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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549


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FORM 10-K

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|   |                                                                                          
|-- | -----------------------------------------------------------------------------------------
|x  | Annual Report Pursuant to
 Section 13 or 15(d) of the Securities Exchange Act of 1934    
|   |                                                                                          
|   | For the
 fiscal year ended December 31, 2010                                             
|or
|   |                                                                                          
|o  | Transition Report Pursuant to
 Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-52585

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APPLE
REIT SEVEN, INC.(Exact
name of registrant as specified in its charter)

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| |                                          |  |                                         | 
| | ---------------------------------------- |  | --------------------------------------- | 
| | VIRGINIA                                 |  | 20-2879175                              | 
| | (State of Organization)                  |  | (I.R.S. Employer Identification Number) | 
| |                                          |  |                                         | 
| | 814 EAST MAIN STREET                     |  |                                         | 
| | RICHMOND, VIRGINIA                       |  | 23219                                   | 
| | (Address of principal executive offices) |  | (Zip Code)                              | 

(804) 344-8121(Registrants
telephone number, including area code)

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Securities registered pursuant to Section
12(b) of the act: None

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

Units (Each Unit is equal to one common share, no par
value and one Series A preferred share)

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

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

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

Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files).    Yes  o    No   o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405, of this chapter) is not contained herein, and will
not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.

| |                                                                        |                            
| | ---------------------------------------------------------------------- | ---------------------------
| | Large accelerated filer o                                              | Accelerated filer o        
| | Non-accelerated filer x (Do not check if a smaller reporting
 company) | Smaller reporting company o

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

There
is currently no established public market on which the Companys common shares
are traded. Based upon the price of Apple REIT Seven, Inc.s common equity last
sold, which was $11, on June 30, 2010, the aggregate market value of the
voting common equity held by non-affiliates of the registrant on such date was
$1,022,233,000. The Company does not have any non-voting common equity.

Number
of registrants common shares outstanding as of February 28, 2011:
91,671,029

Documents Incorporated by Reference.

The
information required by Part III of this report, to the extent not set forth
herein, is incorporated by reference from the registrants definitive proxy
statement for the annual meeting of shareholders to be held on May 12,
2011.

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APPLE REIT SEVEN, INC.

FORM 10-K

Index

|           |          |  |                                                                                                               |  |     
|---------- | -------- |  | ------------------------------------------------------------------------------------------------------------- |  | ----
|           |          |  |                                                                                                               |  | Page
|           |          |  |                                                                                                               |  |     
|Part
I     |          |  |                                                                                                               |  |     
|           | Item 1.  |  | Business                                                                                                      |  | 1   
|           | Item 1A. |  | Risk Factors                                                                                                  |  | 4   
|           | Item 1B. |  | Unresolved Staff Comments                                                                                     |  | 6   
|           | Item 2.  |  | Properties                                                                                                    |  | 7   
|           | Item 3.  |  | Legal Proceedings                                                                                             |  | 9   
|           | Item 4.  |  | (Removed and Reserved)                                                                                        |  |     
|           |          |  |                                                                                                               |  |     
|Part
II    |          |  |                                                                                                               |  |     
|           |          |  |                                                                                                               |  |     
|           | Item 5.  |  | Market for Registrants Common Equity,
 Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 10  
|           | Item 6.  |  | Selected Financial Data                                                                                       |  | 13  
|           | Item 7.  |  | Managements Discussion and Analysis of
 Financial Condition and Results of Operations                        |  | 14  
|           | Item 7A. |  | Quantitative and Qualitative Disclosures
 about Market Risk                                                   |  | 24  
|           | Item 8.  |  | Financial Statements and Supplementary Data                                                                   |  | 25  
|           | Item 9.  |  | Changes in and Disagreements with
 Accountants on Accounting and Financial Disclosure                         |  | 43  
|           | Item 9A. |  | Controls and Procedures                                                                                       |  | 43  
|           | Item 9B. |  | Other Information                                                                                             |  | 43  
|           |          |  |                                                                                                               |  |     
|Part
III   |          |  |                                                                                                              
|           |          |  |                                                                                                               |  |     
|           | Item 10. |  | Directors, Executive Officers and Corporate
 Governance                                                       |  | 44  
|           | Item 11. |  | Executive Compensation                                                                                        |  | 44  
|           | Item 12. |  | Security Ownership of Certain Beneficial
 Owners and Management and Related Shareholder Matters               |  | 44  
|           | Item 13. |  | Certain Relationships and Related
 Transactions, and Director Independence                                    |  | 44  
|           | Item 14. |  | Principal Accounting Fees and Services                                                                        |  | 44  
|           |          |  |                                                                                                               |  |     
|Part
IV    |          |  |                                                                                                               |  |     
|           |          |  |                                                                                                               |  |     
|           | Item 15. |  | Exhibits, Financial Statement Schedules                                                                       |  | 45  
|Signatures |          |  |                                                                                                              

This Form 10-K includes
references to certain trademarks or service marks. The SpringHill Suites® by Marriott, TownePlace Suites® by Marriott,
Fairfield Inn® by Marriott, Courtyard® by Marriott, Residence Inn® by Marriott and
Marriott® trademarks are the property of Marriott
International, Inc. or one of its affiliates. The Homewood Suites® by Hilton, Hilton Garden Inn®, Hampton Inn® and Hampton Inn & Suites® trademarks are
the property of Hilton Worldwide or one or more of its affiliates. For
convenience, the applicable trademark or servicemark symbol has been omitted
but will be deemed to be included wherever the above-referenced terms are used.



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PART I

This Annual Report contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance, or achievements of Apple REIT Seven, Inc. (the Company) to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements. Such factors include, but are
not limited to, the ability of the Company to implement its acquisition
strategy and operating strategy; the Companys ability to manage planned
growth; changes in economic cycles, and competition within the hotel industry.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore there can be no assurance that such
statements included in this Annual Report will prove to be accurate. In light
of the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the results or
conditions described in such statements or the objectives and plans of the
Company will be achieved. In addition, the Companys qualification as a real
estate investment trust involves the application of highly technical and
complex provisions of the Internal Revenue Code. Readers should carefully
review the Companys financial statements and the notes thereto, as well as the
risk factors described in the Companys filings with the Securities and
Exchange Commission and Item 1A.

|        |         
|------- | --------
|Item 1. | Business

Apple
REIT Seven, Inc. is a Virginia corporation formed to invest in hotels and other
selected real estate. Initial capitalization occurred on May 26, 2005,
with its first investor closing under its best efforts offering on
March 15, 2006. The Company acquired its first property on April 27,
2006. As of December 31, 2010, the Company owned 51 hotel properties operating
in eighteen states. The best efforts offering was completed in July 2007.

The
Company is a real estate investment trust (REIT) which owns hotels in the
United States. The REIT Modernization Act, effective January 1, 2001,
permits real estate investment trusts to establish taxable businesses to
conduct certain previously disallowed business activities. The Company has
wholly-owned taxable REIT subsidiaries which lease all of the Companys hotels
from wholly-owned qualified REIT subsidiaries. The hotels are operated and
managed by affiliates of Marriott International, Inc. (Marriott), Hilton
Worldwide (Hilton), Western International (Western), Larry
Blumberg & Associates (LBA), White Lodging Services Corporation
(WLS), Dimension Development Company (Dimension), or Inn Ventures, Inc.
(Inn Ventures) under separate hotel management agreements.

The
Company has no foreign operations or assets and its operating structure
includes only one segment. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All inter-company transactions
and balances have been eliminated upon consolidation. Refer to Part II,
Item 8 of this report, for the consolidated financial statements.

Website Access

The
address of the Companys Internet website is www.applereitseven.com. The Company makes available free of charge
through its Internet website its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as practicable after the Company
electronically files such material with, or furnishes it to, the SEC.

Business Objectives

The
Companys acquisition strategy, substantially complete as of September 2008,
included purchasing hotels in developed markets with strong brand recognition,
high levels of customer satisfaction and the potential for cash flow growth.
The Companys primary objective is to enhance shareholder value by increasing
funds from operations and cash available for distributions through internal
growth and selective hotel renovation. The internal growth strategy includes
utilizing the Companys asset management expertise to improve the quality of
the Companys hotels by aggressively managing room rates, partnering with
industry leaders in hotel management, thereby improving hotel revenue and
operating performance, and franchising the hotels with leading brands, thereby
improving the performance of an individual hotel in its local market. When cost
effective, the Company renovates its properties to increase its ability to
compete in particular markets. The Company believes its planned renovations and
strong asset management of its portfolio will continue to improve each hotels
performance in their individual market, although there can be no assurance of
these results.

1

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Financing

The
Company has nine notes payable that were assumed with the acquisition of
hotels. These notes have a total outstanding balance of $101.2 million at
December 31, 2010, maturity dates ranging from January 2013 to June 2016, and
interest rates ranging from 5.85% to 6.95%. The Company also has an unsecured
syndicated revolving credit facility, originated in October 2010, for a maximum
aggregate commitment by the lenders, three commercial banks, of $85 million.
The credit facility, which matures in October 2012, had an outstanding balance
at December 31, 2010 of $44.9 million. The applicable interest rate under the
credit facility is, at the Companys option, equal to a) LIBOR (London
Interbank Offered Rate for a one-month term) plus 3.5%, subject to a minimum
LIBOR interest rate floor of 1.5%, or b) the banks commercial prime rate plus
3.5%. The effective interest rate for borrowings under the credit facility at
December 31, 2010 was 5.0%. Payments of interest only are due monthly under the
terms of the credit facility; the Company may make voluntary prepayments in
whole or in part, at any time. The Company is required to pay a fee at an
annual rate of 0.5% on the average unused balance of the credit facility. At
closing the Company borrowed $35.6 million under the credit facility to
extinguish its then existing unsecured loans and to pay loan transaction costs,
which included arrangement and commitment fees totaling 1.25% of the gross
facility commitment. The Company anticipates that cash flow from operations and
the credit facility will be adequate to meet its liquidity requirements,
including required distributions to shareholders (the Company is not required
to make distributions at its current rate for REIT purposes), capital expenditures
and debt service. The Company intends to maintain a relatively stable
distribution rate instead of raising and lowering the distribution rate with
varying economic cycles. Should financial results of the Company and the
lodging industry remain depressed compared to pre-recessionary levels, the
Company may utilize additional financing to achieve this objective. Although
the Company has relatively low levels of debt, there can be no assurances it
will be successful with this strategy and may need to reduce its distribution
to required levels. If the Company was unsuccessful in extending its maturing
debt in future periods or if it were to default on its debt, it may be unable
to make distributions. The Companys bylaws require board review and approval
of any debt financing obtained by the Company.

Industry and Competition

The
hotel industry is highly competitive. Each of the Companys hotels is located
in a developed area that includes other hotels and competes for guests
primarily with other hotels in the immediate vicinity, and secondarily with
other hotels in the Companys geographic market. An increase in the number of
competitive hotels in a particular area could have a material adverse effect on
the occupancy, average daily rate (ADR) and revenue per available room
(RevPAR) of the Companys hotels in that area. The Company believes that
brand recognition, location, price and quality (of both the hotel and the
services provided) are the principal competitive factors affecting the Companys
hotels. General economic conditions in a particular market, and nationally,
impact the performance of the hotel industry.

Hotel Operating Performance

At
December 31, 2010, the Company owned seven Hilton Garden Inn hotels, seven
Residence Inn hotels, ten Courtyard hotels, twelve Homewood Suites hotels,
three Fairfield Inns, four SpringHill Suites, four TownePlace Suites, three
Hampton Inn hotels, and one full-service Marriott hotel. They are located in
eighteen states and, in aggregate, consist of 6,426 rooms. The Companys
portfolio of hotels is unchanged from December 31, 2009.

Room
revenue for these hotels totaled $181.2 million for the year ended December 31,
2010, and the hotels achieved average occupancy of 71%, ADR of $108 and RevPAR
of $77. Room revenue for the year ended December 31, 2009 totaled $174.0
million, and the Companys hotels achieved average occupancy of 67%, ADR of
$111 and RevPAR of $74. Hotel performance is impacted by many factors including
the economic conditions in the United States as well as each locality. Since
the beginning of 2010 the Company has experienced an increase in demand
compared to 2009, as shown by the improved occupancy rates. However, in
addition to a stabilizing economy, this improvement is a result of reduced room
rates as reflected in the ADR decline in 2010 versus 2009. The Company believes
room rate has stabilized and should improve slightly in 2011. With expected
demand improvement and room rate improvement, the Company and industry anticipate
percentage revenue growth in 2011 in the mid single digits as compared to 2010.
While 2010 and 2009 results reflect the impact of recessionary to stagnant
levels of economic activity, the Companys hotels continue to be leaders in
their respective markets. The Companys average Market Yield for 2010 and 2009
was 125 and 123, respectively. The Market Yield is a measure of each hotels
RevPAR compared to the average (100) in its local market (the index excludes
hotels under renovation). Market Yield is provided by Smith Travel Research,
Inc.®an independent company that tracks historical hotel
performance in most markets throughout the world.

Management and Franchise Agreements

Each
of the Companys 51 hotels are operated and managed, under separate management
agreements, by affiliates of one of the following companies: Marriott, Hilton,
Western, LBA, Dimension, WLS, or Inn Ventures. The agreements provide

2

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for initial
terms ranging from one to twenty years. Fees associated with the agreements
generally include the payment of base management fees, incentive management
fees, accounting fees, and other fees for centralized services which are
allocated among all of the hotels that receive the benefit of such services.
Base management fees are calculated as a percentage of gross revenues.
Incentive management fees are calculated as a percentage of operating profit in
excess of a priority return to the Company, as defined in the management
agreements. The Company has the option to terminate the management agreements
if specified performance thresholds are not satisfied. During the years ended
December 31, 2010, 2009 and 2008, the Company incurred approximately $6.6
million, $6.1 million and $7.4 million, respectively, in management fees.

Western,
LBA, WLS, Dimension and Inn Ventures are not affiliated with either Marriott or
Hilton, and as a result, the hotels they manage (as well as the two hotels
managed by Promus Hotels, Inc., which is an affiliate of Hilton) were required
to obtain separate franchise agreements with each respective franchisor. The
Hilton franchise agreements provide for initial terms ranging between 10 to 20
years. Fees associated with the Hilton agreements generally include the payment
of royalty fees and program fees based on room revenues. The Marriott franchise
agreements provide for an initial term of between six and 20 years. Fees
associated with the Marriott agreements include the payment of royalty fees,
marketing fees, reservation fees and a communications support fee based on room
revenues. During the years ended December 31, 2010, 2009 and 2008, the Company
incurred approximately $8.2 million, $7.8 million and $8.3 million,
respectively, in franchise fees.

Maintenance and Renovation

The
Companys hotels have an ongoing need for renovation and refurbishment. Under
various hotel management agreements, the Company has agreed to fund
expenditures for periodic repairs, replacement or refurbishment of furniture,
fixtures and equipment for the hotels in an amount equal to a certain
percentage of gross revenues. In addition, other capital improvement projects
may be directly funded by the Company. During 2010 and 2009, the Companys
capital expenditures were approximately $3.1 million and $14.0 million, respectively.

Employees

The
Company does not have any employees. During 2010, all employees involved in the
day-to-day operation of the Companys hotels were employed by third party
management companies engaged pursuant to the hotel management agreements. The
Company utilizes, through an advisory agreement for corporate and strategic
support, Apple Seven Advisors, Inc. (ASA) to provide management of the
Company and its assets. Since October 2007, ASA has utilized Apple REIT Six,
Inc. to provide corporate and strategic support and management services for the
Company.

Environmental Matters

In
connection with each of the Companys hotel acquisitions, the Company obtained
a Phase I Environmental Report and additional environmental reports and
surveys, as were necessitated by the preliminary report. Based on the reports,
the Company is not aware of any environmental situations requiring remediation
at the Companys properties, which have not been, or are not currently being,
remediated. No material remediation costs have occurred or are expected to
occur. Under various laws, owners as well as tenants and operators of real
estate may be required to investigate and clean up or remove hazardous
substances present at or migrating from properties they own, lease or operate
and may be held liable for property damage or personal injuries that result
from hazardous substances. These laws also expose the Company to the
possibility that it may become liable to reimburse governments for damages and
costs they incur in connection with hazardous substances.

Seasonality

The
hotel industry historically has been seasonal in nature. Seasonal variations in
occupancy at the Companys hotels may cause quarterly fluctuations in its
revenues. To the extent that cash flow from operations is insufficient during
any quarter, due to temporary or seasonal fluctuations in revenue, the Company
expects to utilize cash on hand and credit availability to make distributions.

Related Parties

The
Company has, and is expected to continue to engage in, significant transactions
with related parties. These transactions cannot be construed to be arms length,
and the results of the Companys operations may be different if these
transactions were conducted with non-related parties. The Companys independent
members of the Board of Directors oversee and annually review the Companys
related party relationships (which include the relationships discussed in this
section) and are required to approve any significant modifications to the
contracts, as well as any new significant related party transactions. There
were no changes to the contracts discussed in this section and no new
significant related party transactions in 2010. The Board of Directors is not
required to approve each individual transaction that falls under the related

3

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party
relationships. However, under the direction of the Board of Directors, at least
one member of the Companys senior management team approves each related party
transaction.

The
Company has a contract with Apple Suites Realty Group (ASRG) to provide
brokerage services for the acquisition and disposition of the Companys real
estate assets. ASRG is wholly owned by the Companys Chairman and Chief
Executive Officer, Glade M. Knight. In accordance with the contract, ASRG is
paid a fee of 2% of the gross purchase price of any acquisitions or gross sale
price of any dispositions of real estate investments, subject to certain
conditions plus certain reimbursable costs. As of December 31, 2008, payments
to ASRG for services under the terms of this contract have totaled
approximately $18.0 million since inception, which were capitalized as a part
of the purchase price of the hotels. No fees were incurred during 2010 and 2009
under this contract.

The
Company is party to an advisory agreement with ASA to provide management
services to the Company. An annual fee ranging from 0.1% to 0.25% of total
equity proceeds received by the Company, in addition to certain reimbursable expenses,
are payable for these services. Total advisory fees and reimbursable expenses
incurred by the Company under the advisory agreement are included in general
and administrative expenses and totaled approximately $2.8 million, $3.0
million and $3.4 million for the years ended December 31, 2010, 2009 and 2008,
respectively. Of this total expense, approximately $1.0 million, $1.0 million
and $1.5 million were paid to ASA and $1.8 million, $2.0 million and $1.9
million were expenses reimbursed (or paid directly to Apple REIT Six, Inc. on
behalf of ASA) by ASA to Apple REIT Six, Inc. for the years ended December 31,
2010, 2009 and 2008.

The
advisors are staffed with personnel of Apple REIT Six, Inc. (AR6). AR6
provides similar staffing for Apple Six Advisors, Inc. (A6A), Apple Eight
Advisors, Inc. (A8A), Apple Nine Advisors, Inc. (A9A) and Apple Ten
Advisors, Inc. (A10A). A6A, A8A, A9A and A10A provide management services to,
respectively, AR6, Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT
Ten, Inc. Although there is a potential conflict on time allocation of
personnel due to the fact that a senior manager, officer or staff member will
provide services to more than one company, the Company believes that the
executives and staff compensation sharing arrangement allows the companies to
share costs yet attract and retain superior executives and staff. The cost
sharing structure also allows each entity to maintain a much more cost
effective structure than having separate staffing arrangements. Amounts
reimbursed to AR6 include both compensation for personnel and overhead
(office rent, utilities, benefits, office supplies, etc.) utilized by the
companies. The allocation of costs from AR6 is made by the management of the
several REITs and is reviewed at least annually by the Compensation Committees
of the several REITs. In making the allocation, management and the Compensation
Committee, consider all relevant facts related to the Companys level of
business activity and the extent to which the Company requires the services of
particular personnel of AR6. Such payments are based on the actual cost of the
services and are not based on formal record keeping regarding the time these
personnel devote to the Company, but are based on a good faith estimate by the
individual and/or his or her supervisor of the time devoted by the individual
to the Company. As part of this arrangement, the day to day transactions may
result in amounts due to or from the noted related parties. To efficiently manage
cash disbursements, the individual companies may make payments for any or all
of the related companies. The amounts due to or from the related individual
companies are reimbursed or collected and are not significant in amount.

