceeds to holders of the common shares. However, the priority liquidation
payment of the holders of the Series B preferred convertible shares is junior
to the holders of the Series A preferred shares distribution rights. In the
event that the liquidation of our assets results in proceeds that exceed the
distribution rights of the Series A preferred shares and the Series B
convertible preferred share, the remaining proceeds will be distributed between
the common shares and the Series B convertible preferred shares, on an as
converted basis.

Each holder of outstanding Series B preferred convertible shares shall have
the right to convert any of such shares into Units upon and for 180 days
following the occurrence of either of the following conversion events:

(1) substantially all of our assets, stock or business, is transferred
whether through exchange, merger, consolidation, lease, share exchange or
otherwise, or

(2) the termination or expiration without renewal of the Advisory
Agreement with Apple Suites Advisors.

Upon the occurrence of either conversion event, each of the Series B
preferred convertible shares may be converted into a number of Units based upon
the gross proceeds raised through the date of conversion in the offering made
by our prospectus according to the following formula:

Number of Units through
Gross Proceeds Raised from Conversion of One
Sales of Units through Series B Preferred Convertible Share
Date of Conversion (the initial "Conversion Ratio")
-------------------------- ------------------------------------

$150 million....... 3.5
$200 million....... 5.3

No additional consideration is due upon the conversion of the Series B
preferred convertible shares. Upon the probable occurrence of a conversion
event, we will record expense for the difference between the fair value of our
common stock and issue price of the Series B preferred convertible shares. If
the conversion were probable

S-6

at December 31, 2001, based on a price of $10 per common share, the common
shares issued under an event of merger would have been 480,000 resulting in an
expense of $4,776,000. If the conversion were probable at December 31, 2001,
based on a liquidation price of $10 per common share, the common shares issued
under an event of liquidation would have been zero.

Compensation expense related to issuance of 202,500 Series B convertible
preferred shares to Mr. Knight will be recognized at such time when the number
of common shares to be issued for conversion of the Series B shares can be
reasonably estimated and the event triggering the conversion of the Series B
shares to common shares is probable. The expense will be measured as the
difference between the fair value of the common stock for which the Series B
shares can be converted and the amounts paid for the Series B shares.

The issuance of the Series B convertible preferred shares to other
individuals not employed by us will be accounted for under FASB Statement No.
123, "Accounting for Stock-Based Compensation." Expense related to the issuance
of the Series B shares will be determined based on fair value of the Series B
shares at grant date in excess of amounts paid by these individuals. Since the
number of common shares to which the Series B shares can be converted is not
known at grant date and ultimate convertibility to common shares is only
allowed through a defined triggering event, the fair value of the Series B
shares will be remeasured and not recorded as expense until the likely
occurrence of an event triggering the conversion of the Series B convertible
preferred shares to common stock.

Results of Operations

Since operations commenced effective September 7, 2001, with the purchase of
10 hotels, a comparison of prior results is not possible or meaningful.

The results of our operations for the year ended December 31, 2001 include
the results of operations from the ten hotels acquired from the effective date
of acquisition on September 7, 2001.

Revenues

The principal source of revenue is suite revenue. For the period September
7, 2001 through December 31, 2001, we had suite revenue of $10,022,272.

Our interest income represented income earned from the investments of cash
and cash reserves, which are invested in money market type instruments,
interest earned from the $47 million promissory note at a rate of 12%, and
interest earned on furniture, fixtures and equipment and debt service escrows.

Interest income earned on cash and cash reserves was $451,050 in 2001.
Interest earned on the $47 million promissory note was $1,529,753, and interest
earned on the escrow accounts was $24,203 for the period September 7, 2001
through December 31, 2001.

Other revenue consisted of revenues derived from hotel services such as
telephone, television, laundry and vending machine revenue. Other revenue was
$414,493 for the period September 7, 2001 through December 31, 2001.

Expenses

Interest expense, for the period September 7, 2001 through December 31,
2001, was $1,371,540. Interest expense represented interest on the 8.08% $53
million promissory note, assumed in conjunction with the 10 hotels acquired.

Depreciation expense of $1,084,933 represented depreciation of the 10 hotels
for the period September 7 through December 31, 2001.

S-7

Taxes, insurance, and other expense was $552,734 for the period September 7
through December 31, 2001 or 6% of suite revenue.

General and administrative expense totaled 5% of suite revenues for the
period September 7 through December 31, 2001. These expenses represented our
administrative expenses. This percentage is expected to decrease as our asset
base grows.

Hotel operating expenses including room, hotel administrative, sales and
marketing, utilities, and repairs and maintenance expense totaled 45% of suite
revenue for the period September 7 through December 31, 2001. Residence Inn
manages the day-to-day operations of the hotels. Pursuant to the a management
agreement, Residence Inn charges a base management fee of 2% of gross revenues
and an incentive management fee calculated on the basis of operating profit of
the hotels. Base management fees and incentive management fees totaled $208,736
and $265,305, respectively for the period September 7 through December 31, 2001.

The management agreement provides for payment of monthly Residence Inn
system fees equal to 4% of suite revenues. The system fee includes the
following services: system financial planning; product planning and
development; human resources management; and protection of marks. System fees
totaled $400,888 for the period September 7 through December 31, 2001.

The management agreement provides for payment from each hotel of the pro
rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all the hotels
operated by the Residence Inn(R) by Marriott(R) affiliate. Chain Services
include central training and development; computerized payroll and accounting
services; and other such services performed on a centralized or regional basis.
Chain Services totaled $233,643 for the period September 7 through December 31,
2001.

Since Residence Inn is the franchiser of the Residence Inn(R) by Marriott(R)
system, the management agreement provides for payments of all costs associated
with certain system-wide advertising, promotional and public relations
materials and programs and the operational costs of reservation systems. Each
hotel pays 2.5% of suite revenues to this marketing fund. Marketing fund fees
totaled $250,556 for the period September 7 through December 31, 2001, and are
reflected in hotel operating expenses under sales and marketing costs.

Liquidity and Capital Resources

Equity

We commenced operations effective May 1, 2001 with the first investor
closing. Effective September 7, 2001, we acquired 10 hotels, with a purchase
price of $119 million, using a combination of proceeds from our ongoing "best
efforts" offering and the assumption of a $53 million mortgage note. During
2001, we sold 13,907,733 shares of our common stock to our investors (included
in the 13,907,733 common shares sold are 117,158 common shares sold through
dividend reinvestment). The total gross proceeds from the shares sold since the
start of our "best efforts" offering in 2001, were $137,498,266, which netted
$122,889,057 after the payment of a total of 10% for selling commissions and
other offering costs.