Including
ASRG, ASA, A6A, A8A, A9A and A10A discussed above, Mr. Knight is also Chairman
and CEO of AR6, Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT
Ten, Inc. Members of the Companys Board of Directors are also on the boards of
AR6, Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

The
Company is a member of Apple Air Holding, LLC (Apple Air) which owns two Lear
jets as of December 31, 2010. The other members of Apple Air are Apple REIT
Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

|         |             
|-------- | ------------
|Item 1A. | Risk Factors

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

Hotel Operations

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

| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | increases in
 supply of hotel rooms that exceed increases in demand;                                  
| |   |                                                                                                       
| |  | increases in
 energy costs and other travel expenses that reduce business and leisure
 travel;        
| |   |                                                                                                       
| |  | reduced
 business and leisure travel due to continued geo-political uncertainty,
 including terrorism;
| |   |                                                                                                       
| |  | adverse
 effects of declines in general and local economic activity; and                              
| |   |                                                                                                       
| |  | adverse
 effects of a downturn in the hotel industry.                                                 

4

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General Economic Conditions

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

Current General Economic Slowdown in the
Lodging Industry

A
recessionary environment, and uncertainty over its depth and duration,
continues to have a negative impact on the lodging industry. There is some
general consensus among economists that the economy in the United States has
emerged from the recessionary environment of 2009, but high unemployment levels
and sluggish business and consumer travel trends were evident in 2010; as a
result the Company continues to experience reduced revenue as compared to
pre-recessionary periods. Accordingly, financial results have been impacted by
the economic slowdown, and future financial results and growth could be further
harmed until a more expansive national economic environment is prevalent.

Hospitality Industry

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

The
hospitality industry could also experience a significant decline in occupancy
and average daily rates due to a reduction in both business and leisure travel.
General economic conditions, increased fuel costs, natural disasters and
terrorist attacks are a few factors that could affect an individuals
willingness to travel. The Companys property insurance will typically cover
losses for property damage due to terrorist attacks or natural disasters
(subject to policy deductibles). However, the Company is not insured against
the potential negative effect a terrorist attack or natural disaster would have
on the hospitality industry as a whole.

Seasonality

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

Franchise Agreements

The
Companys wholly-owned taxable REIT subsidiaries operate all of the properties
pursuant to franchise or license agreements with nationally recognized hotel
brands. These franchise agreements contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the Companys
properties in order to maintain uniformity within the franchisor system. These
standards could potentially conflict with the Companys ability to create
specific business plans tailored to each property and to each market.

Competition

The
hotel industry is highly competitive. Each of the Companys hotels is located
in a developed area that includes other hotels and competes for guests
primarily with other hotels in the Companys immediate vicinity and secondarily
with other hotels in the Companys geographic market. An increase in the number
of competitive hotels in a particular area could have a material adverse effect
on the occupancy, average daily rate (ADR) and revenue per available room
(RevPAR) of the Companys hotels in that area. In addition, increases in
operating costs due to inflation may not be offset by increased room rates.

Transferability of Shares

There
is and will be no public trading market for the common shares and the Series A
preferred shares for an indefinite period of time, if ever. Therefore, the
Units are and will be highly illiquid and very difficult to trade. In addition,
there are restrictions on the transfer of the common shares. In order to
qualify as a REIT, the shares must be beneficially owned by 100

5

---



or more
persons and no more than 50% of the value of the issued and outstanding shares
may be owned directly or indirectly by five or fewer individuals. Therefore,
the Companys bylaws provide that no person may own more than 9.8% of the
issued and outstanding Units. Any purported transfer of the shares that would
result in a violation of either of these limits will be declared null and void.

Qualification as a REIT

The
rules governing a REIT are highly technical and complex. They require ongoing
compliance with and interpretation of a variety of tests and regulations that
depend on, among other things, future operations. While the Company expects to
satisfy these tests, it cannot ensure it will qualify as a REIT for any
particular year. There is also the risk that the applicable laws governing a
REIT could be changed, which could adversely effect the Company and its
shareholders.

Distributions to Shareholders

If
the Companys properties do not generate sufficient revenue to meet operating
expenses, cash flow and the Companys ability to make distributions to
shareholders may be adversely affected. The Company is subject to all operating
risks common to hotels. These risks might adversely affect occupancy or room
rates. Increases in operating costs due to inflation and other factors may not
necessarily be offset by increased room occupancy or rates. The local, regional
and national hotel markets may limit the extent to which room rates may be
increased to meet increased operating expenses without decreasing occupancy
rates. While the Company intends to make distributions to shareholders, there
can be no assurance that the Company will be able to make distributions at any
particular time or rate, or at all. Further, there is no assurance that a
distribution rate achieved for a particular period will be maintained in the
future. Also, while management may establish goals as to particular rates of
distribution or have an intention to make distributions at a particular rate,
there can be no assurance that such goals or intentions will be realized.

The
Companys objective in setting a distribution rate is to project a rate that
will provide consistency over the life of the Company, taking into account
acquisitions and capital improvements, ramp up of new properties and varying
economic cycles. The Company anticipates that it may need to utilize debt,
offering proceeds and cash from operations to meet this objective. The Company
evaluates the distribution rate on an ongoing basis and may make changes at any
time if the Company feels the rate is not appropriate based on available cash
resources.

While
the Company generally seeks to make distributions from operating cash flows,
distributions may be made (although there is no obligation to do so) in certain
circumstances in part from financing proceeds or other sources, such as
proceeds from the offering of Units. While distributions from such sources
would result in the shareholder receiving cash, the consequences to the
shareholder would differ from a distribution from operating cash flows. For
example, if financing is the source of a distribution, that financing would
have to be repaid, and if proceeds from the offering of Units are distributed,
those proceeds would not then be available for other uses (such as property
acquisitions or improvements).

Financing Risks

Although
the Company anticipates maintaining relatively low levels of debt, it may
periodically use short-term financing to perform renovations to its properties
or make shareholder distributions in periods of fluctuating income from its
properties. The debt markets have been volatile and subject to increased
regulation; as a result, the Company may not be able to use debt to meet its
cash requirements.

Debt Terms

The
line of credit entered into in October 2010 contains financial covenants that
could require the loans to be prepaid prior to maturity or restrict the amount
and timing of distributions to shareholders. The covenants include a minimum
net worth, debt service coverage and fixed charge coverage ratio.

|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments

Not
applicable.

6

---



|        |           
|------- | ----------
|Item 2. | Properties

As
of December 31, 2010, the Company owned 51 hotels with an aggregate of 6,426
rooms, consisting of the following:

|                   |  |                 |    |                  |  |       | 
|------------------ |  | --------------- | -- | ---------------- |  | ----- | 
|Brand              |  | Total by
 Brand |    | Number of
 Rooms | 
|                   |  |                 |    |                  | 
|Hilton
 Garden Inn |  |                 | 7  |                  |  | 892   | 
|Homewood
 Suites   |  |                 | 12 |                  |  | 1,374 | 
|Courtyard          |  |                 | 10 |                  |  | 1,257 | 
|Residence
 Inn     |  |                 | 7  |                  |  | 923   | 
|Hampton Inn        |  |                 | 3  |                  |  | 355   | 
|Fairfield
 Inn     |  |                 | 3  |                  |  | 221   | 
|SpringHill
 Suites |  |                 | 4  |                  |  | 593   | 
|TownePlace
 Suites |  |                 | 4  |                  |  | 401   | 
|Marriott           |  |                 | 1  |                  |  | 410   | 
|                   |  |                 |    |                  |  |       | 
|Total              |  |                 | 51 |                  |  | 6,426 | 
|                   |  |                 |    |                  |  |       | 

The
following table includes the location of each hotel, the date of construction,
the date acquired, encumbrances, initial acquisition cost, gross carrying value
and the number of rooms of each hotel.

7

---



Real Estate and Accumulated Depreciation
As of December 31, 2010
(dollars in thousands)

|                |  |       |  |                   |  |              |         |              |   |                           |  |                   |         |                   |   |             |  |                       |         |                |   |                   |   |             |      |  |        |  |  |              |       |     | 
|--------------- |  | ----- |  | ----------------- |  | ------------ | ------- | ------------ | - | ------------------------- |  | ----------------- | ------- | ----------------- | - | ----------- |  | --------------------- | ------- | -------------- | - | ----------------- | - | ----------- | ---- |  | ------ |  |  | ------------ | ----- | --- | 
|                |  |       |  |                   |  |              |         | Initial Cost |   | Subsequently
 Capitalized |  |                   |         |                   |   |             |  |                       |         |                |   |                   |  
|                |  |       |  |                   |  |              |         |              |   |                           |  |                   |         |                   |   |             |  |                       |         |                |  
|City            |  | State |  | Brand             |  | Encumbrances |         | Land         |   | Bldg./FF&E                |  | Bldg
 Imp. & FF&E |         | Total
 Gross Cost |   | Acc
 Deprec |  | Date of
 Construction |         | Date
 Acquired |   | Depreciable
 Life |   | # of
 Rooms |     
|                |  |       |  |                   |  |              |         |              |   |                           |  |                   |         |                   |   |             |  |                       |         |                |   |                   |   |             |     
|Montgomery      |  | AL    |  | Homewood Suites   |  | $            |        |              | $ | 978                       |  | $                 | 10,032  |                   | $ | 270         |  | $                     | 11,280  |                | $ | (1,530            | ) |             | 2004 |  | Aug-06 |  |  | 3
 - 39 yrs. |       | 91  | 
|Montgomery      |  | AL    |  | Hilton Garden Inn |  |              |        |              |   | 765                       |  |                   | 9,960   |                   |   | 509         |  |                       | 11,234  |                |   | (1,523            | ) |             | 2003 |  | Aug-06 |  |  | 3
 - 39 yrs. |       | 97  | 
|Troy            |  | AL    |  | Hampton Inn       |  |              |        |              |   | 502                       |  |                   | 5,867   |                   |   | 109         |  |                       | 6,478   |                |   | (929              | ) |             | 2003 |  | Aug-06 |  |  | 3
 - 39 yrs. |       | 82  | 
|Auburn          |  | AL    |  | Hilton Garden Inn |  |              |        |              |   | 643                       |  |                   | 9,879   |                   |   | 1,454       |  |                       | 11,976  |                |   | (1,900            | ) |             | 2001 |  | Aug-06 |  |  | 3
 - 39 yrs. |       | 101 | 
|Huntsville      |  | AL    |  | Hilton Garden Inn |  |              |        |              |   | 740                       |  |                   | 9,887   |                   |   | 100         |  |                       | 10,727  |                |   | (1,514            | ) |             | 2005 |  | Aug-06 |  |  | 3
 - 39 yrs. |       | 101 | 
|Huntsville      |  | AL    |  | Homewood Suites   |  |              |        |              |   | 1,092                     |  |                   | 10,889  |                   |   | 48          |  |                       | 12,029  |                |   | (1,632            | ) |             | 2006 |  | Oct-06 |  |  | 3
 - 39 yrs. |       | 107 | 
|Prattville      |  | AL    |  | Courtyard         |  |              |        |              |   | 1,170                     |  |                   | 8,407   |                   |   | 5           |  |                       | 9,582   |                |   | (1,110            | ) |             | 2007 |  | Apr-07 |  |  | 3
 - 39 yrs. |       | 84  | 
|Dothan          |  | AL    |  | Fairfield Inn     |  |              |        |              |   | 570                       |  |                   | 4,243   |                   |   | 65          |  |                       | 4,878   |                |   | (488              | ) |             | 1993 |  | May-07 |  |  | 3
 - 39 yrs. |       | 63  | 
|Trussville      |  | AL    |  | Courtyard         |  |              |        |              |   | 1,088                     |  |                   | 8,744   |                   |   | 1           |  |                       | 9,833   |                |   | (989              | ) |             | 2007 |  | Oct-07 |  |  | 3
 - 39 yrs. |       | 84  | 
|Huntsville      |  | AL    |  | TownePlace Suites |  |              |        |              |   | 804                       |  |                   | 8,384   |                   |   | 8           |  |                       | 9,196   |                |   | (902              | ) |             | 2007 |  | Dec-07 |  |  | 3
 - 39 yrs. |       | 86  | 
|Dothan          |  | AL    |  | Residence Inn     |  |              |        |              |   | 821                       |  |                   | 9,097   |                   |   | 2           |  |                       | 9,920   |                |   | (967              | ) |             | 2008 |  | Apr-08 |  |  | 3
 - 39 yrs. |       | 84  | 
|Tucson          |  | AZ    |  | Residence Inn     |  |              |        |              |   | 998                       |  |                   | 15,960  |                   |   |            |  |                       | 16,958  |                |   | (1,646            | ) |             | 2008 |  | Jan-08 |  |  | 3
 - 39 yrs. |       | 124 | 
|San Diego       |  | CA    |  | Hilton Garden Inn |  |              |        |              |   | 5,021                     |  |                   | 30,345  |                   |   | 539         |  |                       | 35,905  |                |   | (4,660            | ) |             | 2004 |  | May-06 |  |  | 3
 - 39 yrs. |       | 200 | 
|Rancho Bernardo |  | CA    |  | Courtyard         |  |              |        |              |   | 4,669                     |  |                   | 32,271  |                   |   | 224         |  |                       | 37,164  |                |   | (4,080            | ) |             | 1987 |  | Dec-06 |  |  | 3
 - 39 yrs. |       | 210 | 
|Agoura Hills    |  | CA    |  | Homewood Suites   |  |              |        |              |   | 4,511                     |  |                   | 21,434  |                   |   | 32          |  |                       | 25,977  |                |   | (2,460            | ) |             | 2007 |  | May-07 |  |  | 3
 - 39 yrs. |       | 125 | 
|San Diego       |  | CA    |  | Residence Inn     |  |              | 14,490  |              |   | 7,354                     |  |                   | 26,215  |                   |   | 468         |  |                       | 34,037  |                |   | (2,873            | ) |             | 1999 |  | Jun-07 |  |  | 3
 - 39 yrs. |       | 121 | 
|San Diego       |  | CA    |  | Hampton Inn       |  |              |        |              |   | 5,694                     |  |                   | 37,938  |                   |   | 2,149       |  |                       | 45,781  |                |   | (4,316            | ) |             | 2001 |  | Jul-07 |  |  | 3
 - 39 yrs. |       | 177 | 
|Highlands Ranch |  | CO    |  | Residence Inn     |  |              | 11,048  |              |   | 2,345                     |  |                   | 17,333  |                   |   | 523         |  |                       | 20,201  |                |   | (2,015            | ) |             | 1996 |  | Feb-07 |  |  | 3
 - 39 yrs. |       | 117 | 
|Highlands Ranch |  | CO    |  | Hilton Garden Inn |  |              |        |              |   | 2,518                     |  |                   | 18,545  |                   |   | 82          |  |                       | 21,145  |                |   | (2,324            | ) |             | 2007 |  | Mar-07 |  |  | 3
 - 39 yrs. |       | 128 | 
|Sarasota        |  | FL    |  | Homewood Suites   |  |              |        |              |   | 1,785                     |  |                   | 12,277  |                   |   | 605         |  |                       | 14,667  |                |   | (1,911            | ) |             | 2005 |  | Sep-06 |  |  | 3
 - 39 yrs. |       | 100 | 
|Miami           |  | FL    |  | Homewood Suites   |  |              | 8,951   |              |   | 3,215                     |  |                   | 22,152  |                   |   | 1,975       |  |                       | 27,342  |                |   | (3,227            | ) |             | 2000 |  | Feb-07 |  |  | 3
 - 39 yrs. |       | 159 | 
|Tallahassee     |  | FL    |  | Fairfield Inn     |  |              | 3,195   |              |   | 910                       |  |                   | 6,202   |                   |   | 180         |  |                       | 7,292   |                |   | (712              | ) |             | 2000 |  | Apr-07 |  |  | 3
 - 39 yrs. |       | 79  | 
|Lakeland        |  | FL    |  | Courtyard         |  |              | 3,850   |              |   | 1,557                     |  |                   | 8,836   |                   |   | 158         |  |                       | 10,551  |                |   | (1,024            | ) |             | 2000 |  | Apr-07 |  |  | 3
 - 39 yrs. |       | 78  | 
|Miami           |  | FL    |  | Courtyard         |  |              |        |              |   |                          |  |                   | 15,463  |                   |   | 134         |  |                       | 15,597  |                |   | (1,333            | ) |             | 2008 |  | Sep-08 |  |  | 3
 - 39 yrs. |       | 118 | 
|Columbus        |  | GA    |  | Fairfield Inn     |  |              |        |              |   |                          |  |                   | 7,620   |                   |   | 30          |  |                       | 7,650   |                |   | (863              | ) |             | 2003 |  | Apr-07 |  |  | 3
 - 39 yrs. |       | 79  | 
|Macon           |  | GA    |  | Hilton Garden Inn |  |              |        |              |   |                          |  |                   | 10,115  |                   |   | 26          |  |                       | 10,141  |                |   | (1,288            | ) |             | 2007 |  | Jun-07 |  |  | 3
 - 39 yrs. |       | 101 | 
|Columbus        |  | GA    |  | SpringHill Suites |  |              |        |              |   | 1,195                     |  |                   | 8,751   |                   |   | 6           |  |                       | 9,952   |                |   | (904              | ) |             | 2008 |  | Mar-08 |  |  | 3
 - 39 yrs. |       | 85  | 
|Columbus        |  | GA    |  | TownePlace Suites |  |              |        |              |   |                          |  |                   | 8,643   |                   |   | 10          |  |                       | 8,653   |                |   | (902              | ) |             | 2008 |  | May-08 |  |  | 3
 - 39 yrs. |       | 86  | 
|Boise           |  | ID    |  | SpringHill Suites |  |              |        |              |   | 2,024                     |  |                   | 19,580  |                   |   | 426         |  |                       | 22,030  |                |   | (2,474            | ) |             | 1992 |  | Sep-07 |  |  | 3
 - 39 yrs. |       | 230 | 
|New Orleans     |  | LA    |  | Homewood Suites   |  |              | 15,720  |              |   | 4,586                     |  |                   | 39,500  |                   |   | 1,100       |  |                       | 45,186  |                |   | (4,955            | ) |             | 2002 |  | Dec-06 |  |  | 3
 - 39 yrs. |       | 166 | 
|Hattiesburg     |  | MS    |  | Courtyard         |  |              |        |              |   | 877                       |  |                   | 8,914   |                   |   | 16          |  |                       | 9,807   |                |   | (1,291            | ) |             | 2006 |  | Oct-06 |  |  | 3
 - 39 yrs. |       | 84  | 
|Tupelo          |  | MS    |  | Hampton Inn       |  |              | 3,616   |              |   | 336                       |  |                   | 4,928   |                   |   | 1,184       |  |                       | 6,448   |                |   | (1,008            | ) |             | 1994 |  | Jan-07 |  |  | 3
 - 39 yrs. |       | 96  | 
|Omaha           |  | NE    |  | Courtyard         |  |              | 11,573  |              |   | 2,731                     |  |                   | 19,498  |                   |   | 3,672       |  |                       | 25,901  |                |   | (3,082            | ) |             | 1999 |  | Nov-06 |  |  | 3
 - 39 yrs. |       | 181 | 
|Cranford        |  | NJ    |  | Homewood Suites   |  |              |        |              |   | 2,618                     |  |                   | 11,364  |                   |   | 1,871       |  |                       | 15,853  |                |   | (1,970            | ) |             | 2000 |  | Mar-07 |  |  | 3
 - 39 yrs. |       | 108 | 
|Mahwah          |  | NJ    |  | Homewood Suites   |  |              |        |              |   | 3,676                     |  |                   | 16,470  |                   |   | 2,156       |  |                       | 22,302  |                |   | (2,414            | ) |             | 2001 |  | Mar-07 |  |  | 3
 - 39 yrs. |       | 110 | 
|Ronkonkoma      |  | NY    |  | Hilton Garden Inn |  |              |        |              |   | 3,161                     |  |                   | 24,420  |                   |   | 522         |  |                       | 28,103  |                |   | (3,076            | ) |             | 2003 |  | Dec-06 |  |  | 3
 - 39 yrs. |       | 164 | 
|Cincinnati      |  | OH    |  | Homewood Suites   |  |              |        |              |   | 556                       |  |                   | 6,817   |                   |   | 109         |  |                       | 7,482   |                |   | (1,044            | ) |             | 2005 |  | Dec-06 |  |  | 3
 - 39 yrs. |       | 76  | 
|Memphis         |  | TN    |  | Homewood Suites   |  |              |        |              |   | 1,722                     |  |                   | 9,747   |                   |   | 2,088       |  |                       | 13,557  |                |   | (1,835            | ) |             | 1989 |  | May-07 |  |  | 3
 - 39 yrs. |       | 140 | 
|Houston         |  | TX    |  | Residence Inn     |  |              |        |              |   | 1,098                     |  |                   | 13,049  |                   |   | 220         |  |                       | 14,367  |                |   | (2,183            | ) |             | 2006 |  | Apr-06 |  |  | 3
 - 39 yrs. |       | 129 | 
|Brownsville     |  | TX    |  | Courtyard         |  |              |        |              |   | 1,135                     |  |                   | 7,739   |                   |   | 9           |  |                       | 8,883   |                |   | (1,174            | ) |             | 2006 |  | Jun-06 |  |  | 3
 - 39 yrs. |       | 90  | 
|Stafford        |  | TX    |  | Homewood Suites   |  |              |        |              |   | 501                       |  |                   | 7,575   |                   |   | 62          |  |                       | 8,138   |                |   | (1,206            | ) |             | 2006 |  | Aug-06 |  |  | 3
 - 39 yrs. |       | 78  | 
|San Antonio     |  | TX    |  | TownePlace Suites |  |              |        |              |   | 703                       |  |                   | 11,522  |                   |   | 2           |  |                       | 12,227  |                |   | (1,377            | ) |             | 2007 |  | Jun-07 |  |  | 3
 - 39 yrs. |       | 106 | 
|Addison         |  | TX    |  | SpringHill Suites |  |              |        |              |   | 1,545                     |  |                   | 11,312  |                   |   | 771         |  |                       | 13,628  |                |   | (1,305            | ) |             | 2003 |  | Aug-07 |  |  | 3
 - 39 yrs. |       | 159 | 
|San Antonio     |  | TX    |  | TownePlace Suites |  |              |        |              |   | 1,130                     |  |                   | 13,089  |                   |   | 2           |  |                       | 14,221  |                |   | (1,484            | ) |             | 2007 |  | Sep-07 |  |  | 3
 - 39 yrs. |       | 123 | 
|El Paso         |  | TX    |  | Homewood Suites   |  |              |        |              |   | 1,174                     |  |                   | 14,651  |                   |   | 37          |  |                       | 15,862  |                |   | (1,456            | ) |             | 2008 |  | Apr-08 |  |  | 3
 - 39 yrs. |       | 114 | 
|Provo           |  | UT    |  | Residence Inn     |  |              | 5,091   |              |   | 1,358                     |  |                   | 10,388  |                   |   | 2,783       |  |                       | 14,529  |                |   | (1,934            | ) |             | 1996 |  | Jun-07 |  |  | 3
 - 39 yrs. |       | 114 | 
|Alexandria      |  | VA    |  | Courtyard         |  |              |        |              |   | 4,010                     |  |                   | 32,832  |                   |   | 4,296       |  |                       | 41,138  |                |   | (4,013            | ) |             | 1987 |  | Jul-07 |  |  | 3
 - 39 yrs. |       | 178 | 
|Richmond        |  | VA    |  | Marriott          |  |              | 23,686  |              |   |                          |  |                   | 59,614  |                   |   | 15,041      |  |                       | 74,655  |                |   | (10,122           | ) |             | 1984 |  | Jan-08 |  |  | 3
 - 39 yrs. |       | 410 | 
|Seattle         |  | WA    |  | Residence Inn     |  |              |        |              |   |                          |  |                   | 60,489  |                   |   | 6,783       |  |                       | 67,272  |                |   | (9,871            | ) |             | 1991 |  | Sep-06 |  |  | 3
 - 39 yrs. |       | 234 | 
|Vancouver       |  | WA    |  | SpringHill Suites |  |              |        |              |   | 1,314                     |  |                   | 15,122  |                   |   | 23          |  |                       | 16,459  |                |   | (1,957            | ) |             | 2007 |  | Jun-07 |  |  | 3
 - 39 yrs. |       | 119 | 
|Kirkland        |  | WA    |  | Courtyard         |  |              |        |              |   | 3,514                     |  |                   | 28,500  |                   |   | 58          |  |                       | 32,072  |                |   | (2,844            | ) |             | 2006 |  | Oct-07 |  |  | 3
 - 39 yrs. |       | 150 | 
|                |  |       |  |                   |  |              |         |              |   |                           |  |                   |         |                   |   |             |  |                       |         |                |   |                   |   |             |      |  |        |  |  |              |       |    
|                |  |       |  |                   |  | $            | 101,220 |              | $ | 90,714                    |  | $                 | 842,609 |                   | $ | 52,943      |  | $                     | 986,266 |                | $ | (114,097          | ) |             |      |  |        |  |  |              | 6,426 |    
|                |  |       |  |                   |  |              |         |              |   |                           |  |                   |         |                   |   |             |  |                       |         |                |   |                   |   |             |      |  |        |  |  |              |       |    

8

---



Investment
in hotels at December 31, 2010, consisted of the following (in thousands):

|                                   |  |   |          |  
|---------------------------------- |  | - | -------- | -
|Land                               |  | $ | 90,714   |  
|Building and
 Improvements         |  |   | 832,410  |  
|Furniture,
 Fixtures and Equipment |  |   | 63,142   |  
|                                   |  |   |          |  
|                                   |  |   | 986,266  |  
|Less
 Accumulated Depreciation     |  |   | (114,097 | )
|                                   |  |   |          |  
|Investments
 in real estate, net   |  | $ | 872,169  |  
|                                   |  |   |          |  

For
additional information about the Companys properties, refer to Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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

9

---



PART II

|        |                                                                                                              
|------- | -------------------------------------------------------------------------------------------------------------
|Item 5. | Market For Registrants Common Equity, Related Shareholder Matters
 and Issuer Purchases of Equity Securities

Common Shares

There
is currently no established public market in which the Companys common shares
are traded. As of December 31, 2010, there were 92,027,980 Units
outstanding (each Unit consists of one common share, no par value, and one
Series A preferred share). The per share estimated market value of common stock
is deemed to be the offering price of the shares, which is currently $11.00 per
share. This is supported by the fact that the Company is currently selling
shares to the public at a price of $11.00 per share through its Dividend
Reinvestment Plan. As of December 31, 2010, the Units were held by approximately
19,800 beneficial shareholders.

Dividend Reinvestment Plan

In
July 2007, the Company instituted a Dividend Reinvestment Plan for its
shareholders. The plan provides a convenient and cost effective way to increase
shareholder investment in the Company by reinvesting dividends to purchase
additional Units of the Company. The uses of proceeds from this plan may
include purchasing Units under the Companys Unit Redemption Program, enhancing
properties, satisfying financing obligations and other expenses, increasing
working capital, funding various corporate operations, and acquiring hotels. As
of December 31, 2010, approximately 7.9 million Units, representing $86.5
million in proceeds to the Company, have been issued under the plan since
inception.

Unit Redemption Program

Effective
in April 2007 the Companys Board of Directors approved a Unit Redemption
Program to provide limited interim liquidity to shareholders who have held
their Units for at least one year. A shareholder may request redemption of
Units for a purchase price equal to 92% of the price paid per Unit if the Units
have been owned less than three years, or 100% of the price paid per Unit if
the Units have been owned more than three years. The Company reserves the right
to change the purchase price of redemptions, reject any request for redemption,
or otherwise amend the terms of, suspend, or terminate the Unit Redemption
Program. As of December 31, 2010, the Company has redeemed approximately 7.0
million Units in the amount of $74.4 million under the program. The redemptions
represent 100% of the redemption requests as of the last scheduled redemption
date in 2010, which was October 2010. In January 2011, the first scheduled
redemption date of 2011, the Company redeemed in accordance with the Unit
Redemption Program on a pro-rata basis approximately 63% of the requested
redemptions, or a total of $8.0 million. Although the Program allows for up to
5% of the weighted average shares to be redeemed on an annual basis, the
Company plans to redeem approximately 3% of weighted average shares. See the
Companys complete consolidated statements of cash flows for the years ended
December 31, 2010, 2009 and 2008 included in the Companys audited financial
statements in Item 8 of the Form 10-K for a description of the sources and uses
of the Companys cash flows. The following is a summary of redemptions during
the fourth quarter of 2010 (no redemptions occurred in November and December):

Issuer Purchases of Equity Securities

|             |  |                               |           |                            |   |                                                                             |  |                                                                           |           |  |  |     | 
|------------ |  | ----------------------------- | --------- | -------------------------- | - | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------- | --------- |  |  | --- | 
|             |  | (a)                           |           | (b)                        |   | (c)                                                                         |  | (d)                                                                       |          
|             |  |                               |           |                            |   |                                                                             |  |                                                                           |          
|Period       |  | Total Numberof UnitsPurchased |           | Average Price Paidper Unit |   | Total Number ofUnits Purchased asPart of PubliclyAnnounced Plansor Programs |  | Maximum Numberof Units that MayYet Be PurchasedUnder the Plans orPrograms |          
|             |  |                               |           |                            |   |                                                                             |  |                                                                           |          
|October 2010 |  |                               | 1,065,949 |                            | $ | 10.98                                                                       |  |                                                                           | 6,962,399 |  |  | (1) | 

|    |                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The maximum
 number of Units that may be redeemed in any 12 month period is limited to up
 to five percent (5.0%) of the weighted average number of Units
 outstanding from the beginning of the 12 month period, subject to the
 Companys right to change the number of Units to be redeemed.

Series A Preferred Shares

The
Series A preferred shares have no voting rights and no conversion rights. In
addition, the Series A preferred shares are not separately tradable from the
common shares to which they relate. The Series A preferred shares do not have
any distribution rights except a priority distribution upon the sale of the
Companys assets. The priority distribution (Priority Distribution) will be
equal to $11.00 per Series A preferred share, and will be paid before any
distribution will be made to

10

---



the holders of
any other shares. Upon the Priority Distribution, the Series A preferred shares
will have no other distribution rights.

Series B Convertible Preferred Shares

In May 2005 the
Company  issued 240,000 Series B convertible preferred shares to Glade M.
Knight, the Companys Chairman and Chief Executive Officer. There are no
dividends payable on the Series B convertible preferred shares. Holders of more
than two-thirds of the Series B convertible preferred shares must approve any
proposed amendment to the Articles of Incorporation that would adversely affect
the Series B convertible preferred shares. Upon liquidation, each holder of the
Series B convertible preferred shares is entitled to a priority liquidation
payment. However the priority liquidation payment of the holder 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 $11 per
number of common shares into which each Series B convertible preferred share
would convert. In the event that the liquidation of the Companys 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. The Series B
convertible preferred shares are convertible into common shares upon and for
180 days following the occurrence of any of the following events:
(1) substantially all of the Companys assets, stock or business is sold
or transferred through exchange, merger, consolidation, lease, share exchange
or otherwise, other than a sale of assets in liquidation, dissolution or
winding up of the Companys business; or (2) the termination or expiration
without renewal of the advisory agreement with Apple Seven Advisors, Inc., or
if the company ceases to use Apple Suites Realty Group, Inc. to provide
property acquisition and disposition services; or (3) the Companys common
shares are listed on any securities exchange or quotation system or in any
established market.

Preferred Shares

The
Companys articles of incorporation authorize issuance of up to 15 million
additional preferred shares. No preferred shares other than the Series A
preferred shares and the Series B convertible preferred shares (discussed
above) have been issued. The Company believes that the authorization to issue
additional preferred shares benefits the Company and its shareholders by
permitting flexibility in financing additional growth, giving the Company
additional financing options in corporate planning and in responding to
developments in business, including financing of additional acquisitions and
other general corporate purposes. Having authorized preferred shares available
for issuance in the future gives the Company the ability to respond to future
developments and allows preferred shares to be issued without the expense and
delay of a special shareholders meeting. At present, the Company has no
specific financing or acquisition plans involving the issuance of additional
preferred shares and the Company does not propose to fix the characteristics of
any series of preferred shares in anticipation of issuing preferred shares
other than the Series A preferred shares and Series B convertible preferred
shares discussed above. The Company cannot now predict whether or to what
extent, if any, additional preferred shares will be used or if so used what the
characteristics of a particular series may be. The voting rights and rights to
distributions of the holders of common shares will be subject to the prior
rights of the holders of any subsequently-issued preferred shares. Unless
otherwise required by applicable law or regulation, the preferred shares would
be issuable without further authorization by holders of the common shares and
on such terms and for such consideration as may be determined by the Board of
Directors. The preferred shares could be issued in one or more series having
varying voting rights, redemption and conversion features, distribution
(including liquidating distribution) rights and preferences, and other rights,
including rights of approval of specified transactions. A series of preferred
shares could be given rights that are superior to rights of holders of common
shares and a series having preferential distribution rights could limit common
share distributions and reduce the amount holders of common shares would
otherwise receive on dissolution.

Distribution Policy

To
maintain its REIT status the Company is required to distribute at least 90% of
its ordinary income. Distributions totaled $71.3 million in 2010, $75.4 million
in 2009, and $81.4 million in 2008. Distributions from May 2009 through
December 2010 were paid monthly at a rate of $0.064167 per common share. Prior
to the May 2009 distribution, distributions were paid monthly at a rate of
$0.073334 per common share. The timing and amount of distributions to
shareholders are within the discretion of the Companys Board of Directors. The
amount and frequency of future distributions will depend on the Companys
results of operations, cash flow from operations, economic conditions, working
capital requirements, cash requirements to fund investing and financing
activities, capital expenditure requirements, including improvements to and
expansions of properties and the acquisition of additional properties, as well
as the distribution requirements under federal income tax provisions for
qualification as a REIT. The Companys line of credit loan agreement limits
distributions to $84 million annually, unless the Company is required to
distribute more to meet REIT requirements.

11

---



Non-Employee Directors Stock Option Plan and
Incentive Plan

The
Companys Board of Directors has adopted and the Companys shareholders have
approved a Non-Employee Directors Stock Option Plan and an Incentive Plan. The
options issued under each plan convert upon exercise to Units. Each Unit
consists of one common share and one Series A preferred share of the Company.
As of December 31, 2010, options to purchase 294,494 Units were
outstanding with a weighted average exercise price of $11 per Unit under the
Directors Plan. No options have been issued under the Incentive Plan. The
following is a summary of securities issued under the plans as of
December 31, 2010:

|                                                        |  |                                                                                                |         |                                                                                |   |                                                                                                  |  |  |           | 
|------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------ | - | ------------------------------------------------------------------------------------------------ |  |  | --------- | 
|Plan Category                                           |  | Number of securities to be
 issued upon exercise of
 outstanding options,
 warrants and rights |         | Weighted-average
 exercise price of
 outstanding options,
 warrants and rights |   | Number of securities
 remaining available for
 future issuance under
 equity compensation
 plans | 
|                                                        |  |                                                                                                |         |                                                                                |   |                                                                                                  | 
|Equity Compensation plans approved by
 security holders |  |                                                                                                |         |                                                                                |   |                                                                                                  |  |  |           | 
|Non-Employee Directors Stock Option Plan                |  |                                                                                                | 294,494 |                                                                                | $ | 11.00                                                                                            |  |  | 1,305,051 | 
|Incentive Plan                                          |  |                                                                                                |        |                                                                                | $ |                                                                                                 |  |  | 4,029,318 | 

12

---



|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following
table sets forth selected financial data for the years ended December 31,
2010, 2009, 2008, 2007 and 2006. Certain information in the table has been
derived from the Companys audited financial statements and notes thereto. This
data should be read in conjunction with Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations, and
Item 15(1), the Consolidated Financial Statements and Notes thereto,
appearing elsewhere in this Annual Report on Form 10-K. During the period from
the Companys initial capitalization on May 26, 2005 to April 26,
2006, the Company owned no properties, had no revenue exclusive of interest
income, and was primarily engaged in capital formation activities. Operations
commenced on April 27, 2006 with the Companys first property acquisition.

|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|--------------------------------------------------------------- |  | ----------------------------------- | ------- | ----------------------------------- | - | ----------------------------------- | - | ----------------------------------- | -------- | ----------------------------------- | - | -------- | - | - | -------- | -
|(in thousands except per share and
 statistical data)           |  | For the
 yearendedDecember 31, 2010 |         | For the
 yearendedDecember 31, 2009 |   | For the
 yearendedDecember 31, 2008 |   | For the
 yearendedDecember 31, 2007 |          | For the
 yearendedDecember 31, 2006 |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |  
|Revenues:                                                       |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Room revenue                                                    |  | $                                   | 181,161 |                                     | $ | 174,042                             |   | $                                   | 195,414  |                                     | $ | 129,467  |   | $ | 18,800   |  
|Other revenue                                                   |  |                                     | 19,370  |                                     |   | 17,673                              |   |                                     | 18,877   |                                     |   | 9,097    |   |   | 1,545    |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Total revenue                                                   |  |                                     | 200,531 |                                     |   | 191,715                             |   |                                     | 214,291  |                                     |   | 138,564  |   |   | 20,345   |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Expenses:                                                       |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Hotel operating
 expenses                                       |  |                                     | 116,895 |                                     |   | 113,968                             |   |                                     | 124,588  |                                     |   | 76,944   |   |   | 12,229   |  
|Taxes, insurance
 and other                                     |  |                                     | 12,229  |                                     |   | 13,717                              |   |                                     | 13,559   |                                     |   | 8,571    |   |   | 1,472    |  
|General and
 administrative                                     |  |                                     | 5,177   |                                     |   | 4,600                               |   |                                     | 5,881    |                                     |   | 3,823    |   |   | 1,988    |  
|Depreciation                                                    |  |                                     | 33,174  |                                     |   | 32,425                              |   |                                     | 28,434   |                                     |   | 16,990   |   |   | 3,073    |  
|Debt
 extinguishment costs                                      |  |                                     |        |                                     |   |                                    |   |                                     |         |                                     |   | 1,391    |   |   |         |  
|Gain from
 settlement of contingency                            |  |                                     | (3,099  | )                                   |   |                                    |   |                                     |         |                                     |   |         |   |   |         |  
|Interest and
 other expenses, net                               |  |                                     | 7,837   |                                     |   | 6,292                               |   |                                     | 3,766    |                                     |   | (2,388   | ) |   | (1,855   | )
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Total expenses                                                  |  |                                     | 172,213 |                                     |   | 171,002                             |   |                                     | 176,228  |                                     |   | 105,331  |   |   | 16,907   |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Net income                                                      |  | $                                   | 28,318  |                                     | $ | 20,713                              |   | $                                   | 38,063   |                                     | $ | 33,233   |   | $ | 3,438    |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Per
 Share                                                      |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Net income per
 common share                                    |  | $                                   | 0.31    |                                     | $ | 0.22                                |   | $                                   | 0.41     |                                     | $ | 0.47     |   | $ | 0.23     |  
|Distributions
 paid to common shareholders                      |  | $                                   | 0.77    |                                     | $ | 0.81                                |   | $                                   | 0.88     |                                     | $ | 0.88     |   | $ | 0.66     |  
|Weighted-average
 common shares outstanding - basic and diluted |  |                                     | 92,627  |                                     |   | 93,472                              |   |                                     | 92,637   |                                     |   | 70,763   |   |   | 15,152   |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Balance
 Sheet Data (at end of period)                          |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Cash and cash
 equivalents                                      |  | $                                   |        |                                     | $ |                                    |   | $                                   | 20,609   |                                     | $ | 142,437  |   | $ | 44,604   |  
|Investment in
 real estate, net                                 |  | $                                   | 872,169 |                                     | $ | 902,293                             |   | $                                   | 920,688  |                                     | $ | 786,765  |   | $ | 347,092  |  
|Total assets                                                    |  | $                                   | 891,967 |                                     | $ | 923,887                             |   | $                                   | 967,844  |                                     | $ | 961,248  |   | $ | 409,886  |  
|Notes payable                                                   |  | $                                   | 148,017 |                                     | $ | 117,787                             |   | $                                   | 109,275  |                                     | $ | 84,705   |   | $ | 49,292   |  
|Shareholders
 equity                                           |  | $                                   | 733,300 |                                     | $ | 792,257                             |   | $                                   | 845,753  |                                     | $ | 868,531  |   | $ | 354,122  |  
|Net book value
 per share                                       |  | $                                   | 7.97    |                                     | $ | 8.47                                |   | $                                   | 9.04     |                                     | $ | 9.47     |   | $ | 9.56     |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Other
 Data                                                     |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Cash flow from:                                                 |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Operating
 activities                                           |  | $                                   | 59,915  |                                     | $ | 55,460                              |   | $                                   | 69,025   |                                     | $ | 49,957   |   | $ | 5,158    |  
|Investing
 activities                                           |  | $                                   | (2,310  | )                                   | $ | (10,926                             | ) | $                                   | (127,519 | )                                   | $ | (394,301 | ) | $ | (328,324 | )
|Financing
 activities                                           |  | $                                   | (57,605 | )                                   | $ | (65,143                             | ) | $                                   | (63,334  | )                                   | $ | 442,177  |   | $ | 367,720  |  
|Number of hotels
 owned at end of period                        |  |                                     | 51      |                                     |   | 51                                  |   |                                     | 51       |                                     |   | 44       |   |   | 18       |  
|Average Daily
 Rate (ADR) (a)                                   |  | $                                   | 108     |                                     | $ | 111                                 |   | $                                   | 120      |                                     | $ | 120      |   | $ | 116      |  
|Occupancy                                                       |  |                                     | 71      | %                                   |   | 67                                  | % |                                     | 71       | %                                   |   | 74       | % |   | 65       | %
|Revenue Per
 Available Room (RevPAR) (b)                        |  | $                                   | 77      |                                     | $ | 74                                  |   | $                                   | 86       |                                     | $ | 88       |   | $ | 75       |  
|Total Rooms Sold
 (000s) (c)                                    |  |                                     | 1,671   |                                     |   | 1,569                               |   |                                     | 1,623    |                                     |   | 1,080    |   |   | 163      |  
|Total Rooms
 Available (000s) (d)                               |  |                                     | 2,346   |                                     |   | 2,345                               |   |                                     | 2,272    |                                     |   | 1,469    |   |   | 250      |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Funds
 From Operations Calculation (e)                          |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Net income                                                      |  | $                                   | 28,318  |                                     | $ | 20,713                              |   | $                                   | 38,063   |                                     | $ | 33,233   |   | $ | 3,438    |  
|Depreciation of
 real estate owned                              |  |                                     | 33,174  |                                     |   | 32,425                              |   |                                     | 28,434   |                                     |   | 16,990   |   |   | 3,073    |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Funds from
 operations                                          |  |                                     | 61,492  |                                     |   | 53,138                              |   |                                     | 66,497   |                                     |   | 50,223   |   |   | 6,511    |  
|Gain from
 settlement of contingency                            |  |                                     | (3,099  | )                                   |   |                                    |   |                                     |         |                                     |   |         |   |   |         |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  
|Modified Funds
 from operations                                 |  | $                                   | 58,393  |                                     | $ | 53,138                              |   | $                                   | 66,497   |                                     | $ | 50,223   |   | $ | 6,511    |  
|                                                                |  |                                     |         |                                     |   |                                     |   |                                     |          |                                     |   |          |   |   |          |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(a) | Total room revenue divided by number of rooms sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(b) | ADR multiplied by occupancy percentage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(c) | Represents actual number of room nights sold during
 period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(d) | Represents number of rooms owned by the Company
 multiplied by the number of nights in the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(e) | 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. Modified
funds from operations  (MFFO) excludes any gain or loss from the settlement of a
contingency.   The  Company  considers  FFO  and  MFFO  in  evaluating  property
acquisitions and its operating performance and believes that FFO and MFFO should
be  considered  along with,  but not as an  alternative  to, net income and cash
flows as a measure of the  Companys  activities in  accordance  with GAAP.  The
Company considers FFO and MFFO as supplemental measures of operating performance
in the real  estate  industry,  and  along  with the  other  financial  measures
included  in this Form 10-K,  including  net  income,  cash flow from  operating
activities,   financing  activities  and  investing  activities,   they  provide
investors with an indication of the  performance  of the Company.  The Companys
definition of FFO and MFFO are not  necessarily  the same as such terms that are
used by other  companies.  FFO and MFFO are not  necessarily  indicative of cash
available to fund cash needs.