Notes payable

In conjunction with the 10 hotels acquired in September 2001, the Company
assumed a $53 million mortgage note. The note bears a fixed interest rate of
8.08% per annum and is secured by the 10 hotels. The maturity date is January
2010, with a balloon payment of $35.4 million. The loan is payable in monthly
installments, including principal and interest. At December 31, 2001, the
outstanding balance was $52.9 million.

Cash and cash equivalents

Cash and cash equivalents totaled $15,468,841 at December 31, 2001. We plan
to use this cash for future acquisition costs, to pay dividends, to pay down
debt service, and to fund general corporate services.

S-8

Deposit for potential acquisition

We have entered into an agreement for the potential acquisition of 15
extended-stay hotels that operate as part of the Residence Inn(R) by
Marriott(R) franchise. The acquisitions are considered potential, and not
probable, due to the number of conditions to closing and other contingencies.
Either party to the agreement may terminate if closing does not occur on or
before April 27, 2002, although the closing may occur as early as the end of
the first quarter 2002. As required by the agreement, we made an escrow deposit
equal to $35,000,000. This amount, plus any accrued interest, would be applied
as a credit toward the purchase price if the transaction were to occur. Should
the agreement be terminated on account of certain breaches by us, $3,000,000 of
the deposit would become the property of the seller and the $32,000,000 balance
of the deposit would be returned to us.

Capital requirements

Capital resources are expected to grow with the future sale of shares. In
general, we expect capital resources to be adequate to meet our cash
requirements in 2002. The dividends were in excess of cash flow during 2001 and
we will be monitoring the dividends on a quarterly basis during 2002. It is
anticipated that revenues generated from hotels and equity funds will be used
to meet normal hotel operating expenses, make principal payments on the note
assumed with the 2001 acquisitions and payment of distributions. Our ability to
pay regular quarterly distributions is dependent upon the results of operations
of our hotels.

We have an ongoing capital commitment to fund our capital improvements.
Through Apple Hospitality Management, we are required, under the management
agreement with Residence Inn, to make available to Apple Hospitality
Management, for the repair, replacement, and refurbishing of furniture,
fixtures, and equipment, an amount equal to 5% of gross revenues provided that
such amount may be used for capital expenditures made by us with respect to the
hotels. We expect that this amount will be adequate to fund the required
repair, replacement, and refurbishments and to maintain its hotels in a
competitive condition. At December 31, 2001, $2,254,674 was held in escrow for
the furniture, fixture and equipment reserve.

Inflation

Operators of hotels, in general, possess the ability to adjust room rates
daily to reflect the effects of inflation. Competitive pressures may, however,
limit the operator's ability to raise room rates.

Seasonality

The hotel industry historically has been seasonal in nature, reflecting
higher occupancy rates primarily during the first three quarters of the year.
Seasonal variations in occupancy at our hotels may cause quarterly fluctuations
in our revenues, particularly during the fourth quarter. To the extent the cash
flow from operations is insufficient during any quarter, due to temporary or
seasonal fluctuations in revenue, the Company expects to utilize cash on hand
or funds from equity raised through its "best efforts" offering to make
distributions.

Recent Accounting Pronouncements

On January 1, 2001, Financial Accounting Standards Board Statement No. 133
and 138, "Accounting for Certain Derivative Instruments and Hedging Activities"
became effective. We currently do not have any financial instruments subject to
this statement.

In June 2001, the FASB issued Statement for Financial Accounting Standards
(SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangibles," effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment
tests in accordance with the Statements. Other intangible assets will continue
to be amortized over their useful lives. We will adopt these new accounting
standards beginning with the first quarter of fiscal 2002. We believe the
adoption of these standards will not have a material impact on our financial
statements.

S-9

In August 2001, the FASB issued Statement 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The Statement supercedes
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of ", and Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", for segments of a business to
be disposed of. SFAS No. 144 retains the requirements of Statement 121 relating
to recognition and measurement of an impairment loss and resolves certain
implementation issues resulting from Statement 121. This Statement is effective
for fiscal years beginning after December 15, 2001. We are currently assessing
the impact of this statement; however, we do not expect this statement to have
a material impact on our consolidated financial position or results of
operations.

Market Risk Disclosures

Our market risk is exposure to changes in mortgage interest rates related to
the assumption of the mortgage note and interest rates on short-term
investments. The interest rate of the assumed debt was 8.08%. If market
interest rates for fixed-rate debt were 100 basis points higher at December 31,
2001, the fair value of the fixed-rate debt would have decreased from $52.9
million to $50.2 million. If market interest rates for fixed-rate debt were 100
basis points lower at December 31, 2001, the fair value of the fixed-rate debt
would have increased from $52.9 million to $55.7 million. We invest proceeds
from our "best efforts" offering in short-term money market investments pending
acquisitions. We intend to invest this money in real estate assets as suitable
opportunities arise.

S-10

INDEX TO FINANCIAL STATEMENTS

Apple Hospitality Two, Inc.

Page
----

Report of Independent Auditors....................................................................... F-2
Consolidated Balance Sheets at December 31, 2001 and January 17, 2001 (initial capitalization)....... F-3
Consolidated Statement of Operations for the period January 17, 2001 (initial capitalization) through
December 31, 2001.................................................................................... F-4
Consolidated Statement of Shareholders' Equity for the period January 17, 2001 (initial
capitalization) through December 31, 2001............................................................ F-5
Consolidated Statement of Cash Flows for the period January 17, 2001 (initial capitalization) through
December 31, 2001.................................................................................... F-6
Notes to Consolidated Financial Statements........................................................... F-7
Schedule III--Real Estate Owned...................................................................... F-18

- ----------------------------------------------------------------------------------------------------------
Pro Forma Condensed Consolidated Statements (unaudited).............................................. F-19

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholder
Apple Hospitality Two, Inc.