13

---



|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial Condition and
 Results of Operations

This
Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements of the Company
to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, the ability of the Company to implement its acquisition
strategy and operating strategy; the Companys ability to manage planned
growth; changes in economic cycles, and competition within the hotel industry.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore there can be no assurance that
such statements included in this Annual Report will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
results or conditions described in such statements or the objectives and plans
of the Company will be achieved. In addition, the Companys qualification as a
real estate investment trust involves the application of highly technical and
complex provisions of the Internal Revenue Code. Readers should carefully
review the Companys financial statements and the notes thereto, as well as the
risk factors described in the Companys filings with the Securities and
Exchange Commission and Item 1A.

General

The
Company was initially capitalized on May 26, 2005, with its first investor
closing on March 15, 2006. The Company owned 51 hotels as of
December 31, 2010, located within different markets in the United States.
The Company is treated as a Real Estate Investment Trust (REIT) for federal
income tax purposes. The Companys first hotel was acquired on April 27,
2006. An additional 17 hotels were purchased during 2006, 26 hotels were
purchased during 2007, and seven hotels were acquired in 2008. Accordingly, the
results of operations include only the results of operations of the hotels for
the period owned. Exclusive of interest income, the Company had no operating
revenues before the first hotel acquisition in April 2006.

Although
hotel performance can be influenced by many factors including local
competition, local and general economic conditions in the United States and the
performance of individual managers assigned to each hotel, performance of the
hotels within their respective local markets, in general, has met the Companys
expectations for the period owned. With the significant decline in economic
conditions throughout the United States, overall performance of the Companys
hotels has not met expectations. The hotel industry and the Company showed
improvement in revenue and net income in 2010 as compared to 2009. Although
still below pre-recessionary levels, the company anticipates continued revenue
growth in 2011 as compared to 2010. In evaluating financial condition and
operating performance, the most important matters on which the Company focuses
are revenue measurements, such as average occupancy, average daily rate
(ADR), revenue per available room (RevPAR), and Market Yield which compares
an individual hotels results to other hotels in its local market, and
expenses, such as hotel operating expenses, general and administrative and
other expenses described below.

As
noted above, the Company owned 51 hotel properties at December 31, 2010
(consisting of 6,426 total rooms). The following is a summary of results for
the years ended December 31, 2010 and 2009.

|                                       |  |                            |         |                   |  |                            |   |                   |         |               |  |     |   |  |     |  
|-------------------------------------- |  | -------------------------- | ------- | ----------------- |  | -------------------------- | - | ----------------- | ------- | ------------- |  | --- | - |  | --- | -
|(in thousands except statistical data) |  | Year endedDecember 31,2010 |         | Percent ofRevenue |  | Year endedDecember 31,2009 |   | Percent ofRevenue |         | PercentChange | 
|                                       |  |                            |         |                   |  |                            |   |                   |         |               | 
|                                       |  |                            |         |                   |  |                            |   |                   |         |               |  |     |   |  |     |  
|Total revenues                         |  | $                          | 200,531 |                   |  | 100                        | % | $                 | 191,715 |               |  | 100 | % |  | 5   | %
|Hotel operating expenses               |  |                            | 116,895 |                   |  | 58                         | % |                   | 113,968 |               |  | 59  | % |  | 3   | %
|Taxes, insurance and other expense     |  |                            | 12,229  |                   |  | 6                          | % |                   | 13,717  |               |  | 7   | % |  | -11 | %
|General and administrative expense     |  |                            | 5,177   |                   |  | 3                          | % |                   | 4,600   |               |  | 2   | % |  | 13  | %
|Depreciation                           |  |                            | 33,174  |                   |  |                            |   |                   | 32,425  |               |  |     |   |  | 2   | %
|Interest expense, net                  |  |                            | 7,837   |                   |  |                            |   |                   | 6,292   |               |  |     |   |  | 25  | %
|                                       |  |                            |         |                   |  |                            |   |                   |         |               |  |     |   |  |     |  
|Average Market Yield(1)                |  |                            | 125     |                   |  |                            |   |                   | 123     |               |  |     |   |  | 2   | %
|Number of Hotels                       |  |                            | 51      |                   |  |                            |   |                   | 51      |               |  |     |   |  |    | %
|Average Daily Rate (ADR)               |  | $                          | 108     |                   |  |                            |   | $                 | 111     |               |  |     |   |  | -3  | %
|Occupancy                              |  |                            | 71      | %                 |  |                            |   |                   | 67      | %             |  |     |   |  | 6   | %
|RevPAR                                 |  | $                          | 77      |                   |  |                            |   | $                 | 74      |               |  |     |   |  | 4   | %

|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | Calculated from data
 provided by Smith Travel Research, Inc.®. Excludes properties
 under renovations during the applicable periods.

14

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Hotels Owned

As
of December 31, 2010, the Company owned 51 hotels, with a total of 6,426
rooms. As previously noted, seven hotels were purchased in 2008, 26 hotels were
purchased in 2007, and 18 were purchased in 2006. The following table
summarizes the location, brand, manager, date acquired, number of rooms and
gross purchase price for each hotel. All dollar amounts are in thousands.

|                 |  |       |  |                    |  |              |  |                    |  |       |  |                         |         | 
|---------------- |  | ----- |  | ------------------ |  | ------------ |  | ------------------ |  | ----- |  | ----------------------- | ------- | 
|Location         |  | State |  | Brand              |  | Manager      |  | Date of 
 Purchase |  | Rooms |  | Gross
 Purchase 
 Price
|                 |  |       |  |                    |  |              |  |                    |  |       |  |                        
|Montgomery       |  | AL    |  | Homewood
 Suites   |  | LBA          |  | 8/17/06            |  | 91    |  | $                       | 10,660  | 
|Montgomery       |  | AL    |  | Hilton
 Garden Inn |  | LBA          |  | 8/17/06            |  | 97    |  |                         | 10,385  | 
|Troy             |  | AL    |  | Hampton Inn        |  | LBA          |  | 8/17/06            |  | 82    |  |                         | 6,130   | 
|Auburn           |  | AL    |  | Hilton
 Garden Inn |  | LBA          |  | 8/17/06            |  | 101   |  |                         | 10,185  | 
|Huntsville       |  | AL    |  | Hilton
 Garden Inn |  | LBA          |  | 8/17/06            |  | 101   |  |                         | 10,285  | 
|Huntsville       |  | AL    |  | Homewood
 Suites   |  | LBA          |  | 10/27/06           |  | 107   |  |                         | 11,606  | 
|Prattville       |  | AL    |  | Courtyard          |  | LBA          |  | 4/24/07            |  | 84    |  |                         | 9,304   | 
|Dothan           |  | AL    |  | Fairfield
 Inn     |  | LBA          |  | 5/16/07            |  | 63    |  |                         | 4,584   | 
|Trussville       |  | AL    |  | Courtyard          |  | LBA          |  | 10/4/07            |  | 84    |  |                         | 9,510   | 
|Huntsville       |  | AL    |  | TownePlace
 Suites |  | LBA          |  | 12/10/07           |  | 86    |  |                         | 8,927   | 
|Dothan           |  | AL    |  | Residence
 Inn     |  | LBA          |  | 4/16/08            |  | 84    |  |                         | 9,669   | 
|Tucson           |  | AZ    |  | Residence
 Inn     |  | Western      |  | 1/17/08            |  | 124   |  |                         | 16,640  | 
|San Diego        |  | CA    |  | Hilton
 Garden Inn |  | Inn Ventures |  | 5/9/06             |  | 200   |  |                         | 34,500  | 
|Rancho
 Bernardo |  | CA    |  | Courtyard          |  | Dimension    |  | 12/12/06           |  | 210   |  |                         | 36,000  | 
|Agoura Hills     |  | CA    |  | Homewood
 Suites   |  | Dimension    |  | 5/8/07             |  | 125   |  |                         | 25,250  | 
|San Diego        |  | CA    |  | Residence
 Inn     |  | Dimension    |  | 6/13/07            |  | 121   |  |                         | 32,500  | 
|San Diego        |  | CA    |  | Hampton Inn        |  | Dimension    |  | 7/19/07            |  | 177   |  |                         | 42,000  | 
|Highlands
 Ranch |  | CO    |  | Residence
 Inn     |  | Dimension    |  | 2/22/07            |  | 117   |  |                         | 19,000  | 
|Highlands
 Ranch |  | CO    |  | Hilton
 Garden Inn |  | Dimension    |  | 3/9/07             |  | 128   |  |                         | 20,500  | 
|Sarasota         |  | FL    |  | Homewood
 Suites   |  | Hilton       |  | 9/15/06            |  | 100   |  |                         | 13,800  | 
|Miami            |  | FL    |  | Homewood
 Suites   |  | Dimension    |  | 2/21/07            |  | 159   |  |                         | 24,300  | 
|Tallahassee      |  | FL    |  | Fairfield
 Inn     |  | LBA          |  | 4/24/07            |  | 79    |  |                         | 6,647   | 
|Lakeland         |  | FL    |  | Courtyard          |  | LBA          |  | 4/24/07            |  | 78    |  |                         | 9,805   | 
|Miami            |  | FL    |  | Courtyard          |  | Dimension    |  | 9/5/08             |  | 118   |  |                         | 15,000  | 
|Columbus         |  | GA    |  | Fairfield
 Inn     |  | LBA          |  | 4/24/07            |  | 79    |  |                         | 7,333   | 
|Macon            |  | GA    |  | Hilton
 Garden Inn |  | LBA          |  | 6/28/07            |  | 101   |  |                         | 10,660  | 
|Columbus         |  | GA    |  | SpringHill
 Suites |  | LBA          |  | 3/6/08             |  | 85    |  |                         | 9,675   | 
|Columbus         |  | GA    |  | TownePlace
 Suites |  | LBA          |  | 5/22/08            |  | 86    |  |                         | 8,428   | 
|Boise            |  | ID    |  | SpringHill
 Suites |  | Inn Ventures |  | 9/14/07            |  | 230   |  |                         | 21,000  | 
|New Orleans      |  | LA    |  | Homewood
 Suites   |  | Dimension    |  | 12/15/06           |  | 166   |  |                         | 43,000  | 
|Hattiesburg      |  | MS    |  | Courtyard          |  | LBA          |  | 10/5/06            |  | 84    |  |                         | 9,455   | 
|Tupelo           |  | MS    |  | Hampton Inn        |  | LBA          |  | 1/23/07            |  | 96    |  |                         | 5,245   | 
|Omaha            |  | NE    |  | Courtyard          |  | Marriott     |  | 11/4/06            |  | 181   |  |                         | 23,100  | 
|Cranford         |  | NJ    |  | Homewood
 Suites   |  | Dimension    |  | 3/7/07             |  | 108   |  |                         | 13,500  | 
|Mahwah           |  | NJ    |  | Homewood
 Suites   |  | Dimension    |  | 3/7/07             |  | 110   |  |                         | 19,500  | 
|Ronkonkoma       |  | NY    |  | Hilton
 Garden Inn |  | White        |  | 12/15/06           |  | 164   |  |                         | 27,000  | 
|Cincinnati       |  | OH    |  | Homewood
 Suites   |  | White        |  | 12/1/06            |  | 76    |  |                         | 7,100   | 
|Memphis          |  | TN    |  | Homewood
 Suites   |  | Hilton       |  | 5/15/07            |  | 140   |  |                         | 11,100  | 
|Houston          |  | TX    |  | Residence
 Inn     |  | Western      |  | 4/27/06            |  | 129   |  |                         | 13,600  | 
|Brownsville      |  | TX    |  | Courtyard          |  | Western      |  | 6/19/06            |  | 90    |  |                         | 8,550   | 
|Stafford         |  | TX    |  | Homewood
 Suites   |  | Western      |  | 8/15/06            |  | 78    |  |                         | 7,800   | 
|San Antonio      |  | TX    |  | TownePlace
 Suites |  | Western      |  | 6/29/07            |  | 106   |  |                         | 11,925  | 
|Addison          |  | TX    |  | SpringHill
 Suites |  | Marriott     |  | 8/10/07            |  | 159   |  |                         | 12,500  | 
|San Antonio      |  | TX    |  | TownePlace
 Suites |  | Western      |  | 9/27/07            |  | 123   |  |                         | 13,838  | 
|El Paso          |  | TX    |  | Homewood
 Suites   |  | Western      |  | 4/23/08            |  | 114   |  |                         | 15,390  | 
|Provo            |  | UT    |  | Residence
 Inn     |  | Dimension    |  | 6/13/07            |  | 114   |  |                         | 11,250  | 
|Alexandria       |  | VA    |  | Courtyard          |  | Marriott     |  | 7/13/07            |  | 178   |  |                         | 36,997  | 
|Richmond         |  | VA    |  | Marriott           |  | White        |  | 1/25/08            |  | 410   |  |                         | 53,300  | 
|Seattle          |  | WA    |  | Residence
 Inn     |  | Inn Ventures |  | 9/1/06             |  | 234   |  |                         | 56,173  | 
|Vancouver        |  | WA    |  | SpringHill
 Suites |  | Inn Ventures |  | 6/1/07             |  | 119   |  |                         | 15,988  | 
|Kirkland         |  | WA    |  | Courtyard          |  | Inn Ventures |  | 10/23/07           |  | 150   |  |                         | 31,000  | 
|                 |  |       |  |                    |  |              |  |                    |  |       |  |                         |         | 
|                 |  |       |  |                    |  |              |  |                    |  | 6,426 |  | $                       | 901,594 | 
|                 |  |       |  |                    |  |              |  |                    |  |       |  |                         |         | 

15

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The
Company leased all of its hotels to wholly-owned taxable REIT subsidiaries
(collectively, the lessee) under master hotel lease agreements. The Company
also used the proceeds of its ongoing offering to pay 2% of the gross purchase
price for these hotels, which was approximately $18.0 million, as a commission
to Apple Suites Realty Group, Inc. (ASRG). ASRG is 100% owned by the
Companys Chairman and Chief Executive Officer, Glade M. Knight.

With
the exception of assumed mortgage loans on some of its hotel properties,
substantially all of the purchase price of the hotels was funded by the
Companys best-efforts offering of Units, which concluded in July 2007. The
following table summarizes the hotel, interest rate, maturity date, principal
amount assumed associated with each mortgage, and outstanding principal balance
as of December 31, 2010. All dollar amounts are in thousands.

|                    |  |                 |  |                 |      |                 |  |                     |  |                                                               |         |  |   |         | 
|------------------- |  | --------------- |  | --------------- | ---- | --------------- |  | ------------------- |  | ------------------------------------------------------------- | ------- |  | - | ------- | 
|Location            |  | Brand           |  | Interest 
 Rate |      | Maturity 
 Date |  | Principal 
 Assumed |  | Outstanding 
 Principal 
 Balance as of 
 December 31, 
 2010 |        
|                    |  |                 |  |                 |      |                 |  |                     |  |                                                               |        
|Omaha, NE           |  | Courtyard       |  |                 | 6.79 | %               |  | 1/1/14              |  | $                                                             | 12,658  |  | $ | 11,573  | 
|New Orleans, LA     |  | Homewood Suites |  |                 | 5.85 | %               |  | 10/1/14             |  |                                                               | 17,144  |  |   | 15,720  | 
|Tupelo, MS          |  | Hampton Inn     |  |                 | 5.90 | %               |  | 3/1/16              |  |                                                               | 4,110   |  |   | 3,616   | 
|Miami, FL           |  | Homewood Suites |  |                 | 6.50 | %               |  | 7/1/13              |  |                                                               | 9,820   |  |   | 8,951   | 
|Highlands Ranch, CO |  | Residence Inn   |  |                 | 5.94 | %               |  | 6/1/16              |  |                                                               | 11,550  |  |   | 11,048  | 
|Tallahassee, FL     |  | Fairfield Inn   |  |                 | 6.80 | %               |  | 1/11/13             |  |                                                               | 3,494   |  |   | 3,195   | 
|Lakeland, FL        |  | Courtyard       |  |                 | 6.80 | %               |  | 1/11/13             |  |                                                               | 4,210   |  |   | 3,850   | 
|San Diego, CA       |  | Residence Inn   |  |                 | 6.55 | %               |  | 4/1/13              |  |                                                               | 15,804  |  |   | 14,490  | 
|Provo, UT           |  | Residence Inn   |  |                 | 6.55 | %               |  | 4/1/13              |  |                                                               | 5,553   |  |   | 5,091   | 
|Richmond, VA        |  | Marriott        |  |                 | 6.95 | %               |  | 9/1/14              |  |                                                               | 25,298  |  |   | 23,686  | 
|                    |  |                 |  |                 |      |                 |  |                     |  |                                                               |         |  |   |         | 
|                    |  |                 |  |                 |      |                 |  |                     |  | $                                                             | 109,641 |  | $ | 101,220 | 
|                    |  |                 |  |                 |      |                 |  |                     |  |                                                               |         |  |   |         | 

No
goodwill was recorded in connection with any of the acquisitions.

Management and Franchise Agreements

Each
of the Companys 51 hotels are operated and managed, under separate management
agreements, by affiliates of one of the following companies: Marriott
International, Inc. (Marriott), Hilton Worldwide (Hilton), Western
International (Western), Larry Blumberg & Associates (LBA), Dimension
Development Company (Dimension), White Lodging Services Corporation (WLS),
or Inn Ventures, Inc. (Inn Ventures). The agreements provide for initial
terms ranging from one to twenty years. Fees associated with the agreements
generally include the payment of base management fees, incentive management
fees, accounting fees, and other fees for centralized services which are
allocated among all of the hotels that receive the benefit of such services.
Base management fees are calculated as a percentage of gross revenues.
Incentive management fees are calculated as a percentage of operating profit in
excess of a priority return to the Company, as defined in the management
agreements. The Company has the option to terminate the management agreements
if specified performance thresholds are not satisfied. During the years ended
December 31, 2010, 2009 and 2008 the Company incurred approximately $6.6 million,
$6.1 million and $7.4 million, respectively, in management fees.

Western,
LBA, WLS, Dimension and Inn Ventures are not affiliated with either Marriott or
Hilton, and as a result, the hotels they manage (as well as the two hotels
managed by Promus Hotels, Inc., which is an affiliate of Hilton) were required
to obtain separate franchise agreements with each respective franchisor. The
Hilton franchise agreements provide for initial

16

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terms ranging
between 10 to 20 years. Fees associated with the Hilton agreements generally
include the payment of royalty fees and program fees based on room revenues.
The Marriott franchise agreements provide for an initial term of between six
and 20 years. Fees associated with the Marriott agreements include the payment
of royalty fees, marketing fees, reservation fees and a communications support
fee based on room revenues. During the years ended December 31, 2010, 2009
and 2008 the Company incurred approximately $8.2 million, $7.8 million and $8.3
million, respectively, in franchise fees.

Results
of Operations for Years 2010 and 2009

As
of December 31, 2010 the Company owned 51 hotels with 6,426 rooms. The
Companys portfolio of hotels owned is unchanged since December 31, 2008. Hotel
performance is impacted by many factors including the economic conditions in
the United States, as well as each locality. During the past two years, the
overall weakness in the U.S. economy has had a considerable negative impact on
both leisure and business travel. As a result, revenue in most markets in the
United States has declined from 2007 and 2008 levels. Economic conditions
stabilized and showed modest growth in 2010 as compared to 2009 throughout the
United States, which led to the Companys improved revenue and net income in
2010 as compared to 2009. Although the Company expects continued improvement in
2011, it is not anticipated revenue and net income will reach pre-recessionary
levels. The Companys hotels in general have shown results consistent with
industry and brand averages for the period of ownership.

Revenues

The
Companys principal source of revenue is hotel room revenue and other related
revenue for the Companys 51 hotels owned during the years ended December 31,
2010 and 2009. For the year ended December 31, 2010, the Company had room
revenue and other revenue of $181.2 million and $19.4 million, respectively.
For the year ended December 31, 2010, the hotels achieved average occupancy of
71%, ADR of $108 and RevPAR of $77. For the year ended December 31, 2009,
the Company had room revenue and other revenue of $174.0 million and $17.7
million, respectively. The hotels achieved average occupancy during the year
ended December 31, 2009 of 67%, ADR of $111 and RevPAR of $74. ADR is
calculated as room revenue divided by the number of rooms sold, and RevPAR is
calculated as occupancy multiplied by ADR. These rates are consistent with
industry and brand averages, given the Companys portfolio of hotels and the
markets where the Companys hotels are located. Since the beginning of 2010 the
Company has experienced an increase in demand, as shown by the improved
occupancy rates in comparison to 2009. In addition to a stabilizing economy, this
improvement is a result of reduced room rates as reflected in the ADR decline
in 2010 from comparable 2009 results. However, as reflected in the fourth
quarter of 2010 ADR ($106) as compared to the fourth quarter of 2009 ($106),
the Company believes room rate has stabilized and will improve in 2011. With
demand improvement and expected rate improvement, the Company and industry
anticipate percentage revenue growth in 2011 in the mid single digits, as
compared to 2010. While reflecting the impact of recessionary to low-growth
levels of economic activity in 2009 and 2010, the Companys hotels continue to
be leaders in their respective markets. The Companys average Market Yield for
2010 and 2009 was 125 and 123, respectively. The Market Yield is a measure of
each hotels RevPAR compared to the average (100) in its local market (the
index excludes hotels under renovations).

Expenses

For
the years ended December 31, 2010 and 2009, hotel operating expenses
totaled $116.9 million and $114.0 million, respectively, representing 58% of
total revenue for 2010 and 59% of total hotel revenue for 2009. Hotel operating
expenses include direct operational expenses, hotel administrative expense,
sales and marketing expense, utilities expense, repair and maintenance expense,
franchise fees and management fees. Hotel operational expenses for 2010 reflect
the impact of modest increases in revenues and occupancy at most of the
Companys hotels, and the Companys efforts to control costs in a challenging
and relatively flat to low-growth economic environment during 2010. Certain
operating costs such as management costs, certain utility costs and minimum
supply and maintenance costs are relatively fixed in nature. The Company has
been successful in reducing relative to revenue increases in certain labor
costs, hotel supply costs and utility costs by continually monitoring and
sharing utilization data across its hotels and management companies. Although
operating expenses will increase as occupancy and revenue increases, the
Company has and will continue to work with its management companies to reduce
costs as a percentage of revenue as aggressively as possible while maintaining
quality and service levels at each property.

Taxes,
insurance, and other expenses for the period ended December 31, 2010 and
2009 were $12.2 and $13.7 million, or 6% and 7% of total revenue for each
respective period. Decreases in these expenses for 2010 versus the prior year
reflect lower real estate property tax assessments at selected hotels,
including the results of successful appeals of initial assessments for several
locations. In addition, the Company experienced slightly lower property
insurance expense for most hotel properties, in comparison to insurance rates
in effect during 2009. Primarily due to the success of real estate assessment
appeals during 2010, the Company anticipates 2011 property tax and insurance
expense to be similar to 2010.

17

---



General
and administrative expense for the years ended December 31, 2010 and 2009
was $5.2 and $4.6 million, or 3% and 2% of total revenue for each respective
period. The components of general and administrative expense include advisory
fees, legal fees, accounting fees, reporting expenses and the Companys share
of the loss from its investment in Apple Air Holding, LLC. The 2010 increase is
primarily due to an approximately $0.45 million loss related to Apple Airs
contract to trade-in its two jets for one new jet. As a public company, the
Company is subject to various regulatory oversight. In 2010 the Company
incurred approximately $0.5 million in legal and related costs responding to
the Securities and Exchange Commission.

Depreciation
expense for the years ended December 31, 2010 and 2009 was $33.2 and $32.4
million, respectively. Depreciation expense represents the expense of the
Companys hotels and related personal property (furniture, fixtures and
equipment) for their respective periods owned.

Interest
expense, net of interest income, for the twelve month periods ended
December 31, 2010 and 2009 was $7.8 million and $6.3 million,
respectively. Interest expense primarily arose from mortgage debt assumed with
the acquisition of ten of the Companys hotels, in addition to interest on
borrowings under the Companys unsecured credit facilities during 2010 and
2009. As of December 31, 2010, the Company had mortgage debt outstanding of
$101.2 million, representing mortgage loans outstanding on ten of the Companys
51 hotel properties and associated fair value adjustments. The Company also had
borrowings outstanding of $44.9 million at December 31, 2010 under its
unsecured revolving credit facility. At December 31, 2009 the Company had
unsecured credit facility borrowings outstanding of $11.5 million. The increase
from prior year levels of outstanding unsecured borrowings at December 31,
2010, and the related increase in interest expense for 2010 in comparison to
2009, arises from the Companys increased use of unsecured borrowings to fund
working capital needs, while maintaining a relatively stable distribution rate
to Unit holders during a recessionary to low-growth economic period. Interest
expense for 2009 is net of capitalized interest of approximately $0.4 million
associated with several significant capital renovations; interest capitalized
during 2010 was not significant.

Gain from
settlement of contingency

The
Company recorded other income of $3.1 million in November 2010 arising from the
de-recognition of a liability for taxes, previously assessed by the Broad
Street Community Development Authority of Richmond, VA (CDA). Upon the
Companys purchase in January 2008 of the full service Marriott hotel in
Richmond, VA (MRV), the Company assumed all remaining obligations of the MRV
under a multi-year minimum tax assessment on hotels operating within the CDAs
jurisdiction. The MRV was obligated for minimum annual tax payments to the CDA
of $257 thousand, which related to the 2003 issuance by the CDA of tax-exempt
revenue bonds with maturities extending through 2033. Annual tax payments to
the CDA were effective through the earlier of a) a period extending through
2033, or b) payment or defeasance in full of all applicable CDA revenue bonds.
In November 2010, the CDA provided for the defeasance or redemption of all
applicable CDA revenue bonds. Accordingly, the CDA announced that assessments
and collections of the prior tax have ceased as of November 2010. The Companys
net present value of the previously required minimum annual tax assessments,
originally projected to extend through 2033, was $3.1 million at the date of
the CDAs bond defeasance and redemption in November 2010. The impact of the
de-recognition of the liability to the Companys net income per common share
(basic and diluted) was $0.03, recorded in the fourth quarter of 2010. The
de-recognition was a non-cash transaction and had no impact on the Companys
net cash provided by operating activities for the year ended December 31, 2010.

Results
of Operations for Years 2009 and 2008

Revenues

For
the year ended December 31, 2009, the Company had room revenue and other
revenue of $174.0 million and $17.7 million, respectively. For the year ended
December 31, 2009, the hotels achieved average occupancy of 67%, ADR of $111
and RevPAR of $74. For the year ended December 31, 2008, the Company had
room revenue and other revenue of $195.4 million and $18.9 million,
respectively. For the year ended December 31, 2008, the hotels achieved
average occupancy of 71%, ADR of $120 and RevPAR of $86. These revenues reflect
hotel operations for the 51 hotels acquired through December 31, 2009 and
2008 for their respective periods of ownership by the Company, seven of which
were purchased during 2008. The Companys occupancy and room rates in 2009 and
2008 were consistent with industry and brand averages, given the Companys
portfolio of hotels and the markets where the Companys hotels are located.
However, because overall hotel room demand declined and general U.S. economic
conditions (including business and consumer travel) weakened in 2009, the
Companys revenue at most individual hotels experienced declines during 2009 as
compared to 2008 results.

18

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Expenses

Expenses
for the years ended December 31, 2009 and 2008 represent the expenses
related to the 51 hotels acquired through December 31, 2009 for their
respective periods owned; seven of the Companys 51 hotels were purchased
during 2008.

For
the years ended December 31, 2009 and 2008, hotel operating expenses
totaled $114.0 million and $124.6 million, respectively, representing 59% of
total revenue for 2009 and 58% of total hotel revenue for 2008. Hotel
operational expenses for 2009 reflect the impact of declining revenues at most
of the Companys hotels, and the Companys efforts to control costs in such an
economic environment. However, certain operating costs are relatively fixed in
nature, and cannot be curtailed or eliminated. This resulted in an increase in
operating expenses as a percentage of gross revenues, in comparison to 2008.

Hotel
operational expenses in 2008 were impacted by the Companys acquisition, in
January 2008, of the 410 room full-service Marriott hotel in Richmond,
Virginia. At the time of purchase, the Company implemented a change from the
predecessor owners hotel management company to White Lodging Services
Corporation. The Company incurred hotel staff recruiting, training, travel and
relocation costs associated with the installation of the new management company
and related personnel resources at the MRV. In addition, expenditures for
non-capitalized items associated with improving the hotels rooms, restaurant,
and overall service levels, and addressing deferred maintenance and repair,
were incurred. These transition costs associated with the MRV hotel, incurred
during 2008, were approximately $1.1 million.

Taxes,
insurance, and other expenses for the period ended December 31, 2009 and
2008 were $13.7 and $13.6 million, or 7% and 6% of total revenue for each respective
period. Increases in these expenses for 2009 versus the prior year reflect
higher real estate and personal property tax assessments at selected hotels,
including some of the Companys hotels that were newly constructed during 2007
and 2008.

General
and administrative expense for the years ended December 31, 2009 and 2008
was $4.6 and $5.9 million, or 2% and 3% of total revenue for each respective
period. Reduction in this expense for 2009, as compared to the prior year,
reflects a reduction (from 50% to 26% in January 2009) in the Companys
investment in Apple Air Holding, LLC. The Company recorded a loss in 2009 of
approximately $0.5 million, and a loss in 2008 of approximately $1.0 million in
its investment, primarily due to depreciation expense on the two aircraft owned
by the entity during this time period. Additionally, the Companys advisory
fees declined by $0.5 million in 2009, compared to 2008, due to lower earnings.

Depreciation
expense for the years ended December 31, 2009 and 2008 was $32.4 and $28.4
million, respectively. Depreciation expense represents the expense of the
Companys hotels and related personal property (furniture, fixtures and
equipment) for their respective periods owned. The increase reflects additional
acquisitions in 2008, in addition to capital expenditures in both 2009 and
2008.

Interest
expense for the twelve month periods ended December 31, 2009 and 2008 was
$6.4 million and $5.7 million, respectively. Interest expense primarily arose
from mortgage debt assumed with the acquisition of ten of the Companys hotels,
in addition to interest on borrowings under an unsecured line of credit
facility originated in April 2009. Interest expense is net of capitalized
interest, of approximately $0.4 million in 2009 and $1.0 million in 2008,
associated with several significant capital renovations during each year.
During 2009 and 2008, the Company recognized $0.1 million and $1.9 million,
respectively, in interest income, representing interest on excess cash invested
in short-term money market instruments. Interest income earned by the Company
declined as cash raised from the Companys Unit offering was utilized for the
purchase of seven hotel properties in 2008, and for the renovation of several hotel
locations during both 2008 and 2009.

Related Party Transactions

The
Company has, and is expected to continue to engage in, significant transactions
with related parties. These transactions cannot be construed to be arms length,
and the results of the Companys operations may be different if these
transactions were conducted with non-related parties. The Companys independent
members of the Board of Directors oversee and annually review the Companys
related party relationships (which include the relationships discussed in this
section) and are required to approve any significant modifications to these
contracts, as well as any new significant related party transactions. There
were no changes to the contracts discussed in this section and no new
significant related party transactions during 2010. The Board of Directors is
not required to approve each individual transaction that falls under a related
party relationship, however under the direction of the Board of Directors, at
least one member of the Companys senior management team approves each related
party transaction.

The
Company has a contract with ASRG, a related party, to provide brokerage
services for the acquisition and disposition of the Companys real estate
assets. In accordance with the contract, ASRG is paid a fee of 2% of the gross

19

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purchase price
of any acquisitions or gross sale price of any dispositions of real estate
investments, subject to certain conditions plus certain reimbursable costs.
Payments to ASRG for services under the terms of this contract have totaled
approximately $18.0 million since inception, which were capitalized as a part
of the purchase price of the hotels. No fees were incurred under this contract
during the years ended December 31, 2010 and 2009.

The
Company is party to an advisory agreement with ASA to provide management
services to the Company. An annual fee ranging from 0.1% to 0.25% of total
equity proceeds received by the Company, in addition to certain reimbursable
expenses, are payable for these services. Total advisory fees and reimbursable
expenses incurred by the Company under the advisory agreement are included in
general and administrative expenses and totaled approximately $2.8 million,
$3.0 million and $3.4 million for the years ended December 31, 2010, 2009 and
2008, respectively. Of this total expense, approximately $1.0 million, $1.0
million and $1.5 million were paid to ASA and $1.8 million, $2.0 million and
$1.9 million were expenses reimbursed (or paid directly to Apple REIT Six, Inc.
on behalf of ASA) by ASA to Apple REIT Six, Inc. for the years ended December
31, 2010, 2009 and 2008.

The
advisors are staffed with personnel of Apple REIT Six, Inc. (AR6). AR6
provides similar staffing for Apple Six Advisors, Inc. (A6A), Apple Eight
Advisors, Inc. (A8A), Apple Nine Advisors, Inc. (A9A) and Apple Ten
Advisors, Inc. (A10A). A6A, A8A, A9A and A10A provide management services to,
respectively, AR6, Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT
Ten, Inc. Although there is a potential conflict on time allocation of
personnel due to the fact that a senior manager, officer or staff member will
provide services to more than one company, the Company believes that the
executives and staff compensation sharing arrangement allows the companies to
share costs yet attract and retain superior executives and staff. The cost
sharing structure also allows each entity to maintain a much more cost
effective structure than having separate staffing arrangements. Amounts
reimbursed to AR6 include both compensation for personnel and overhead
(office rent, utilities, benefits, office supplies, etc.) utilized by the
companies. The allocation of costs from AR6 is made by the management of the
several REITs and is reviewed at least annually by the Compensation Committees
of the several REITs. In making the allocation, management and the Compensation
Committee, consider all relevant facts related to the Companys level of
business activity and the extent to which the Company requires the services of
particular personnel of AR6. Such payments are based on the actual cost of the
services and are not based on formal record keeping regarding the time these
personnel devote to the Company, but are based on a good faith estimate by the
individual and/or his or her supervisor of the time devoted by the individual
to the Company. As part of this arrangement, the day to day transactions may
result in amounts due to or from the noted related parties. To efficiently manage
cash disbursements, the individual companies may make payments for any or all
of the related companies. The amounts due to or from the related individual
companies are reimbursed or collected and are not significant in amount.

The
Company has a partial ownership interest in Apple Air Holdings, LLC (Apple
Air). A 50% interest was originally purchased by the Company for approximately
$7.5 million in 2007 to allow the Company access to two corporate Lear jets for
asset management and hotel renovation purposes. In January 2009, the Companys
ownership interest in Apple Air was reduced from 50% to 26% through the
redemption of a 24% ownership interest by Apple Air. The Company received
approximately $3.2 million for the ownership interest redeemed, which
approximated the Companys carrying value of the 24% ownership interest at the
date of redemption. No gain or loss from the redemption was recognized by the
Company. The Companys ownership interest in Apple Air is included in other
assets, net on the Companys consolidated balance sheet, and was approximately
$2.0 million and $2.8 million at December 31, 2010 and 2009, respectively. The
other members of Apple Air are Apple REIT Six, Inc., Apple REIT Eight, Inc. and
Apple REIT Nine, Inc. The Company records its share of income or loss of the
entity under the equity method of accounting, adjusting its investment in Apple
Air accordingly. For the years ended December 31, 2010 and 2009, the Company
recorded a loss of approximately $0.9 million and $0.5 million, respectively.
The loss relates primarily to the depreciation of aircraft owned by Apple Air
and in 2010 $0.4 million related to the reduction in basis of the two jets due
to the planned trade-in for one new jet.

Including
ASRG, ASA, A6A, A8A, A9A and A10A discussed above, Mr. Knight is also
Chairman and CEO of Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT
Nine, Inc. and Apple REIT Ten, Inc. Members of the Companys Board of Directors
are also on the boards of Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple
REIT Nine, Inc. and Apple REIT Ten, Inc.

The
Company has issued 240,000 Series B convertible preferred shares to Glade M.
Knight, Chairman and Chief Executive Officer of the Company, in exchange for
the payment by him of $0.10 per Series B convertible preferred share, or
an aggregate of $24,000. The Series B convertible preferred shares are
convertible into common shares pursuant to the formula and on the terms and
conditions set forth below.

There
are no dividends payable on the Series B convertible preferred shares. Holders
of more than two-thirds of the Series B convertible preferred shares must
approve any proposed amendment to the articles of incorporation that would
adversely affect the Series B convertible preferred shares.

20

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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 holder 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 $11 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 the Companys 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 convertible preferred shares shall have the
right to convert any of such shares into common shares of the Company upon and
for 180 days following the occurrence of any of the following events:

| |                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)
 substantially all of the Companys assets, stock or business is sold or
 transferred through exchange, merger, consolidation, lease, share exchange,
 sale or otherwise, other than a sale of assets in liquidation, dissolution or
 winding up of the Company;
| |                                                                                                                                                                                                                                                                     
| | (2)
 the termination or expiration without renewal of the advisory agreement with
 ASA, or if the Company ceases to use ASRG to provide property acquisition and
 disposition services; or                                                                          
| |                                                                                                                                                                                                                                                                     
| | (3)
 the Companys common shares are listed on any securities exchange or
 quotation system or in any established market.                                                                                                                                           

Upon
the occurrence of any conversion event, each Series B convertible preferred
share may be converted into 24.17104 common shares. In the event the Company
raises additional gross proceeds in a subsequent public offering, each Series B
convertible preferred share may be converted into an additional number of
common shares based on the additional gross proceeds raised through the date of
conversion in a subsequent public offering according to the following formula:
(X/50 million) x 1.20568, where X is the additional gross proceeds rounded down
to the nearest 50 million.

No
additional consideration is due upon the conversion of the Series B convertible
preferred shares. The conversion into common shares of the Series B convertible
preferred shares will result in dilution of the shareholders interests.

Expense
related to issuance of 240,000 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 occurs. 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. If a conversion event
had occurred at December 31, 2010, expense would have ranged from $0 to $63.8
million (assumes $11 per common share fair market value) which represents
approximately 5.8 million shares of common stock.