We have audited the accompanying consolidated balance sheet of Apple
Hospitality Two, Inc. (the "Company") as of December 31, 2001 and January 17,
2001 (initial capitalization), and the related consolidated statements of
operations, shareholders' equity, and cash flows for the period January 17,
2001 (initial capitalization) through December 31, 2001. These financial
statements are the responsibility of the Company's management. Our audits also
included the financial statement schedules listed in the financial statement
index. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Apple Hospitality Two, Inc. at December 31, 2001 and January 17, 2001
(initial capitalization) and the consolidated results of its operations and
cash flows for the period January 17, 2001 (initial capitalization) through
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

/s/ ERNST & YOUNG LLP

Richmond, Virginia
February 15, 2002

F-2

APPLE HOSPITALITY TWO, INC.

CONSOLIDATED BALANCE SHEETS

(Initial
Capitalization)
December 31, January 17,
2001 2001
------------ ---------------

ASSETS
Investment in hotels, net of accumulated depreciation of $1,084,933........... $121,078,235 --
Cash and cash equivalents..................................................... 15,468,841 $100
Deposit for acquisition....................................................... 35,000,000 --
Due from third party manager, net............................................. 860,229 --
Furniture, fixtures and equipment reserve..................................... 2,254,674 --
Other assets.................................................................. 3,719,308 --
------------ ----
Total assets........................................................... $178,381,287 $100
============ ====
LIABILITIES and SHAREHOLDERS' EQUITY
Notes payable-secured......................................................... $ 52,874,346 $ --
Accounts payable and accrued expenses......................................... 934,198 --
Capital lease liability....................................................... 276,135 --
Deferred incentive management fees............................................ 204,698 --
Interest payable.............................................................. 367,888 --
Account payable-affiliate..................................................... 261,330 --
Distributions payable......................................................... 3,001,721 --
------------ ----
Total liabilities...................................................... 57,920,316 --
Shareholders' equity
Preferred stock, no par value, authorized 15,000,000 shares, none issued and
outstanding................................................................ -- --
Series B preferred convertible stock, no par value, authorized 240,000 shares;
issued and outstanding 240,000 shares...................................... 24,000 --
Common stock, no par value, authorized 200,000,000 shares; issued and
outstanding 13,907,733..................................................... 122,889,057 100
Distributions greater than net income........................................ (2,452,086) --
------------ ----
Total shareholders' equity............................................. 120,460,971 100
------------ ----
Total liabilities and shareholders' equity............................. $178,381,287 $100
============ ====

See accompanying notes to consolidated financial statements.

F-3

APPLE HOSPITALITY TWO, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

For the period
January 17,
2001
(initial
capitalization)
through
December 31,
2001 (a)
---------------

REVENUES:
Suite revenue.............................. $10,022,272
Other revenue.............................. 414,493
-----------
Total revenues.......................... 10,436,765

EXPENSES:
Operating expenses......................... 2,262,543
Hotel administrative expenses.............. 1,068,709
Sales and marketing........................ 482,086
Utilities.................................. 422,565
Repair and maintenance..................... 280,361
Franchise fees............................. 400,888
Management fees............................ 474,041
Chain services............................. 233,643
Taxes, insurance and other................. 552,734
General and administrative................. 491,009
Depreciation of real estate owned.......... 1,084,933
-----------
Total expenses.......................... 7,753,512
-----------

Operating Income........................... 2,683,253
Interest income............................ 2,005,006
Interest expense........................... (1,371,540)
-----------
Net income.............................. $ 3,316,719
===========
Basic and diluted earnings per common share $ 0.52
===========

- --------
(a)The Company was initially capitalized on January 17, 2001; however,
operations did not commence until September 7, 2001.

See accompanying notes to the consolidated financial statements.

F-4

APPLE HOSPITALITY TWO, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Series B Preferred
Common Stock Convertible Stock
----------------------- ------------------ Distributions
Number Greater Total
Number of Than Net Shareholders'
of Shares Amount Shares Amount Income Equity
---------- ------------ ------- ------- ------------- -------------

Balances at January 17, 2001, initial capitalization. 10 $ 100 -- -- -- $ 100
Net proceeds from the sale of common shares.......... 13,790,565 121,834,539 -- -- -- 121,834,539
Common shares issued through reinvestment of
distributions....................................... 117,158 1,054,418 -- -- -- 1,054,418
Issuance of Series B preferred convertible shares.... -- -- 240,000 $24,000 -- 24,000
Net income........................................... -- -- -- -- $ 3,316,719 3,316,719
Cash distributions declared to shareholders ($.75 per
share).............................................. -- -- -- (5,768,805) (5,768,805)
---------- ------------ ------- ------- ----------- ------------
Balance at December 31, 2001......................... 13,907,733 $122,889,057 240,000 $24,000 $(2,452,086) $120,460,971
========== ============ ======= ======= =========== ============

See accompanying notes to the consolidated financial statements.

F-5

APPLE HOSPITALITY TWO, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

For the period
January 17, 2001
(initial capitalization)
through
December 31, 2001
------------------------

Cash flow from operating activities:
Net income................................................................ $ 3,316,719
Depreciation of real estate owned......................................... 1,084,933
Changes in operating assets and liabilities:
Due from third party manager.......................................... (289,229)
Other assets.......................................................... 101,730
Deferred incentive management fees.................................... 204,698
Accounts payable-affiliates........................................... 261,330
Interest payable...................................................... 367,888
Accrued expenses...................................................... (353,709)
-------------
Net cash provided by operating activities.................................... 4,694,360

Cash flow from investing activities:
Decrease (Increase) in cash restricted for cap improvement................ (862,179)
Cash paid for acquisition of Residence Inn III, LLC....................... (71,599,214)
Capital improvements...................................................... (572,636)
Deposit for pending acquisitions.......................................... (35,000,000)
Cash paid for pre-acquisition costs....................................... (884,096)
-------------
Net cash used in investing activities........................................ (108,918,125)

Cash flow from financing activities:
Repayment of mortgage note................................................ (382,062)
Net proceeds from issuance of common stock................................ 122,888,957
Repayment of capital lease liability...................................... (71,305)
Cash distributions paid to shareholders................................... (2,767,084)
Payment from officer-shareholder for Series B preferred convertible stock. 24,000
-------------
Net cash provided by financing activities.................................... 119,692,506
Increase in cash and cash equivalents........................................ 15,468,741
Cash and cash equivalents, beginning of period............................... 100
-------------
Cash and cash equivalents, end of period..................................... $ 15,468,841
=============
Supplemental Information:
Interest paid............................................................. $ 1,003,652
Non-cash transactions:
Assumption of mortgage notes payable...................................... $ 53,256,408
Other liabilities assumed................................................. $ 768,848
Repair escrow reserve assumed at acquisition.............................. $ 387,762

- --------
(a)The Company was initially capitalized on January 17, 2001; however,
operations did not commence until September 7, 2001.

See accompanying notes to consolidated financial statements.

F-6

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 General Information and Summary of Significant Accounting Policies

Organization

The Company and its subsidiaries are Virginia corporations, capitalized on
January 17, 2001, with the first investor closing commencing on May 1, 2001.
The accompanying consolidated financial statements include our accounts along
with its subsidiaries. All significant intercompany transactions and balances
have been eliminated.

Effective September 7, 2001, the Company acquired using the purchase method
of accounting, a limited partnership that, through a subsidiary, Residence Inn
III, LLC, owns 10 extended-stay hotels with 1,150 suites, located in 7 states.
Each hotel operates as part of the Residence Inn(R) by Marriott(R) franchise.
The sellers were Crestline Capital Corporation and certain subsidiaries. The
purchase price for the acquisition was $119 million. No goodwill was recorded
in connection with this transaction.

The Company is a self-administered real estate investment trust ("REIT"),
operating in one defined business segment consisting of upscale, extended stay
hotels. The hotels are located throughout the United States and operate as part
of the Residence Inn(R) by Marriott(R) franchise. The Company leased to Apple
Hospitality Management, a 100% owned taxable REIT subsidiary, all hotels
acquired.

The REIT Modernization Act, effective January 1, 2001, permits REIT's to
establish taxable businesses to conduct certain previously disallowed business
activities. The Act also reduces the REIT distribution requirement from 95% to
90% of its taxable income.

Residence Inn by Marriott, Inc., a wholly owned subsidiary of Marriott
International, Inc., manages its hotels under the terms of a management
agreement between the Residence Inn and the Apple Hospitality Management.

Cash and Cash Equivalents

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

Deposit for Potential Acquisition

The Company has entered into an agreement for the potential acquisition of
15 extended-stay hotels that operate as part of the Residence Inn(R) by
Marriott(R) franchise. The acquisitions are considered potential, and not
probable, due to the number of conditions to closing and other contingencies.
Either party to the agreement may terminate if closing does not occur on or
before April 27, 2002, although the closing may occur as early as the end of
the first quarter 2002. As required by the agreement, the Company made an
escrow deposit equal to $35,000,000. This amount, plus any accrued interest,
would be applied as a credit toward the purchase price if the transaction were
to occur. Should the agreement be terminated on account of certain breaches by
us, $3,000,000 of the deposit would become the property of the seller and the
$32,000,000 balance of the deposit would be returned to the Company.

Investment in Hotels

The hotels are stated at cost, net of depreciation, and including real
estate brokerage commissions paid to Apple Suites Realty, a related party (see
Note 7). Repair and maintenance costs are expensed as incurred while
significant improvements, renovations, and replacements are capitalized.
Depreciation is computed using the straight-line method over estimated useful
lives of the assets, which are 39 years for buildings and major improvements
and three to seven years for furniture and equipment.

The Company considers expenditures to be capital in nature based on the
following criteria: (1) For a single asset, the cost must be at least $300,
including all normal and necessary costs to place the asset in service, and the
useful life must be at least one year; (2) For group purchases of 10 or more
identical assets, the unit cost for each asset must be at least $50, with the
aggregate cost of the group purchase being at least $750, including all normal

F-7

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and necessary costs to place the asset in service, and the useful life must be
at least one year; and (3) For major repairs to buildings, furniture, fixtures
and equipment, the repair must be at least $2,000, and the useful life of the
asset must be substantially extended. Capitalized expenditures for the period
September 7, 2001 through December 31, 2001 were $783,168.

Most repair costs are considered routine repair and replacement costs and
are expensed as incurred to hotel operating expenses. For the period September
7, 2001 through December 31, 2001, the Company incurred $280,361 in repair and
replacement expense.

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

Repairs and maintenance costs are expensed as incurred while significant
improvements, renovations, replacements and planned major maintenance projects
are capitalized. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets which are 39 years for buildings,
and 3 to 7 years for furniture, fixtures, and equipment.

Revenue Recognition

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

Stock Incentive Plans

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

Earnings Per Common Share

Basic earnings per common share is computed based upon the weighted average
number of shares outstanding during the year. Diluted earnings per share is
calculated after giving effect to all potential common shares that were
dilutive and outstanding for the year. Series B preferred convertible shares
are not included in earnings per common share calculations until such time it
becomes probable that such shares can be converted to common shares (see Note
4).

Federal Income Taxes

The Company is operated as, and will annually elect to be taxed as, a real
estate investment trust under the Internal Revenue Code of 1986, as amended
(the "Code"). Generally, a real estate investment trust which complies with the
provisions of the Code and distributes at least 90% of its taxable income to
its shareholders does not pay federal income taxes on its distributed income.
Accordingly, no provision has been made for federal income taxes.

F-8

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The taxable REIT subsidiary is subject to federal and state income taxes.
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. This method also requires the recognition of future
tax benefits such as net operating loss carry forwards, to the extent that
realization of such benefits is more likely than not. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The taxable REIT subsidiary incurred a loss during 2001 and as
such, has no income tax liability at December 31, 2001. The Company has not
recognized any deferred tax assets or operating loss carry forwards as
realization of such amounts is not probable. Net operating losses at
December 31, 2001 are not material.

For federal income tax purposes, distributions paid to shareholders consist
of ordinary income and return of capital or a combination thereof.
Distributions declared per share were $.75 for the period ended December 31,
2001. In 2001, of the total distribution, 55% was taxable as ordinary income,
and 45% was a non-taxable return of capital.

Sales and Marketing Costs

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

Use of Estimates

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

Seasonality

The hotel industry is seasonal in nature. Seasonal variations in revenues at
the hotels under lease may cause quarterly fluctuations in its revenues,
particularly in the fourth quarter.

The Company does not currently have any items of comprehensive income
requiring separate reporting and disclosure.

Recent Accounting Pronouncements

On January 1, 2001, Financial Accounting Standards Board Statement No. 133
and 138, "Accounting for Certain Derivative Instruments and Hedging Activities"
became effective. The Company currently does not have any financial instruments
subject to this statement.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangibles," effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. The
Company will adopt these new accounting standards beginning the first quarter
of fiscal 2002. The Company believes the adoption of these standards will not
have a material impact on its financial statements.