Liquidity
and Capital Resources

The
following table presents the Companys commercial commitments, relating to
principal and interest payments on debt outstanding, and contractual
obligations under land lease commitments, as of December 31, 2010. See Capital
Requirements and Resources for a discussion of the Companys liquidity and
available capital resources as of December 31, 2010.

|                                            |  |       |         |                   |                                           |           |  |           |        |               |   |        |  |   |         | 
|------------------------------------------- |  | ----- | ------- | ----------------- | ----------------------------------------- | --------- |  | --------- | ------ | ------------- | - | ------ |  | - | ------- | 
|                                            |  |       |         |                   | Amount of Commitments expiring per period |          
|                                            |  |       |         |                   |                                           |          
|Commercial Commitments(000s)               |  | Total |         | Less than
 1 Year |                                           | 2-3 Years |  | 4-5 Years |        | Over
 5 Years |  
|                                            |  |       |         |                   |                                           |           |  |           |        |               |  
|Debt
 (including interest of $25.6 million) |  | $     | 171,704 |                   | $                                         | 11,564    |  | $         | 96,020 |               | $ | 50,865 |  | $ | 13,255  | 
|Land Lease
 Commitments                     |  |       | 95,062  |                   |                                           | 934       |  |           | 1,971  |               |   | 2,270  |  |   | 89,887  | 
|                                            |  |       |         |                   |                                           |           |  |           |        |               |   |        |  |   |         | 
|Total
 Commercial Commitments               |  | $     | 266,766 |                   | $                                         | 12,498    |  | $         | 97,991 |               | $ | 53,135 |  | $ | 103,142 | 
|                                            |  |       |         |                   |                                           |           |  |           |        |               |   |        |  |   |         | 

Capital Requirements and Resources

In
October 2010, the Company entered into a new unsecured revolving credit
facility, to be utilized for working capital, hotel renovations and other
general corporate funding purposes including the payment of redemptions and distributions.
The syndicated credit facility provides for a maximum aggregate commitment by
the lenders, three commercial banks, of $85 million, and has a scheduled
maturity in October 2012. The applicable interest rate under the unsecured
revolving credit facility is, at the Companys option, equal to a) LIBOR (the
London Interbank Offered Rate for a one-month term) plus 3.5%, subject to a
minimum LIBOR interest rate floor of 1.5%, or b) the banks commercial prime
rate plus 3.5%. The Companys prior line of credit facility was extinguished
upon implementation of the new credit facility. With the availability of the

21

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Companys
current and prior credit facilities, the Company maintains little cash on hand,
accessing its credit facility as necessary. As a result, cash balances totaled
$0 at December 31, 2010 and 2009. The outstanding balance on the revolving
credit facility as of December 31, 2010 was $44.9 million and its annual
interest rate was 5.0%. The loan has quarterly financial covenants which the Company
was in compliance with at December 31, 2010. The Company anticipates that cash
flow from operations and its current revolving credit facility will be adequate
to meet its anticipated liquidity requirements in 2011, including capital
expenditures, debt service and required distributions to shareholders (the
Company is not required to make distributions at its current rate for REIT
purposes). The Company intends to maintain a relatively stable distribution
rate instead of raising and lowering the distribution rate with varying
economic cycles. Should financial results of the Company and the lodging
industry remain depressed compared to pre-recessionary levels, the Company may
utilize additional financing to achieve this objective. Although the Company has
relatively low levels of debt, there can be no assurances it will be successful
with this strategy and may need to reduce its distribution to required levels.
If the Company was unsuccessful in extending its maturing debt in future
periods or if it were to default on its debt, it may be unable to make
distributions. The Companys bylaws require board review and approval of any
debt financing obtained by the Company.

To
maintain its REIT status the Company is required to distribute at least 90% of
its ordinary income. The Companys objective in setting a distribution rate is
to project a rate that will provide consistency over the life of the Company,
taking into account acquisitions, capital improvements, ramp-up of new
properties and varying economic cycles. Distributions in 2010 totaled $71.3
million and were paid monthly at a rate of $0.064167 per common share. Total
2010 dividends paid equaled $0.77 per common share and included a return of
capital. For the same period the Companys cash generated from operations was
approximately $59.9 million. As a result, the difference between distributions
paid and cash generated from operations has been funded primarily from
borrowings under its unsecured credit facilities. This portion of distributions
is expected to be treated as a return of capital for federal income tax
purposes. Since a portion of distributions has been funded with borrowed funds,
the Companys ability to maintain its current intended rate of distribution
will be primarily based on the ability of the Companys properties to generate
cash from operations at this level, the Companys ability to utilize currently
available financing, or the Companys ability to obtain additional financing
until general economic conditions improve. Since there can be no assurance of
the Companys ability to obtain additional financing or that the properties
owned by the Company will provide income at this level, there can be no
assurance as to the classification or duration of distributions at the current
rate. Additionally, the Board of Directors monitors the Companys distribution
rate relative to the performance of the hotels on an ongoing basis and may make
additional adjustments to the distribution rate as determined to be prudent in
relation to other cash requirements of the Company. Effective with the common
stock dividend paid in May 2009, the Companys annual dividend distribution
rate was reduced to $0.77 per share (or $0.064167 monthly per share) from the
prior $0.88 annual distribution rate per share (or $0.073334 monthly per
share).

The
Company has on-going capital commitments to fund its capital improvements. The
Company is required, under all of the hotel management agreements, to make
available, for the repair, replacement, refurbishing of furniture, fixtures,
and equipment, an amount between 2% to 5% of gross revenues of the applicable
hotel, provided that such amount may be used for the Companys capital
expenditures with respect to the applicable hotel. The Company expects that this
amount will be adequate to fund required repair, replacement, and
refurbishments and to maintain the Companys hotels in a competitive condition.
Also, as of December 31, 2010, the Company held $6.3 million in reserve
for capital expenditures. The Company completed one major hotel renovation in
2010 and at December 31, 2010, the Company had two major hotel renovations in
progress, which are expected to be completed during the first six months of
2011. Total capital expenditures in 2010 were approximately $3.1 million. Due
to the work done on the properties when acquired and the depressed economic
environment, the Companys investment was lower than 2009 and lower than
anticipated in 2011. The Company anticipates 2011 capital improvements to
increase and be in the range of approximately $10 to $15 million.

The
Companys Board of Directors has approved the Unit Redemption Program to
provide limited interim liquidity to its shareholders who have held their Units
for at least one year; the program was initiated in April 2007. Shareholders
may request redemption of Units for a purchase price equal to 92% of the price
paid per Unit if the Units have been owned less than three years, or 100% of
the price paid per Unit if the Units have been owned more than three years. The
Company reserves the right to change the purchase price of redemptions, reject
any request for redemption, or otherwise amend the terms of, suspend, or
terminate the Unit Redemption Program. As of December 31, 2010, the Company has
redeemed approximately 7.0 million Units in the amount of $74.4 million under
the program, including approximately 3.7 million Units redeemed for $40.7
million in 2010, 2.4 million Units redeemed for $24.8 million in 2009, and
729,000 Units redeemed for $7.5 million in 2008.

In
July 2007 the Company instituted a Dividend Reinvestment Plan for its
shareholders. The plan provides a convenient and cost effective way to increase
shareholder investment in the Company by reinvesting dividends to purchase
additional Units of the Company. The uses of proceeds from this plan may
include purchasing Units under the Companys Unit Redemption Program, enhancing
properties, satisfying financing obligations and other expenses, increasing
working capital, funding various corporate operations, and acquiring hotels. As
of December 31, 2010, approximately 7.9 million

22

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Units,
representing $86.5 million in proceeds to the Company, have been issued under
the plan, including approximately 2.2 million Units issued in 2010 for $24.6
million, 2.4 million Units issued in 2009 for $25.9 million, and 2.5 million
Units issued in 2008 for $28.0 million.

Subsequent
Events

In
January 2011, the Company declared and paid $5.9 million or $0.064167 per
common share, in a distribution to its common shareholders. Under the Companys
Dividend Reinvestment Plan, $2.0 million were reinvested, resulting in the
issuance of 184,047 Units.

In
January 2011, under the guidelines of the Companys Unit Redemption Program, 728,135
Units were repurchased from shareholders at a cost of $8.0 million. As
contemplated in the Program, the Company redeemed Units on a pro-rata basis.
This redemption was approximately 63% of the requested redemption amount.

In
February 2011, the Company declared and paid $5.9 million or $0.064167 per
common share, in a distribution to its common shareholders. Under the Companys
Dividend Reinvestment Plan, $2.1 million were reinvested, resulting in the
issuance of 187,137 Units.

On
February 28, 2011, the Company entered into a term loan agreement, secured by
the Companys Houston, TX Residence Inn property, for $10.5 million. The loan
has a stated maturity of five years, at an annual interest rate of 5.71%, and
has scheduled payments of interest and principal due monthly. Funds from the
loan were used for general corporate purposes, including the reduction in the
outstanding balance of the Companys revolving credit facility.

Impact
of Inflation

Operators
of hotels, in general, possess the ability to adjust room rates daily to
reflect the effects of inflation. Competitive pressures may, however, limit the
operators ability to raise room rates. Currently the Company is not
experiencing any material impact from inflation.

Business
Interruption

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

Seasonality

The
hotel industry historically has been seasonal in nature. Seasonal variations in
occupancy at the Companys hotels may cause quarterly fluctuations in its
revenues. To the extent that cash flow from operations is insufficient during
any quarter, due to temporary or seasonal fluctuations in revenue, the Company
expects to utilize cash on hand and credit availability to make distributions.

Critical
Accounting Policies

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

Capitalization Policy

The
Company considers expenditures to be capital in nature based on the following
criteria: (1) for a single asset, the cost must be at least $500,
including all normal and necessary costs to place the asset in service, and the
useful life must be at least one year; (2) for group purchases of 10 or
more identical assets, the unit cost for each asset must be at least $50,
including all normal and necessary costs to place the asset in service, and the
useful life must be at least one year; and (3) for major repairs to a
single asset, the repair must be at least $2,500 and the useful life of the
asset must be substantially extended.

Impairment Losses Policy

The
Company records impairment losses on hotel properties used in operations if
indicators of impairment are present, and the sum of the undiscounted cash
flows estimated to be generated by the respective properties, based on
historical and

23

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industry data,
is less than the properties carrying amount. Indicators of impairment include
a property with current or potential losses from operations, when it becomes
more likely than not that a property will be sold before the end of its
previously estimated useful life or when events, trends, contingencies or
changes in circumstances indicate that a triggering event has occurred and an
assets carrying value may not be recoverable. Impairment losses are measured
as the difference between the assets fair value and its carrying value. No
impairment losses have been recorded to date.

Recently Adopted or Issued Accounting
Pronouncements

In
June 2009, the Financial Accounting Standards Board issued a pronouncement
(Accounting Standards Update No. 2009-17) which amends its guidance surrounding
a companys analysis to determine whether any of its variable interests
constitute controlling financial interests in a variable interest entity. This
analysis identifies the primary beneficiary of a variable interest entity as
the enterprise that has both of the following characteristics: (a) the power to
direct the activities of a variable interest entity that most significantly
impact the entitys economic performance, and (b) the obligation to absorb
losses of the entity that could potentially be significant to the variable
interest entity or the right to receive benefits from the entity that could
potentially be significant to the variable interest entity. Additionally, an
enterprise is required to assess whether it has an implicit financial
responsibility to ensure that a variable interest entity operates as designed
when determining whether it has the power to direct the activities of the
variable interest entity that most significantly impact the entitys economic
performance. The new pronouncement also requires ongoing assessments of whether
an enterprise is the primary beneficiary of a variable interest entity and
enhanced disclosure about an enterprises involvement with a variable interest
entity. This pronouncement was adopted by the Company in the first quarter of
2010. The adoption of this standard did not have a material impact on the
Companys consolidated financial statements.

|         |                                                           
|-------- | ----------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk

The
Company does not engage in transactions in derivative financial instruments or
derivative commodity instruments. As of December 31, 2010, the Companys
financial instruments were not exposed to significant market risk due to
foreign currency exchange risk, commodity price risk or equity price risk. The
Company will be exposed to interest rate risk due to possible changes in short
term interest rates as it invests its cash or borrows on its line of credit.
The Company had an outstanding balance of $44.9 million on its $85 million
revolving credit facility at December 31, 2010, and to the extent it utilizes
the credit facility, the Company will be exposed to changes in short term
interest rates. Based on the outstanding balance at December 31, 2010, every
100 basis point change in interest rates can potentially impact the Companys
annual net income by $449 thousand, subject to conditions of the interest rate
floor provisions of the credit facility, and with all other factors remaining
the same. The Companys cash balance at December 31, 2010 was not
material.

In
addition to its $44.9 million outstanding balance under its credit facility at
December 31, 2010, which is due in 2012 and included in the table below, the
Company has also assumed fixed interest rate notes payable to lenders under
permanent financing arrangements. The following table summarizes the annual
maturities and average interest rates of the Companys variable rate and fixed
rate notes payable outstanding at December 31, 2010.

|                       |  |      |       |      |   |        |   |      |        |      |   |            |   |       |     |                     |   |        |   |   |         |  |   |         | 
|---------------------- |  | ---- | ----- | ---- | - | ------ | - | ---- | ------ | ---- | - | ---------- | - | ----- | --- | ------------------- | - | ------ | - | - | ------- |  | - | ------- | 
|(000s)                |  | 2011 |       | 2012 |   | 2013   |   | 2014 |        | 2015 |   | Thereafter |   | Total |     | Fair
 Market
 Value |  
|                       |  |      |       |      |   |        |   |      |        |      |   |            |   |       |     |                     |  
|Maturities             |  | $    | 2,737 |      | $ | 47,809 |   | $    | 35,281 |      | $ | 46,989     |   | $     | 394 |                     | $ | 12,910 |   | $ | 146,120 |  | $ | 150,112 | 
|Average
 Interest Rate |  |      | 6.0   | %    |   | 6.1    | % |      | 6.5    | %    |   | 6.3        | % |       | 5.9 | %                   |   | 5.9    | % |   |         |  |   |         | 

24

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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

Report of Management 
on Internal Control Over Financial Reporting

March 8, 2011 
To the Shareholders 
Apple REIT Seven, Inc.

Management
of Apple REIT Seven, Inc. (the Company) is responsible for establishing and
maintaining adequate internal control over financial reporting and for the
assessment of the effectiveness of internal control over financial reporting.
As defined by the Securities and Exchange Commission, internal control over
financial reporting is a process designed by, or under the supervision of the
Companys principal executive and principal financial officers and effected by
the Companys Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the consolidated financial statements in accordance with U.S.
generally accepted accounting principles.

The
Companys internal control over financial reporting is supported by written
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the Companys transactions and
dispositions of the Companys assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of the
consolidated financial statements in accordance with generally accepted
accounting principles, and the receipts and expenditures of the Company are
being made only in accordance with authorizations of the Companys management
and directors; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the consolidated financial
statements.

Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In
connection with the preparation of the Companys annual consolidated financial
statements, management has undertaken an assessment of the effectiveness of the
Companys internal control over financial reporting as of December 31, 2010,
based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO Framework). Managements assessment included an evaluation of the design
of the Companys internal control over financial reporting and testing of the
operational effectiveness of those controls.

Based
on this assessment, management has concluded that as of December 31, 2010, the
Companys internal control over financial reporting was effective to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.

Ernst
& Young LLP, the independent registered public accounting firm that audited
the Companys consolidated financial statements included in this report, has
issued an attestation report on the Companys internal control over financial
reporting, a copy of which appears on the next page of this annual report.

|                                     |  |                               
|------------------------------------ |  | ------------------------------
|/s/ GLADE
 M. KNIGHT                 |  | /s/ BRYAN
 PEERY              
|                                     |  |                               
|Glade M. Knight                      |  | Bryan Peery                   
|Chairman and Chief Executive Officer |  | Chief Financial Officer       
|                                     |  | (Principal Accounting Officer)

25

---



Report of Independent Registered Public
Accounting Firm 
on Internal Control Over Financial Reporting

The Board of
Directors and Shareholders of 
Apple REIT Seven, Inc.

We have
audited Apple REIT Seven, Inc.s internal control over financial reporting as
of December 31, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Apple REIT Seven,
Inc.s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Report
of Management on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the companys internal control over financial
reporting based on our audit.

We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A companys
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the companys assets that could have a material effect on the financial
statements.

Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our
opinion, Apple REIT Seven, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on the
COSO criteria.

We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2010 consolidated financial statements of
Apple REIT Seven, Inc. and our report dated March 8, 2011 expressed an
unqualified opinion thereon.

| |                       
| | ----------------------
| | /s/ ERNST
 & YOUNG LLP

Richmond,
Virginia 
March 8, 2011

26

---



Report of Independent Registered Public
Accounting Firm

The Board of
Directors and Shareholders of 
Apple REIT Seven, Inc.

We have audited the accompanying consolidated balance sheets of Apple
REIT Seven, Inc. as of December 31, 2010 and 2009, and the related consolidated
statements of operations, shareholders equity and cash flows for each of the
three years in the period ended December 31, 2010. Our audits also included the
financial statement schedule listed in the Index at Item 15(2). These financial
statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Apple
REIT Seven, Inc. at December 31, 2010 and 2009, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2010, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Apple REIT Seven, Inc.s
internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 8, 2011 expressed an unqualified opinion thereon.

| |                       
| | ----------------------
| | /s/ ERNST
 & YOUNG LLP

Richmond,
Virginia 
March 8, 2011

27

---



Apple REIT Seven, Inc. 
Consolidated Balance Sheets 
(in thousands, except share data)

|                                                                                                                                                |  |                    |          |                    |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | ------------------ | - | -------- | -
|                                                                                                                                                |  | December 31,
 2010 |          | December 31,
 2009 |  
|                                                                                                                                                |  |                    |          |                    |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|ASSETS                                                                                                                                          |  |                    |          |                    |   |          |  
|Investment in real estate, net of accumulated depreciation of $114,097
 and $80,923, respectively                                               |  | $                  | 872,169  |                    | $ | 902,293  |  
|Restricted cash-furniture, fixtures and other escrows                                                                                           |  |                    | 7,733    |                    |   | 9,582    |  
|Due from third party managers                                                                                                                   |  |                    | 5,829    |                    |   | 5,639    |  
|Other assets, net                                                                                                                               |  |                    | 6,236    |                    |   | 6,373    |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|TOTAL ASSETS                                                                                                                                    |  | $                  | 891,967  |                    | $ | 923,887  |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|LIABILITIES                                                                                                                                     |  |                    |          |                    |   |          |  
|Notes payable                                                                                                                                   |  | $                  | 148,017  |                    | $ | 117,787  |  
|Accounts payable and accrued expenses                                                                                                           |  |                    | 10,650   |                    |   | 13,843   |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|TOTAL LIABILITIES                                                                                                                               |  |                    | 158,667  |                    |   | 131,630  |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|SHAREHOLDERS EQUITY                                                                                                                            |  |                    |          |                    |   |          |  
|Preferred stock, authorized 15,000,000 shares; none issued and
 outstanding                                                                     |  |                    |         |                    |   |         |  
|Series A preferred stock, no par value, authorized 200,000,000 shares:
 issued and outstanding 92,027,980 and 93,521,656 shares, respectively   |  |                    |         |                    |   |         |  
|Series B convertible preferred stock, no par value, authorized 240,000
 shares; issued and outstanding 240,000 and 240,000 shares, respectively |  |                    | 24       |                    |   | 24       |  
|Common stock, no par value, authorized 200,000,000 shares; issued and
 outstanding 92,027,980 and 93,521,656 shares, respectively               |  |                    | 910,484  |                    |   | 926,419  |  
|Distributions greater than net income                                                                                                           |  |                    | (177,208 | )                  |   | (134,186 | )
|                                                                                                                                                |  |                    |          |                    |   |          |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                      |  |                    | 733,300  |                    |   | 792,257  |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|                                                                                                                                                |  |                    |          |                    |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                      |  | $                  | 891,967  |                    | $ | 923,887  |  
|                                                                                                                                                |  |                    |          |                    |   |          |  

See notes to consolidated financial statements.

28

---



Apple REIT Seven, Inc. 
Consolidated Statements of Operations 
(in thousands, except per share data)

|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|------------------------------------------------------------ |  | ------------------------------- | ------- | ------------------------------- | - | ------------------------------- | - | - | ------- | -
|                                                             |  | Year ended 
 December 31,
 2010 |         | Year ended 
 December 31,
 2009 |   | Year ended 
 December 31,
 2008 |  
|                                                             |  |                                 |         |                                 |   |                                 |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|Revenues:                                                    |  |                                 |         |                                 |   |                                 |   |   |         |  
|Room revenue                                                 |  | $                               | 181,161 |                                 | $ | 174,042                         |   | $ | 195,414 |  
|Other revenue                                                |  |                                 | 19,370  |                                 |   | 17,673                          |   |   | 18,877  |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|Total revenue                                                |  |                                 | 200,531 |                                 |   | 191,715                         |   |   | 214,291 |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|Expenses:                                                    |  |                                 |         |                                 |   |                                 |   |   |         |  
|Operating expense                                            |  |                                 | 53,552  |                                 |   | 51,524                          |   |   | 56,382  |  
|Hotel administrative expense                                 |  |                                 | 15,084  |                                 |   | 15,548                          |   |   | 17,216  |  
|Sales and marketing                                          |  |                                 | 15,385  |                                 |   | 15,084                          |   |   | 16,410  |  
|Utilities                                                    |  |                                 | 8,796   |                                 |   | 8,833                           |   |   | 9,124   |  
|Repair and maintenance                                       |  |                                 | 9,241   |                                 |   | 9,002                           |   |   | 9,711   |  
|Franchise fees                                               |  |                                 | 8,203   |                                 |   | 7,832                           |   |   | 8,331   |  
|Management fees                                              |  |                                 | 6,634   |                                 |   | 6,145                           |   |   | 7,414   |  
|Taxes, insurance and other                                   |  |                                 | 12,229  |                                 |   | 13,717                          |   |   | 13,559  |  
|General and administrative                                   |  |                                 | 5,177   |                                 |   | 4,600                           |   |   | 5,881   |  
|Depreciation expense                                         |  |                                 | 33,174  |                                 |   | 32,425                          |   |   | 28,434  |  
|Gain from settlement of contingency                          |  |                                 | (3,099  | )                               |   |                                |   |   |        |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|Total expenses                                               |  |                                 | 164,376 |                                 |   | 164,710                         |   |   | 172,462 |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|Operating income                                             |  |                                 | 36,155  |                                 |   | 27,005                          |   |   | 41,829  |  
|Interest expense, net                                        |  |                                 | (7,837  | )                               |   | (6,292                          | ) |   | (3,766  | )
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|Net income                                                   |  | $                               | 28,318  |                                 | $ | 20,713                          |   | $ | 38,063  |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|Basic and diluted net income per common share                |  | $                               | 0.31    |                                 | $ | 0.22                            |   | $ | 0.41    |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|                                                             |  |                                 |         |                                 |   |                                 |   |   |         |  
|Weighted average common shares outstandingbasic and diluted |  |                                 | 92,627  |                                 |   | 93,472                          |   |   | 92,637  |  

See notes to consolidated financial
statements.