F-9

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In August 2001, the FASB issued Statement 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The Statement supercedes
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of", and APB Opinion No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for segments of a business to be disposed of. SFAS No. 144
retains the requirements of Statement 121 relating to recognition and
measurement of an impairment loss and resolves certain implementation issues
resulting from Statement 121. This Statement is effective for fiscal years
beginning after December 15, 2001. The Company is currently assessing the
impact of this statement; however, the Company does not anticipate this
statement to have a material impact on the consolidated financial position or
results of operations of the Company.

Note 2 Investment in Hotels

Using proceeds from its prior "best efforts" offering and assuming a $53
million promissory note (see Note 3), the Company acquired 10 hotels with 1,150
suites for an aggregate purchase price of $121.4 million including brokerage
commissions.

At December 31, 2001, the Company owned 10 hotels. Investment in hotels
consisted of the following:

Gross
------------------------------------------
Initial Carrying Accumulated
Description Acquisition Cost Value* Depreciation Encumbrances Date Acquired
----------- ---------------- ------------ ------------ ------------ --------------

Montgomery, Ala.... $ 5,989,633 $ 6,093,331 $ 64,990 $ 2,643,717 September 2001
Bakersfield, Calif. 9,436,951 9,548,325 86,833 4,229,948 September 2001
Concord, Calif..... 21,741,476 21,829,575 171,484 6,873,664 September 2001
San Ramon, Calif... 18,989,430 19,084,639 156,057 5,816,183 September 2001
Meriden, Conn...... 9,092,070 8,737,890 94,043 4,758,690 September 2001
Atlanta, Ga........ 12,117,063 12,256,063 111,086 4,758,692 September 2001
Boston, Mass....... 17,437,874 17,661,555 134,735 7,402,407 September 2001
Cincinnati, Ohio... 7,045,270 7,196,142 69,714 5,287,434 September 2001
Las Colinas, Texas. 9,667,592 9,778,017 95,639 5,816,177 September 2001
Houston, Texas..... 9,862,641 9,977,631 100,352 5,287,434 September 2001
------------ ------------ ---------- -----------
Totals.......... $121,380,000 $122,163,168 $1,084,933 $52,874,346
============ ============ ========== ===========

* Includes real estate commissions (see Note 7), closing costs, and
improvements capitalized since the date of acquisition for hotels.

Investment in hotels at December 31, 2001, consists of the following:

The following is a reconciliation of the carrying amount of real estate
owned:

Land............................ $ 21,685,178
Building and improvements....... 95,600,836
Furniture fixtures and equipment 4,877,154
-------------
122,163,168
Less: accumulated depreciation.. (1,084,933)
-------------
Investment in hotels, net....... $121,078,235
=============

F-10

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

These acquisitions have been accounted for under the purchase method of
accounting. The results of operations have been included in the accompanying
financial statements since, September 7, 2001, the effective date of the
acquisition.

In conjunction with the acquisition of the Meriden, Connecticut property,
the Company assumed a prepaid ground lease which is being amortized over the
life of the lease and is included in other assets in the consolidated balance
sheet. The lease automatically renews, upon expiration of the initial term, for
5-year periods, not to exceed 10 consecutive renewals. At December 31, 2001,
the carrying value of the ground lease net of accumulated amortization of
$15,000 was $510,250.

Note 3 Notes Payable & Leases

In conjunction with the 10 hotels acquired, the Company assumed a $53
million mortgage note. The note bears a fixed interest rate of 8.08% per annum
and is secured by the 10 hotels. The maturity date is January 2010, with a
balloon payment of $35.4 million. The loan is payable in monthly installments,
including principal and interest. At December 31, 2001, the balance of the
mortgage note was $52,874,346.

The aggregate maturities of the mortgage note for the five years subsequent
to December 31, 2001 are as follows:

2002...... $ 1,728,867
2003...... 1,744,452
2004...... 1,881,012
2005...... 2,052,866
2006...... 2,227,502
Thereafter 43,239,647
-----------
$52,874,346
===========

The carrying value of the notes at December 31, 2001 approximates fair
value. Fair value is estimated based on current rates offered to us for debt of
the same terms.

In conjunction with the acquisition, the Company obtained capital lease
obligations pertaining to phone systems, computer systems and vans at various
properties of $360,230, which are classified as furniture, fixtures, and
equipment in Note 2. Amortization of assets under capital leases of $71,305 is
included in depreciation expense at December 31, 2001. The future minimum lease
payments under the Company's lease obligations at December 31, 2001 are as
follows:

Lease obligations:
2002..................... $175,542
2003..................... 102,044
2004..................... 21,720
--------
Total minimum lease payments $299,306
Less: imputed interest...... (23,121)
--------
$276,185

F-11

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 4 Shareholders' Equity

The Company is raising equity capital through a "best-efforts" offering of
shares by David Lerner Associates, Inc., which will receive selling commissions
of 7.5% and a marketing expense allowance of 2.5% based on proceeds of the
shares sold. The Company received gross proceeds of $137,498,266 from the sale
of 3,157,895 shares at $9.50 per share and 10,749,838 shares at $10 per share,
including shares sold through the reinvestment of distributions during 2001.
The net proceeds of the offering, after deducting selling commissions and other
offering costs were $122,889,057.

With each purchase of one common share the Company will issue one Series A
preferred share, together a "Unit." The Series A preferred shares will have no
voting rights, no conversion rights and no distribution rights. The only right
associated with the Series A preferred shares will be a priority distribution
upon the sale of the Company's assets. The priority would be equal to $10.00
per Series A preferred share, and no more, before any distributions are made to
the holders of any other shares. The Series A preferred shares will not be
separately tradable from the common shares to which they relate. The Company is
authorized 200,000,000 shares, with the number of shares issued and outstanding
at January 17, 2001 and December 31, 2001 of 10 and 13,907,733, respectively.

The Company issued 240,000 Series B preferred convertible shares, consisting
of 202,500 shares to Mr. Knight, and a combined 37,500 Series B preferred
convertible shares to two other individuals. The Company issued the Series B
preferred convertible shares before the initial closing of the minimum offering
of $30,000,000 in the Company's prior offering, in exchange for payment of $.10
per Series B preferred convertible share, or an aggregate of $24,000. There
will be no dividend payable on the Series B preferred convertible shares. Upon
the Company's liquidation, the holder of the Series B convertible preferred
shares is entitled to a priority liquidation payment before any distribution of
liquidation proceeds to the holders of the common shares. However, the priority
liquidation payment of the holders of the Series B convertible preferred shares
is junior to the holders of the Series A preferred shares distribution rights.
The holder of a Series B convertible preferred share is entitled to a
liquidation payment of $10 per number of common shares each Series B
convertible preferred share would be convertible into according to the formula
described below. In the event that the liquidation of our assets results in
proceeds that exceed the distribution rights of the Series A preferred shares
and the Series B convertible preferred shares, the remaining proceeds will be
distributed between the common shares and the Series B convertible preferred
shares, on an as converted basis.

Each holder of outstanding Series B preferred convertible shares shall have
the right to convert any of such shares into Units of the Company upon and for
180 days following the occurrence of either of the following conversion events:

(1) The Company transfers substantially all of its assets, stock or
business, whether through exchange, merger, consolidation, lease, share
exchange or otherwise, or

(2) the Advisory Agreement with Apple Suites Advisors is terminated or
expires without renewal.

$100 million 2.0
$150 million 3.5
$200 million 5.3

F-12

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

No additional consideration is due upon the conversion of the Series B
preferred convertible shares. Upon the probable occurrence of a conversion
event, the Company will record expense for the difference between the fair
value of its common stock and issue price of the Series B preferred convertible
shares. If the conversion were probable at December 31, 2001, based on a price
of $10 per common share, the common shares issued under an event of merger
would have been 480,000 resulting in an expense of $4,776,000. If the
conversion were probable at December 31, 2001, based on a liquidation price of
$10 per common share, the common shares issued under an event of liquidation
would have been zero.

In the event additional Series B convertible preferred shares are authorized
and issued, the issuance of the Series B convertible preferred shares to other
individuals not employed by the Company is accounted for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation." Expense related to the
issuance of the Series B shares was determined based on fair value of the
Series B shares at grant date in excess of amounts paid by these individuals.
Since the number of common shares to which the Series B shares can be converted
was not known at grant date and ultimate convertibility to common shares is
only allowed through a defined triggering event, the fair value of the Series B
shares will be remeasured and not recorded as expense until the likely
occurrence of an event triggering the conversion of the Series B convertible
preferred shares to common stock.

Note 5 Stock Incentive Plans

On April 30, 2001, the Board of Directors approved a Directors' Plan whereby
Directors, who are not the Company's employees or affiliates (see Note 6),
automatically receive options to purchase stock for five years from the
adoption of the plan. Under the Directors' Plan, the number of shares to be
issued is equal to 45,000 plus 1.8% of the number of Units sold in excess of
3,157,895 Units. This plan currently relates to the initial public offering of
20,157,895 Units; therefore the maximum number of shares to be issued under the
Directors Plan currently is 351,000. The options expire 10 years from the date
of grant. As of December 31, 2001, 238,497 Units had been reserved for issuance.

On April 30, 2001, the Board of Directors approved an Incentive Plan whereby
incentive awards may be granted to certain employees of the Company or
affiliates. Under the Incentive Plan, the number of Units to be issued is equal
to 35,000 plus 4.625% of the number of shares sold in excess of 3,157,895. This
plan also currently relates to the initial public offering of 20,157,895 Units;
therefore, the maximum number of Units that can be issued under the Incentive
Plan currently is 821,250. As of December 31, 2001, 532,180 Units had been
reserved for issuance.

F-13

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Both plans generally provide, among other things, that options be granted at
exercise prices not lower than the market value of the Units on the date of
grant. Under the Incentive Plan, at the earliest, options become exercisable at
the date of grant. The optionee has up to 10 years from the date on which the
options first become exercisable to exercise the options. In 2001, the Company
granted 26,592 options to purchase shares under the Directors Plan and no
options under the Incentive Plan. Activity in the Company's share option plan
during 2001 is summarized in the following table:

2001
Weighted-
Average Exercise
Options Price
--------- --------

Granted....................................................... 22,000 $ 9.50
Granted....................................................... 4,592 $10.00
Exercised..................................................... -- --
Forfeited..................................................... -- --
------ ------
Outstanding, end of year...................................... 26,592 $ 9.59
Exercisable at end of year.................................... 26,592 $ 9.59
------ ------
Weighted-average fair value of options granted during the year $ 0.51
------ ------

Pro forma information regarding net income and earnings per share is
required by FASB 123, under the fair value method described in that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions. For the options granted on May 1, 2001, the Company assumed a
risk-free interest rate of 5.35%; a dividend yield of 10.53%; and volatility
factor of the expected market price of the Company's common stock of .253; and
a weighted-average expected life of the options of 10 years. For the options
granted on June 1, 2001, the Company assumed a risk-free interest rate of
5.35%; a dividend yield of 10%; and volatility factor of the expected market
price of the Company's common stock of .253 ; and a weighted-average expected
life of the options of 10 years. Fair value of these options was .53 for May 1,
2001 and .43 for June 1, 2001 options granted.

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

For purposes of FASB 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. As the
options are exercisable within six months of the date of grant, the full impact
of the pro forma adjustment to net income is disclosed below.

2001
----------

Net income available to common shareholders
Pro forma............................... $3,304,825
As reported............................. $3,316,719
Earnings per common share -- diluted
Pro forma............................... $ 0.52
As reported............................. $ 0.52

F-14

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 6 Management Agreement

Apple Hospitality Management has entered into a management agreement with
Residence Inn(R) by Marriott(R), Inc., a wholly-owned subsidiary of Marriott
International Inc. The initial term expires on December 2011 and has renewal
terms of up to five 10-year terms. Pursuant to the management agreement, the
Residence Inn charges a base management fee of 2% of gross revenues and an
incentive management fee calculated on the basis of operating profit of the
hotels. Base management fees and incentive management fees totaled $208,736 and
$265,305, respectively for the period September 7 through December 31, 2001. At
December 31, 2001, the balance in deferred incentive management fees was
$204,698.

The Company has an ongoing capital commitment to fund its capital
improvements. Through Apple Hospitality Management, the Company is required,
under the management agreement, to make available to Apple Hospitality
Management, for the repair, replacement and refurbishing of furniture,
fixtures, and equipment, an amount of 5% of gross revenues provided that such
amount may be used for capital expenditures made by the Company with respect to
the hotels. The Company expects that this amount will be adequate to fund the
required repair, replacement, and refurbishments and to maintain its hotels in
a competitive condition. At December 31, 2001, $2,254,674 was held in escrow
for the furniture, fixture and equipment reserve.