29

---



Apple REIT Seven, Inc.
Consolidated Statements of Shareholders Equity 
(in thousands except per share data)

|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  
|---------------------------------------------------------------------- |  | ----------------- | ------ | ------------------------------------- | - | --------------------------------------- | - | ---------------------------- | --- |  | - | -- |  | - | -------- | - | - | ------- | -
|                                                                       |  | Common Stock      |        | Class B Convertible 
 Preferred Stock |   | Distributions
 Greater than
 Net income |   | Total
 Shareholders
 Equity |    
|                                                                       |  |                   |        |                                       |   |                                         |  
|                                                                       |  | Number of
 Shares |        | Amount                                |   | Number of
 Shares                       |   | Amount                       |     |  |  
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    | 
|                                                                      
|Balance at December 31, 2007                                           |  |                   | 91,713 |                                       | $ | 904,649                                 |   |                              | 240 |  | $ | 24 |  | $ | (36,142  | ) | $ | 868,531 |  
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  
|Net proceeds from the sale of common shares                            |  |                   | 2,546  |                                       |   | 28,061                                  |   |                              |    |  |   |   |  |   |         |   |   | 28,061  |  
|Common shares redeemed                                                 |  |                   | (729   | )                                     |   | (7,462                                  | ) |                              |    |  |   |   |  |   |         |   |   | (7,462  | )
|Net income                                                             |  |                   |       |                                       |   |                                        |   |                              |    |  |   |   |  |   | 38,063   |   |   | 38,063  |  
|Cash distributions declared and paid to shareholders ($.88 per share)  |  |                   |       |                                       |   |                                        |   |                              |    |  |   |   |  |   | (81,440  | ) |   | (81,440 | )
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  
|Balance at December 31, 2008                                           |  |                   | 93,530 |                                       |   | 925,248                                 |   |                              | 240 |  |   | 24 |  |   | (79,519  | ) |   | 845,753 |  
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  
|Net proceeds from the sale of common shares                            |  |                   | 2,355  |                                       |   | 26,014                                  |   |                              |    |  |   |   |  |   |         |   |   | 26,014  |  
|Common shares redeemed                                                 |  |                   | (2,363 | )                                     |   | (24,843                                 | ) |                              |    |  |   |   |  |   |         |   |   | (24,843 | )
|Net income                                                             |  |                   |       |                                       |   |                                        |   |                              |    |  |   |   |  |   | 20,713   |   |   | 20,713  |  
|Cash distributions declared and paid to shareholders ($.81 per
 share) |  |                   |       |                                       |   |                                        |   |                              |    |  |   |   |  |   | (75,380  | ) |   | (75,380 | )
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  
|Balance at December 31, 2009                                           |  |                   | 93,522 |                                       |   | 926,419                                 |   |                              | 240 |  |   | 24 |  |   | (134,186 | ) |   | 792,257 |  
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  
|Net proceeds from the sale of common shares                            |  |                   | 2,239  |                                       |   | 24,745                                  |   |                              |    |  |   |   |  |   |         |   |   | 24,745  |  
|Common shares redeemed                                                 |  |                   | (3,733 | )                                     |   | (40,680                                 | ) |                              |    |  |   |   |  |   |         |   |   | (40,680 | )
|Net income                                                             |  |                   |       |                                       |   |                                        |   |                              |    |  |   |   |  |   | 28,318   |   |   | 28,318  |  
|Cash distributions declared and paid to shareholders ($.77 per share)  |  |                   |       |                                       |   |                                        |   |                              |    |  |   |   |  |   | (71,340  | ) |   | (71,340 | )
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  
|Balance at December 31, 2010                                           |  |                   | 92,028 |                                       | $ | 910,484                                 |   |                              | 240 |  | $ | 24 |  | $ | (177,208 | ) | $ | 733,300 |  
|                                                                       |  |                   |        |                                       |   |                                         |   |                              |     |  |   |    |  |   |          |   |   |         |  

See notes to consolidated financial statements.

30

---



Apple REIT Seven, Inc.
Consolidated Statements of Cash Flows
(in thousands)

|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | ------------------------------ | - | ------------------------------ | - | - | -------- | -
|                                                                                                   |  | Year ended
 December 31,
 2010 |         | Year ended
 December 31,
 2009 |   | Year ended
 December 31,
 2008 |  
|                                                                                                   |  |                                |         |                                |   |                                |  
|                                                                                                   |  |                                |         |                                |   |                                |  
|Cash flow from operating activities:                                                               |  |                                |         |                                |   |                                |   |   |          |  
|Net income                                                                                         |  | $                              | 28,318  |                                | $ | 20,713                         |   | $ | 38,063   |  
|Adjustments to reconcile net income to cash provided by
 operating activities:                     |  |                                |         |                                |   |                                |   |   |          |  
|Depreciation of real estate owned                                                                  |  |                                | 33,174  |                                |   | 32,425                         |   |   | 28,434   |  
|Gain from settlement of contingency                                                                |  |                                | (3,099  | )                              |   |                               |   |   |         |  
|Amortization of deferred financing costs, fair value
 adjustments and other non-cash expenses, net |  |                                | 665     |                                |   | 114                            |   |   | (382     | )
|Changes in operating assets and liabilities, net of
 amounts acquired/assumed:                     |  |                                |         |                                |   |                                |   |   |          |  
|Decrease (increase) in funds due from third party managers                                         |  |                                | (190    | )                              |   | 909                            |   |   | 82       |  
|Decrease (increase) in other assets                                                                |  |                                | (33     | )                              |   | 530                            |   |   | 852      |  
|Increase in accounts payable and accrued expenses                                                  |  |                                | 1,080   |                                |   | 769                            |   |   | 1,976    |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|Net cash provided by operating activities                                                          |  |                                | 59,915  |                                |   | 55,460                         |   |   | 69,025   |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|Cash flow from investing activities:                                                               |  |                                |         |                                |   |                                |   |   |          |  
|Capital improvements                                                                               |  |                                | (4,234  | )                              |   | (13,777                        | ) |   | (26,541  | )
|Cash paid for the acquisition of hotel properties                                                  |  |                                |        |                                |   |                               |   |   | (103,048 | )
|Redemptions (additions) to ownership interest in non-hotel
 properties                             |  |                                | (125    | )                              |   | 3,240                          |   |   |         |  
|Net decrease (increase) in cash restricted for property
 improvements                              |  |                                | 2,049   |                                |   | (389                           | ) |   | 2,070    |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|Net cash used in investing activities                                                              |  |                                | (2,310  | )                              |   | (10,926                        | ) |   | (127,519 | )
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|Cash flow from financing activities:                                                               |  |                                |         |                                |   |                                |   |   |          |  
|Payment of mortgage notes payable                                                                  |  |                                | (2,563  | )                              |   | (2,401                         | ) |   | (2,192   | )
|Proceeds (payments on) extinguished short-term borrowing
 facilities                               |  |                                | (34,425 | )                              |   | 11,510                         |   |   |         |  
|Net proceeds from current short-term borrowing facility                                            |  |                                | 67,815  |                                |   |                               |   |   |         |  
|Payment of financing costs related to borrowings                                                   |  |                                | (1,157  | )                              |   | (43                            | ) |   | (301     | )
|Redemptions of Units                                                                               |  |                                | (40,680 | )                              |   | (24,843                        | ) |   | (7,462   | )
|Net proceeds related to issuance of Units                                                          |  |                                | 24,745  |                                |   | 26,014                         |   |   | 28,061   |  
|Cash distributions paid to common shareholders                                                     |  |                                | (71,340 | )                              |   | (75,380                        | ) |   | (81,440  | )
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|Net cash used in financing activities                                                              |  |                                | (57,605 | )                              |   | (65,143                        | ) |   | (63,334  | )
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|Decrease in cash and cash equivalents                                                              |  |                                |        |                                |   | (20,609                        | ) |   | (121,828 | )
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|Cash and cash equivalents, beginning of period                                                     |  |                                |        |                                |   | 20,609                         |   |   | 142,437  |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|Cash and cash equivalents, end of period                                                           |  | $                              |        |                                | $ |                               |   | $ | 20,609   |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|Supplemental information:                                                                          |  |                                |         |                                |   |                                |   |   |          |  
|Interest paid                                                                                      |  | $                              | 7,980   |                                | $ | 7,168                          |   | $ | 6,794    |  
|                                                                                                   |  |                                |         |                                |   |                                |   |   |          |  
|Non-cash transactions:                                                                             |  |                                |         |                                |   |                                |   |   |          |  
|Notes payable assumed in acquisitions                                                              |  | $                              |        |                                | $ |                               |   | $ | 27,334   |  

See notes to consolidated financial statements.

31

---



Notes to Consolidated Financial Statements

Note 1

General Information and Summary of
Significant Accounting Policies

Organization

Apple
REIT Seven, Inc. (the Company) is a Virginia corporation formed to invest in
real estate in select metropolitan areas in the United States. Initial
capitalization occurred on May 26, 2005 and operations began on
April 27, 2006 when the Company acquired its first hotel. The Company has
no foreign operations or assets and its operations include only one segment.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany transactions and balances have been
eliminated upon consolidation.

The
Company has elected to be treated as a real estate investment trust (REIT)
for federal income tax purposes. The REIT Modernization Act, effective
January 1, 2001, permits real estate investment trusts to establish
taxable businesses to conduct certain previously disallowed business
activities. The Company has formed wholly-owned taxable REIT subsidiaries
(collectively, the Lessee), which lease all of the Companys hotels.

Cash and Cash
Equivalents

Cash
and cash equivalents include highly liquid investments with original maturities
of three months or less. The fair market value of cash and cash equivalents
approximates their carrying value. Balances held may at times exceed federal depository
insurance limits.

Restricted Cash

Restricted
cash includes reserves for debt service, real estate taxes, and insurance, as
well as excess cash flow deposits and reserves for furniture, fixtures, and
equipment replacements of up to 5% of property revenue for certain hotels, as
required by certain management or mortgage debt agreement restrictions and
provisions.

Investment in
Real Estate and Related Depreciation

The
hotels are stated at cost, net of depreciation, and include real estate
brokerage commissions paid to Apple Suites Realty Group, Inc. (ASRG), a
related party 100% owned by Glade M. Knight, Chairman and Chief Executive
Officer of the Company. 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, ten years for major
improvements and three to seven years for furniture, fixtures and equipment.

The
Company considers expenditures to be capital in nature based on the following
criteria: (1) for a single asset, the cost must be at least $500,
including all normal and necessary costs to place the asset in service, and the
useful life must be at least one year; (2) for group purchases of 10 or
more identical assets, the unit cost for each asset must be at least $50,
including all normal and necessary costs to place the asset in service, and the
useful life must be at least one year; and (3) for major repairs to a
single asset, the repair must be at least $2,500 and the useful life of the
asset must be substantially extended.

The
Company records impairment losses on hotel properties used in operations if
indicators of impairment are present, and the sum of the undiscounted cash
flows estimated to be generated by the respective properties, based on
historical and industry data, is less than the properties carrying amount.
Indicators of impairment include a property with current or potential losses
from operations, when it becomes more likely than not that a property will be
sold before the end of its previously estimated useful life or when events,
trends, contingencies or changes in circumstances indicate that a triggering
event has occurred and an assets carrying value may not be recoverable.
Impairment losses are measured as the difference between the assets fair value
and its carrying value. No impairment losses have been recorded to date.

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.

Comprehensive
Income

The
Company recorded no comprehensive income other than net income during the
periods reported.

32

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Earnings and
Cash Distributions 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. There were no dilutive shares outstanding at
December 31, 2010, 2009 or 2008. As a result, basic and dilutive outstanding
shares were the same. Series B convertible preferred shares are not included in
earnings per common share calculations until such time the Series B convertible
preferred shares are converted to common shares.

The
Companys annual cash distribution rate as of December 31, 2010 is $0.77 per
common share. For the year ended December 31, 2010 and 2009 the Company made
cash distributions of $0.77 and $0.81 per common share, for a total of $71.3
million and $75.4 million, respectively.

Federal Income
Taxes

The
Company is operated as, and has elected to be taxed as, a REIT under
Sections 856 to 860 of the Internal Revenue Code. Earnings and profits,
which will determine the taxability of distributions to shareholders, will
differ from income reported for financial reporting purposes primarily due to
the differences for federal income tax purposes in the estimated useful lives
used to compute depreciation. The characterization of 2010 distributions of
$0.77 per share for tax purposes was 51% ordinary income and 49% return of
capital (unaudited). The characterization of 2009 distributions of $0.81 per
share for tax purposes was 47% ordinary income and 53% return of capital
(unaudited). The characterization of 2008 distributions of $0.88 per share for
tax purposes was 56% ordinary income and 44% return of capital (unaudited).

The
Lessee, as a taxable REIT subsidiary of the Company, is subject to federal and
state income taxes. The taxable REIT subsidiary incurred a loss for the years
ended December 31, 2010, 2009 and 2008, and therefore did not have any
federal tax expense. No operating loss benefit has been recorded in the
consolidated balance sheet since realization is uncertain. Total net operating
loss carry forward for federal income tax purposes was approximately $22
million as of December, 31, 2010. The net operating loss carry forwards will
expire beginning in 2026. There are no material differences between the book
and tax cost basis of the Companys assets.

As
of December 31, 2010, the tax years that remain subject to examination by major
tax jurisdictions generally include 2007  2010.

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 and franchise 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.

Recently
Adopted or Issued Accounting Pronouncements

In
June 2009, the Financial Accounting Standards Board issued a pronouncement
(Accounting Standards Update No. 2009-17) which amends its guidance surrounding
a companys analysis to determine whether any of its variable interests
constitute controlling financial interests in a variable interest entity. This
analysis identifies the primary beneficiary of a variable interest entity as the
enterprise that has both of the following characteristics: (a) the power to
direct the activities of a variable interest entity that most significantly
impact the entitys economic performance, and (b) the obligation to absorb
losses of the entity that could potentially be significant to the variable
interest entity or the right to receive benefits from the entity that could
potentially be significant to the variable interest entity. Additionally, an
enterprise is required to assess whether it has an implicit financial
responsibility to ensure that a variable interest entity operates as designed
when determining whether it has the power to direct the activities of the
variable interest entity that most significantly impact the entitys economic
performance. The new pronouncement also requires ongoing assessments of whether
an enterprise is the primary beneficiary of a variable interest entity and
enhanced disclosure about an enterprises involvement with a variable interest
entity. This pronouncement was adopted by the Company in the first quarter of
2010. The adoption of this standard did not have a material impact on the
Companys consolidated financial statements.

33

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Note 2

Investment in Real Estate

As
of December 31, 2010, the Company owned 51 hotels consisting of seven
Hilton Garden Inn hotels, seven Residence Inn hotels, ten Courtyard hotels,
twelve Homewood Suites hotels, three Fairfield Inn hotels, four SpringHill
Suites hotels, four TownePlace Suites hotels, three Hampton Inn hotels and one
Marriott hotel. The hotels are located in 18 states and, in aggregate, consist
of 6,426 rooms.

Investment
in real estate consisted of the following (in thousands):

|                                   |  |                   |          |                   |   |         |  
|---------------------------------- |  | ----------------- | -------- | ----------------- | - | ------- | -
|                                   |  | December 31, 2010 |          | December 31, 2009 |  
|                                   |  |                   |          |                   |  
|Land                               |  | $                 | 90,714   |                   | $ | 90,714  |  
|Building and
 Improvements         |  |                   | 832,410  |                   |   | 831,121 |  
|Furniture,
 Fixtures and Equipment |  |                   | 63,142   |                   |   | 61,381  |  
|                                   |  |                   |          |                   |   |         |  
|                                   |  |                   |          |                   |   |         |  
|                                   |  |                   | 986,266  |                   |   | 983,216 |  
|Less
 Accumulated Depreciation     |  |                   | (114,097 | )                 |   | (80,923 | )
|                                   |  |                   |          |                   |   |         |  
|Investment
 in Real Estate, net    |  | $                 | 872,169  |                   | $ | 902,293 |  
|                                   |  |                   |          |                   |   |         |  

The
following table summarizes the location, brand, manager, date acquired, number
of rooms and gross purchase price for each hotel. All dollar amounts are in
thousands.