Note 7 Related Party Transactions

The Company has contracted with Apple Suites Realty to provide real estate
brokerage services for the acquisition and disposition of real estate assets
for us. In accordance with the contract, Apple Suites Realty is to be paid a
fee of 2% of the purchase price of any acquisitions or sale price of any
dispositions of real estate investments, subject to certain conditions. During
2001, Apple Suites Realty earned $2,380,000, under the agreement.

The Company has contracted with Apple Suites Advisors to advise and provide
day-to-day management services to the Company and due-diligence services on
acquisitions. In accordance with the contract, the Company pays Apple Suites
Advisors a fee equal to .1% to .25% of total equity contributions received by
the Company in addition to certain reimbursable expenses. During 2001, Apple
Suites Advisors earned $157,350 under this agreement.

F-15

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Apple Suites Advisors contracted with a third party for the implementation
of accounting software and entered into a three year contract with a third
party for monthly maintenance and support of accounting software. During 2001,
the Company re-imbursed Apple Suite Advisors for an upfront fee of $70,000 for
the implementation of this software and is re-imbursing Apple Suites Advisors
for a portion of the monthly fee for the maintenance and support.

Mr. Knight also serves as the Chairman and Chief Executive Officer of
Cornerstone, an apartment REIT, and Apple Suites, a hospitality REIT. During
2001, Cornerstone provided the Company with acquisition, offering related and
other services and was paid approximately $191,837. During 2001, Apple Suites
provided services and rental space to us and was paid approximately $190,010.

Note 8 Earnings Per Share

The following table sets forth the computation of basic and diluted earnings
per share:

2001
----------

Numerator:
Net income and numerator for basic and diluted earnings.......... $3,316,719
Denominator:
Denominator for basic earnings per share-weighted-average shares. 6,334,168
Effect of dilutive securities:
Stock options.................................................... 1,100
Denominator for diluted earnings per share-adjusted weighted-average
shares and assumed conversions.................................... 6,335,268
Basic and diluted earnings per common share...................... $ 0.52

Note 9 Quarterly Financial Data (Unaudited)

The following is a summary of quarterly results of operations for the period
ended December 31, 2001:

Second Third Fourth
2001* Quarter Quarter Quarter
----- -------- ---------- ----------

Revenues................................... $635,526 $3,445,057 $6,356,182
Net income................................. 582,228 1,407,278 1,327,213
Basic and diluted earnings per common share $ .20 $ .17 $ .11
Distributions per share.................... $ .25 $ .25 $ .25

* The Company's first investor closing commenced on May 1, 2001 and operations
commenced effective September 7, 2001.

F-16

APPLE HOSPITALITY TWO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 10 Pro Forma Information (Unaudited)

The following unaudited pro forma information for the year ended December
31, 2001 is presented as if the acquisition of the 10 hotels occurred on
January 1, 2001. The pro forma information does not purport to represent what
the Company's results of operations would actually have been if such
transaction, in fact, had occurred as of the beginning of the year, nor does it
purport to represent the results of operations for future periods.

Revenues................................. $38,179,020
Net income............................... $ 7,052,721
Net income per share -- basic and diluted $ 0.75

The pro forma information reflects adjustments for actual lease revenue and
expenses of the 10 hotels acquired in 2001. Net income has been adjusted as
follows: (1) depreciation has been adjusted based on the Company's basis in the
hotels; (2) advisory expenses have been adjusted based on the Company's
contractual arrangements; (3) interest expense has been adjusted to reflect the
acquisition as of January 1, 2001; and (4) common stock raised during 2001 to
purchase these hotels has been adjusted to reflect issuance as of January 1,
2001.

Note 11 Subsequent Events

During January and February, 2002, the Company closed the sale to investors
of 2,087,384 shares at $10 per share representing net proceeds of $18,786,456.

F-17

SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(As of December 31, 2001)

Subsequently
Initial Cost Capitalized Gross Amount Carried
- - ----------------------- ------------ ------------------------
Bldg. Imp. & Bldg. & Acc.
Description Encumbrances Land Bldg. FF&E Land Imp. Total Deprec.
- - ----------------------- ------------ ----------- ----------- ------------ ----------- ------------ ------------ ----------

1. Montgomery, Alabama.... $ 2,643,717 $ 964,925 $ 5,024,708 $ 103,698 $ 972,599 $ 5,120,732 $ 6,093,331 $ 64,990
2. Bakersfield, California 4,229,948 1,869,938 7,567,013 111,374 1,880,402 7,667,923 9,548,325 86,833
3. Concord, California.... 6,873,664 4,937,019 16,804,457 88,099 4,943,169 16,886,406 21,829,575 171,484
4. San Ramon, California.. 5,816,183 3,447,702 15,541,728 95,209 3,454,168 15,630,471 19,084,639 156,057
5. Meriden, Connecticut... 4,758,690 -- 9,092,070 (354,180) -- 8,737,890 8,737,890 94,043
6. Atlanta, Georgia....... 4,758,692 1,757,113 10,359,950 139,000 1,764,735 10,491,328 12,256,063 111,086
7. Boston, Massachusetts.. 7,402,407 4,707,447 12,730,427 223,681 4,716,252 12,945,303 17,661,555 134,735
8. Cincinnati, Ohio....... 5,287,434 1,573,478 5,471,792 150,873 1,584,626 5,611,516 7,196,142 69,714
9. Dallas, Texas.......... 5,816,177 1,396,737 8,270,855 110,425 1,404,737 8,373,280 9,778,017 95,639
10 Houston, Texas......... 5,287,434 959,509 8,903,132 114,991 964,490 9,013,141 9,977,631 100,352
----------- ----------- ----------- --------- ----------- ------------ ------------ ----------
$52,874,346 $21,613,868 $99,766,132 $ 783,168 $21,685,178 $100,477,990 $122,163,168 $1,084,933
=========== =========== =========== ========= =========== ============ ============ ==========

Date of Depreciable
Description Construction Date Acquired Life
- ----------------------- ------------ -------------- -----------

Montgomery, Alabama.... 1990 September 2001 39 yrs.
Bakersfield, California 1990 September 2001 39 yrs.
Concord, California.... 1989 September 2001 39 yrs.
San Ramon, California.. 1989 September 2001 39 yrs.
Meriden, Connecticut... 1989 September 2001 39 yrs.
Atlanta, Georgia....... 1990 September 2001 39 yrs.
Boston, Massachusetts.. 1989 September 2001 39 yrs.
Cincinnati, Ohio....... 1990 September 2001 39 yrs.
Dallas, Texas.......... 1989 September 2001 39 yrs.
Houston, Texas......... 1990 September 2001 39 yrs.

Real estate owned: 2001
------------------------- ------------

Balance as of January 1.. $ --
Acquisition.............. 121,380,000
Improvements............. 783,168
------------
Balance at December 31... $122,163,168

Accumulated depreciation:
Balance as of January 1.. $ --
Depreciation expense..... 1,084,933
------------
Balance at December 31... $ 1,084,933

Net Book Value $121,078,235

F-18

APPLE HOSPITALITY TWO, INC.

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

The following unaudited Pro Forma Condensed Consolidated Statement of
Operations of Apple Hospitality Two, Inc. (the "Company") is presented as if
the purchase of Marriott Residence Inn USA Limited Partnership (the
"Partnership") from Crestline Capital Corporation ("Crestline") for $119
million had occurred at the beginning of the period presented and all of the
hotels had been leased to Apple Hospitality Management, Inc., our wholly owned
taxable REIT subsidiary pursuant to master hotel lease agreements. All of the
assets and liabilities of the Partnership were held by Residence Inn III LLC.
Residence Inn III LLC consists of 10 Residence Inn(R) by Marriott(R) Hotels.
Marriott(R) will continue to manage the hotels under agreements not materially
different from historical contractual arrangements. Such pro forma information
is based in part upon the historical Consolidated Statement of Operations of
the Company, and the historical Statement of Operations of Residence Inn III
LLC. In management's opinion, all adjustments necessary to reflect the effects
of these transactions have been made.

The following Pro Forma Condensed Consolidated Statement of Operations for
the period presented is not necessarily indicative of what actual results of
operations of the Company would have been assuming such transactions had been
completed as of the beginning of the period presented, nor does it purport to
represent the results of operations for future periods.

For the year ended December 31, 2001 (unaudited)
------------------------------------------------------
Historical Historical
Statement of Residence Inn Pro Forma Total Pro
Operations III LLC (A) Adjustments Forma
------------ ------------- ----------- -----------

Revenue:
Suite revenue...................... $10,022,272 $27,564,918 -- $37,587,190
Other operating revenue............ 414,493 -- -- 414,493
Interest income and other revenue.. 2,005,006 -- $(1,827,669)(B) 177,337
----------- ----------- ----------- -----------
Total revenue.................. 12,441,771 27,564,918 (1,827,669) 38,179,020

Expenses:
Operating expenses................. 4,516,264 12,288,306 -- 16,804,570
General and administrative......... 491,009 -- 372,897(C) 863,906
Franchise fees..................... 400,888 1,055,127 -- 1,456,015
Base management fees............... 208,736 551,298 -- 760,034
Permits, Licenses & Lease Payments. -- 128,688 -- 128,688
Chain Services..................... 233,643 552,449 -- 786,092
Incentive management fees.......... 265,305 841,983 -- 1,107,288
Taxes, insurance and other......... 552,734 1,322,418 -- 1,875,152
Depreciation of real estate owned.. 1,084,933 -- 2,019,336(D) 3,104,269
Interest........................... 1,371,540 -- 2,868,745(E) 4,240,285
----------- ----------- ----------- -----------
Total expenses................. 9,125,052 16,740,269 5,260,978 31,126,299

Income tax expense.................... -- -- --- (F) --
----------- ----------- ----------- -----------

Net income............................ $ 3,316,719 $10,824,649 $(7,088,647) $ 7,052,721
=========== =========== =========== ===========

Earnings per common share:
Basic and Diluted.................. $ 0.52 $ 0.75
=========== ===========

Basic and diluted weighted average
common shares outstanding........ 6,334,168 -- 3,038,590(G) 9,372,758
=========== ===========

F-19

Notes to Pro Forma Condensed Consolidated Statement of Operations (unaudited):

The total purchase price for the hotels consisted of the following:

Purchase price per contract.............................................................. $119,000,000
Fair value of deferred incentive management fee liability assumed, net of $750,000 credit 736,000
Fair value of liability assumed.......................................................... 563,000
Sub-total............................................................................. 120,299,000
Acquisition fee payable to ASRG.......................................................... 2,380,000
Additional closing costs................................................................. 843,000
------------
Total purchase price.................................................................. $123,522,000
============

The allocation of purchase price to assets acquired at fair value is as
follows:

Total purchase price.............................. $123,522,000
Less:.............................................
Restricted cash--FF&E reserves................. 2,305,000
Other assets and prepaids...................... 530,000
------------
Amount allocated to investment in hotel properties $120,687,000
============

- --------
(A)The historical financial statements of Residence Inn III LLC include results
of operations of the hotels through September 7, 2001, the effective date of
the acquisition of the hotels by the Company. The Statements exclude
interest, depreciation and general and administrative expenses, none of
which would be ongoing expenses of the Company subsequent to acquisition of
the hotels and all of which would be eliminated for pro forma presentation.
(B)Represents the elimination of the interest income recorded on the $47
million promissory note with Crestline, as the related note receivable was
used to purchase the Partnership.
(C)Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company plus anticipated legal and accounting fees, employee costs, salaries
and other costs of operating as a public company of $372,897 for the year
ended December 31, 2001.
(D)Represents the depreciation on the hotels acquired based on the purchase
price allocation of $98 million to depreciable property. The weighted
average lives of the depreciable assets are 39 years for building and
7 years for FF&E. The estimated useful lives are based on management's
knowledge of the properties and the hotel industry in general.
(E)Represents the interest expense for the hotel acquisitions for the period in
which the hotels were not owned. Interest was computed using the interest
rates of 8.08% on the mortgage debt of $53,619,000, including amortization
of deferred financing costs.
(F)Represents the combined state and federal income tax expense of our wholly
owned taxable REIT subsidiary estimated on a combined rate of 40%.
(G)Represents additional common shares assuming the Partnership was acquired at
the beginning of the periods presented with $68 million of the gross
proceeds from the "best efforts" offering of $9.50 per share (net $8.50 per
share) for the first $30 million and $10 per share (net $8.95 per share) for
the remainder.

F-20