|                     |  |                    |  |              |  |                  |  |       |  |                       |         | 
|-------------------- |  | ------------------ |  | ------------ |  | ---------------- |  | ----- |  | --------------------- | ------- | 
|Location             |  | Brand              |  | Manager      |  | Date of Purchase |  | Rooms |  | Gross Purchase
 Price |        
|                     |  |                    |  |              |  |                  |  |       |  |                       |        
|Houston, TX          |  | Residence
 Inn     |  | Western      |  | 4/27/06          |  | 129   |  | $                     | 13,600  | 
|San Diego,
 CA       |  | Hilton
 Garden Inn |  | Inn Ventures |  | 5/9/06           |  | 200   |  |                       | 34,500  | 
|Brownsville,
 TX     |  | Courtyard          |  | Western      |  | 6/19/06          |  | 90    |  |                       | 8,550   | 
|Stafford, TX         |  | Homewood
 Suites   |  | Western      |  | 8/15/06          |  | 78    |  |                       | 7,800   | 
|Auburn, AL           |  | Hilton
 Garden Inn |  | LBA          |  | 8/17/06          |  | 101   |  |                       | 10,185  | 
|Huntsville,
 AL      |  | Hilton
 Garden Inn |  | LBA          |  | 8/17/06          |  | 101   |  |                       | 10,285  | 
|Montgomery,
 AL      |  | Homewood
 Suites   |  | LBA          |  | 8/17/06          |  | 91    |  |                       | 10,660  | 
|Montgomery,
 AL      |  | Hilton
 Garden Inn |  | LBA          |  | 8/17/06          |  | 97    |  |                       | 10,385  | 
|Troy, AL             |  | Hampton Inn        |  | LBA          |  | 8/17/06          |  | 82    |  |                       | 6,130   | 
|Seattle, WA          |  | Residence
 Inn     |  | Inn Ventures |  | 9/1/06           |  | 234   |  |                       | 56,173  | 
|Sarasota, FL         |  | Homewood
 Suites   |  | Hilton       |  | 9/15/06          |  | 100   |  |                       | 13,800  | 
|Hattiesburg,
 MS     |  | Courtyard          |  | LBA          |  | 10/5/06          |  | 84    |  |                       | 9,455   | 
|Huntsville,
 AL      |  | Homewood
 Suites   |  | LBA          |  | 10/27/06         |  | 107   |  |                       | 11,606  | 
|Omaha, NE            |  | Courtyard          |  | Marriott     |  | 11/4/06          |  | 181   |  |                       | 23,100  | 
|Cincinnati,
 OH      |  | Homewood
 Suites   |  | White        |  | 12/1/06          |  | 76    |  |                       | 7,100   | 
|Rancho Bernardo,
 CA |  | Courtyard          |  | Dimension    |  | 12/12/06         |  | 210   |  |                       | 36,000  | 
|New Orleans,
 LA     |  | Homewood
 Suites   |  | Dimension    |  | 12/15/06         |  | 166   |  |                       | 43,000  | 
|Ronkonkoma,
 NY      |  | Hilton
 Garden Inn |  | White        |  | 12/15/06         |  | 164   |  |                       | 27,000  | 
|Tupelo, MS           |  | Hampton Inn        |  | LBA          |  | 1/23/07          |  | 96    |  |                       | 5,245   | 
|Miami, FL            |  | Homewood
 Suites   |  | Dimension    |  | 2/21/07          |  | 159   |  |                       | 24,300  | 
|Highlands
 Ranch, CO |  | Residence
 Inn     |  | Dimension    |  | 2/22/07          |  | 117   |  |                       | 19,000  | 
|Cranford, NJ         |  | Homewood
 Suites   |  | Dimension    |  | 3/7/07           |  | 108   |  |                       | 13,500  | 
|Mahwah, NJ           |  | Homewood
 Suites   |  | Dimension    |  | 3/7/07           |  | 110   |  |                       | 19,500  | 
|Highlands
 Ranch, CO |  | Hilton
 Garden Inn |  | Dimension    |  | 3/9/07           |  | 128   |  |                       | 20,500  | 
|Prattville,
 AL      |  | Courtyard          |  | LBA          |  | 4/24/07          |  | 84    |  |                       | 9,304   | 
|Lakeland, FL         |  | Courtyard          |  | LBA          |  | 4/24/07          |  | 78    |  |                       | 9,805   | 
|Tallahassee,
 FL     |  | Fairfield
 Inn     |  | LBA          |  | 4/24/07          |  | 79    |  |                       | 6,647   | 
|Columbus, GA         |  | Fairfield
 Inn     |  | LBA          |  | 4/24/07          |  | 79    |  |                       | 7,333   | 
|Agoura
 Hills, CA    |  | Homewood
 Suites   |  | Dimension    |  | 5/8/07           |  | 125   |  |                       | 25,250  | 
|Memphis, TN          |  | Homewood
 Suites   |  | Hilton       |  | 5/15/07          |  | 140   |  |                       | 11,100  | 
|Dothan, AL           |  | Fairfield
 Inn     |  | LBA          |  | 5/16/07          |  | 63    |  |                       | 4,584   | 
|Vancouver,
 WA       |  | SpringHill
 Suites |  | Inn Ventures |  | 6/1/07           |  | 119   |  |                       | 15,988  | 
|San Diego,
 CA       |  | Residence
 Inn     |  | Dimension    |  | 6/13/07          |  | 121   |  |                       | 32,500  | 
|Provo, UT            |  | Residence
 Inn     |  | Dimension    |  | 6/13/07          |  | 114   |  |                       | 11,250  | 
|Macon, GA            |  | Hilton
 Garden Inn |  | LBA          |  | 6/28/07          |  | 101   |  |                       | 10,660  | 
|San Antonio,
 TX     |  | TownePlace
 Suites |  | Western      |  | 6/29/07          |  | 106   |  |                       | 11,925  | 
|Alexandria,
 VA      |  | Courtyard          |  | Marriott     |  | 7/13/07          |  | 178   |  |                       | 36,997  | 
|San Diego,
 CA       |  | Hampton Inn        |  | Dimension    |  | 7/19/07          |  | 177   |  |                       | 42,000  | 
|Addison, TX          |  | SpringHill
 Suites |  | Marriott     |  | 8/10/07          |  | 159   |  |                       | 12,500  | 
|Boise, ID            |  | SpringHill
 Suites |  | Inn Ventures |  | 9/14/07          |  | 230   |  |                       | 21,000  | 
|San Antonio,
 TX     |  | TownePlace
 Suites |  | Western      |  | 9/27/07          |  | 123   |  |                       | 13,838  | 
|Trussville,
 AL      |  | Courtyard          |  | LBA          |  | 10/4/07          |  | 84    |  |                       | 9,510   | 
|Kirkland, WA         |  | Courtyard          |  | Inn Ventures |  | 10/23/07         |  | 150   |  |                       | 31,000  | 
|Huntsville,
 AL      |  | TownePlace
 Suites |  | LBA          |  | 12/10/07         |  | 86    |  |                       | 8,927   | 
|Tucson, AZ           |  | Residence
 Inn     |  | Western      |  | 1/17/08          |  | 124   |  |                       | 16,640  | 
|Richmond, VA         |  | Marriott           |  | White        |  | 1/25/08          |  | 410   |  |                       | 53,300  | 
|Columbus, GA         |  | SpringHill
 Suites |  | LBA          |  | 3/6/08           |  | 85    |  |                       | 9,675   | 
|Dothan, AL           |  | Residence
 Inn     |  | LBA          |  | 4/16/08          |  | 84    |  |                       | 9,669   | 
|El Paso, TX          |  | Homewood
 Suites   |  | Western      |  | 4/23/08          |  | 114   |  |                       | 15,390  | 
|Columbus, GA         |  | TownePlace
 Suites |  | LBA          |  | 5/22/08          |  | 86    |  |                       | 8,428   | 
|Miami, FL            |  | Courtyard          |  | Dimension    |  | 9/5/08           |  | 118   |  |                       | 15,000  | 
|                     |  |                    |  |              |  |                  |  |       |  |                       |         | 
|                     |  |                    |  |              |  |                  |  | 6,426 |  | $                     | 901,594 | 
|                     |  |                    |  |              |  |                  |  |       |  |                       |         | 

34

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The
Company leased all of its hotels to wholly-owned taxable REIT subsidiaries
under master hotel lease agreements. The Company also used the proceeds of its
Unit offering to pay 2% of the gross purchase price for these hotels, which
equaled approximately $18.0 million, as a commission to ASRG.

No
goodwill was recorded in connection with any of the acquisitions.

Note 3

Notes Payable and Credit Agreements

In
October 2010, the Company entered into a new unsecured revolving credit
facility, to be utilized for working capital, hotel renovations, and other
general corporate funding purposes, including the payment of redemptions and
dividends. The syndicated credit facility provides for a maximum aggregate
commitment by the lenders, three commercial banks, of $85 million, and has a
scheduled maturity in October 2012. The applicable interest rate under the
unsecured revolving credit facility is, at the Companys option, equal to
either a) LIBOR (the London Interbank Offered Rate for a one-month term) plus
3.5%, subject to a minimum LIBOR interest rate floor of 1.5%, or b) the banks
commercial prime rate plus 3.5%. The applicable LIBOR rate was approximately
0.26% at December 31, 2010. Payments of interest only are due monthly under the
terms of the credit agreement; the Company may make voluntary prepayments in
whole or in part, at any time. The Company is required to pay a quarterly fee
at an annual rate of 0.5% on the average unused balance of the credit facility.
At closing the Company borrowed $35.6 million under the credit facility to
extinguish its then existing unsecured loans and to pay loan transaction costs,
which included arrangement and commitment fees totaling 1.25% of the gross facility
commitment. The balance outstanding under the credit facility on December 31,
2010 was $44.9 million, at an annual interest rate of 5.0%. Interest expense
incurred in 2010 under the Companys unsecured credit facilities was
approximately $1.2 million; interest expense incurred in 2009 under the
Companys prior unsecured line of credit facility was approximately $105
thousand. The new credit facility contains financial covenants requiring
quarterly minimum net worth, debt service coverage and fixed charge coverage.
The Company was in compliance with these covenants at December 31, 2010.

In
conjunction with the acquisition of several hotel properties, the Company
assumed mortgage notes payable outstanding, secured by the applicable hotel property.
The following table summarizes the hotel, interest rate, maturity date and the
principal amount assumed associated with each note payable outstanding as of
December 31, 2010 and 2009. All dollar amounts are in thousands.

35

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|                    |  |  |                 |  |  |                |  |  |                |  |                    |         |                                                      |   |                                                      |  |   |         | 
|------------------- |  |  | --------------- |  |  | -------------- |  |  | -------------- |  | ------------------ | ------- | ---------------------------------------------------- | - | ---------------------------------------------------- |  | - | ------- | 
|Location            |  |  | Brand           |  |  | Interest
 Rate |  |  | Maturity
 Date |  | Principal
 Assumed |         | Outstanding
 Principal balance
 as of Dec. 31,
 2010 |   | Outstanding
 Principal balance
 as of Dec. 31,
 2009 | 
|                    |  |  |                 |  |  |                |  |  |                |  |                    |         |                                                      |   |                                                      | 
|Omaha, NE           |  |  | Courtyard       |  |  | 6.79%          |  |  | 1/1/14         |  | $                  | 12,658  |                                                      | $ | 11,573                                               |  | $ | 11,868  | 
|New Orleans, LA     |  |  | Homewood Suites |  |  | 5.85%          |  |  | 10/1/14        |  |                    | 17,144  |                                                      |   | 15,720                                               |  |   | 16,109  | 
|Tupelo, MS          |  |  | Hampton Inn     |  |  | 5.90%          |  |  | 3/1/16         |  |                    | 4,110   |                                                      |   | 3,616                                                |  |   | 3,754   | 
|Miami, FL           |  |  | Homewood Suites |  |  | 6.50%          |  |  | 7/1/13         |  |                    | 9,820   |                                                      |   | 8,951                                                |  |   | 9,199   | 
|Highlands Ranch, CO |  |  | Residence Inn   |  |  | 5.94%          |  |  | 6/1/16         |  |                    | 11,550  |                                                      |   | 11,048                                               |  |   | 11,203  | 
|Tallahassee, FL     |  |  | Fairfield Inn   |  |  | 6.80%          |  |  | 1/11/13        |  |                    | 3,494   |                                                      |   | 3,195                                                |  |   | 3,285   | 
|Lakeland, FL        |  |  | Courtyard       |  |  | 6.80%          |  |  | 1/11/13        |  |                    | 4,210   |                                                      |   | 3,850                                                |  |   | 3,957   | 
|San Diego, CA       |  |  | Residence Inn   |  |  | 6.55%          |  |  | 4/1/13         |  |                    | 15,804  |                                                      |   | 14,490                                               |  |   | 14,898  | 
|Provo, UT           |  |  | Residence Inn   |  |  | 6.55%          |  |  | 4/1/13         |  |                    | 5,553   |                                                      |   | 5,091                                                |  |   | 5,234   | 
|Richmond, VA        |  |  | Marriott        |  |  | 6.95%          |  |  | 9/1/14         |  |                    | 25,298  |                                                      |   | 23,686                                               |  |   | 24,276  | 
|                    |  |  |                 |  |  |                |  |  |                |  |                    |         |                                                      |   |                                                      |  |   |         | 
|                    |  |  |                 |  |  |                |  |  |                |  | $                  | 109,641 |                                                      | $ | 101,220                                              |  | $ | 103,783 | 
|                    |  |  |                 |  |  |                |  |  |                |  |                    |         |                                                      |   |                                                      |  |   |         | 

The
aggregate amounts of principal payable under the Companys unsecured revolving
credit facility and mortgage obligations, for the five years subsequent to
December 31, 2010 and thereafter are as follows (in thousands):

|                                       |  |       |         | 
|-------------------------------------- |  | ----- | ------- | 
|                                       |  | Total |        
|                                       |  |       |        
|2011                                   |  | $     | 2,737   | 
|2012                                   |  |       | 47,809  | 
|2013                                   |  |       | 35,281  | 
|2014                                   |  |       | 46,989  | 
|2015                                   |  |       | 394     | 
|Thereafter                             |  |       | 12,910  | 
|                                       |  |       |         | 
|                                       |  |       | 146,120 | 
|Fair Value
 Adjustment of Assumed Debt |  |       | 1,897   | 
|                                       |  |       |         | 
|Total                                  |  | $     | 148,017 | 
|                                       |  |       |         | 

A
fair value adjustment was recorded upon the assumption of above market rate
mortgage loans in connection with several of the Companys hotel acquisitions.
These premiums will be amortized into interest expense over the remaining term
of the related indebtedness using a method approximating the effective interest
rate method. The effective interest rates on the applicable debt obligations
assumed ranged from 5.40% to 6.24% at the date of assumption. The total
adjustment to interest expense was $597 thousand in 2010, $597 thousand in 2009
and $571 thousand in 2008. The unamortized balance of the fair value adjustment
was $1.9 million at December 31, 2010 and $2.5 million at December 31, 2009.

The
Company incurred loan origination costs related to the assumption of the
mortgage obligations on purchased hotels, and upon the origination of its
current corporate unsecured revolving credit facility and on the former
corporate line of credit facilities extinguished in 2010. Such costs are
amortized over the period to maturity of the applicable mortgage loan or credit
facility, or to termination of the applicable credit agreement, as an addition
to interest expense. Amortization of such costs totaled $351 thousand in 2010,
$212 thousand in 2009 and $189 thousand in 2008, and is included in interest
expense. The unamortized balance of loan origination costs was $1.6 million at
December 31, 2010 and $0.8 million at December 31, 2009.

The
mortgage loan assumed on the Richmond, Virginia Marriott hotel has a stated
maturity date of September 1, 2014. As a condition of the mortgage loan, the
maturity date of the note payable may be accelerated by the lender should the
Company be required to expand the hotel, under terms of the ground lease on the
hotel property. The Company is under no such requirement as of December 31,
2010.

The
Company estimates the fair value of its debt by discounting the future cash
flows of each instrument at estimated market rates consistent with the maturity
of the debt obligation with similar credit policies. Market rates take into
consideration general market conditions and maturity. As of December 31, 2010,
the carrying value and estimated fair value

36

---



of the
Companys debt was $148.0 million and $150.1 million. As of December 31, 2009,
the carrying value and estimated fair value of the Companys debt was $117.8
million and $119.6 million.

The
Companys Interest expense in its Consolidated Statements of Operations is net
of capitalized interest of $0.4 million and $1.0 million for the years ended
December 31, 2009 and 2008. Interest capitalized during the year ended December
31, 2010 was not significant. The interest was capitalized in conjunction with
hotel renovations.

Note 4

Shareholders Equity

The
Company concluded its best-efforts offering of Units (each Unit consists of one
common share, no par value, and one Series A preferred share) on July 17, 2007.
The Company registered its Units on Registration Statement Form S-11 (File
No. 333-125546) filed March 3, 2006. The Company began its
best-efforts offering (the Offering) of Units on March 15, 2006, the
same day the Registration Statement was declared effective by the Securities
and Exchange Commission.

The
Series A preferred shares have no voting rights and no conversion rights. In
addition, the Series A preferred shares are not separately tradable from the
common shares to which they relate. The Series A preferred shares do not have
any distribution rights except a priority distribution upon the sale of the
Companys assets. The priority distribution (Priority Distribution) will be
equal to $11.00 per Series A preferred share, and will be paid before any
distribution will be made to the holders of any other shares. Upon the Priority
Distribution the Series A preferred shares will have no other distribution
rights.

The
Company has issued 240,000 Series B convertible preferred shares to Glade M.
Knight, Chairman and Chief Executive Officer of the Company, in exchange for
the payment by him of $0.10 per Series B convertible preferred share, or
an aggregate of $24,000. The Series B convertible preferred shares are
convertible into common shares pursuant to the formula and on the terms and
conditions set forth below.

There
are no dividends payable on the Series B convertible preferred shares. Holders
of more than two-thirds of the Series B convertible preferred shares must
approve any proposed amendment to the articles of incorporation that would
adversely affect the Series B convertible preferred 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 holder 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 $11 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 the Companys 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 convertible preferred shares shall have the
right to convert any of such shares into common shares of the Company upon and
for 180 days following the occurrence of any of the following events:

| |                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)
 substantially all of the Companys assets, stock or business is sold or
 transferred through exchange, merger, consolidation, lease, share exchange,
 sale or otherwise, other than a sale of assets in liquidation, dissolution or
 winding up of the Company;
| |                                                                                                                                                                                                                                                                     
| | (2)
 the termination or expiration without renewal of the advisory agreement with
 Apple Seven Advisors, Inc. (ASA), or if the Company ceases to use ASRG to
 provide property acquisition and disposition services; or                                           
| |                                                                                                                                                                                                                                                                     
| | (3)
 the Companys common shares are listed on any securities exchange or
 quotation system or in any established market.                                                                                                                                           

Upon
the occurrence of any conversion event, each Series B convertible preferred
share may be converted into 24.17104 common shares. In the event the Company
raises additional gross proceeds in a subsequent public offering, each Series B
convertible preferred share may be converted into an additional number of
common shares based on the additional gross proceeds raised through the date of
conversion in a subsequent public offering according to the following formula:
(X/50 million) x 1.20568, where X is the additional gross proceeds rounded down
to the nearest 50 million.

No
additional consideration is due upon the conversion of the Series B convertible
preferred shares. The conversion into common shares of the Series B convertible
preferred shares will result in dilution of the shareholders interests.

37

---



Expense
related to issuance of 240,000 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
occurs. 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. If a conversion event had occurred at
December 31, 2010, expense would have ranged from $0 to $63.8 million (assumes
$11 per common share fair market value) which represents approximately 5.8
million shares of common stock.

The
Companys Board of Directors has approved the Unit Redemption Program to
provide limited interim liquidity to its shareholders who have held their Units
for at least one year; the program was initiated in April 2007. Shareholders
may request redemption of Units for a purchase price equal to 92% of the price
paid per Unit if the Units have been owned less than three years, or 100% of
the price paid per Unit if the Units have been owned more than three years. The
Company reserves the right to change the purchase price of redemptions, reject
any request for redemption, or otherwise amend the terms of, suspend, or
terminate the Unit Redemption Program. As of December 31, 2010, the Company has
redeemed approximately 7.0 million Units in the amount of $74.4 million under
the program, including approximately 3.7 million Units redeemed for $40.7
million in 2010, 2.4 million Units redeemed for $24.8 million in 2009, and
729,000 Units redeemed for $7.5 million in 2008.

In
July 2007 the Company instituted a Dividend Reinvestment Plan for its
shareholders. The plan provides a convenient and cost effective way to increase
shareholder investment in the Company by reinvesting dividends to purchase
additional Units of the Company. The uses of proceeds from this plan may
include purchasing Units under the Companys Unit Redemption Program, enhancing
properties, satisfying financing obligations and other expenses, increasing
working capital, funding various corporate operations, and acquiring hotels. As
of December 31, 2010, approximately 7.9 million Units, representing $86.5
million in proceeds to the Company, have been issued under the plan, including
approximately 2.2 million Units issued in 2010 for $24.6 million, 2.4 million
Units issued in 2009 for $25.9 million, and 2.5 million Units issued in 2008
for $28.0 million.

The
Companys articles of incorporation authorize issuance of up to 15 million
additional preferred shares. No preferred shares other than the Series A
preferred shares and the Series B convertible preferred shares (discussed
above) have been issued. The Company believes that the authorization to issue
additional preferred shares benefits the Company and its shareholders by
permitting flexibility in financing additional growth, giving the Company
additional financing options in corporate planning and in responding to
developments in business, including financing of additional acquisitions and
other general corporate purposes. Having authorized preferred shares available
for issuance in the future gives the Company the ability to respond to future
developments and allows preferred shares to be issued without the expense and
delay of a special shareholders meeting. At present, the Company has no
specific financing or acquisition plans involving the issuance of additional
preferred shares and the Company does not propose to fix the characteristics of
any series of preferred shares in anticipation of issuing preferred shares
other than the Series A preferred shares and Series B convertible preferred
shares discussed above. The Company cannot now predict whether or to what
extent, if any, additional preferred shares will be used or if so used what the
characteristics of a particular series may be. The voting rights and rights to
distributions of the holders of common shares will be subject to the prior
rights of the holders of any subsequently-issued preferred shares. Unless
otherwise required by applicable law or regulation, the preferred shares would
be issuable without further authorization by holders of the common shares and
on such terms and for such consideration as may be determined by the Board of
Directors. The preferred shares could be issued in one or more series having
varying voting rights, redemption and conversion features, distribution
(including liquidating distribution) rights and preferences, and other rights,
including rights of approval of specified transactions. A series of preferred
shares could be given rights that are superior to rights of holders of common
shares and a series having preferential distribution rights could limit common
share distributions and reduce the amount holders of common shares would
otherwise receive on dissolution.

Note 5

Stock Incentive Plans

In
2006 the Board of Directors approved a Non-Employee Directors Stock Option Plan
(the Directors Plan) whereby directors, who are not employees of the Company
or affiliates, automatically receive the option to purchase Units. Under the
Directors Plan, the number of Units authorized for issuance is equal to 45,000
plus 1.8% of the number of Units sold in excess of the minimum offering of
4,761,905 Units. This plan currently relates to the initial public offering of
91,125,541 Units. The maximum number of Units authorized under the Directors
Plan as of December 31, 2010 is 1,599,545.

Also
in 2006, the Board of Directors approved an Incentive Stock Option Plan (the
Incentive Plan) whereby incentive awards may be granted to certain personnel
of the Company or affiliates. Under the Incentive Plan, the number of

38

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Units authorized for
issuance is equal to 35,000 plus 4.625% of the number of Units sold in the
initial offering in excess of 4,761,905. This plan also currently relates to
the initial public offering of 91,125,541 Units. The maximum number of Units that
can be issued under the Incentive Plan as of December 31, 2010 is 4,029,318.

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. The options expire 10 years from the date of the grant. During 2010,
2009 and 2008, the Company granted options to purchase 74,224, 74,796 and
74,024 Units, respectively, under the Directors Plan. All of the options issued
vested at the date of issuance, and have an exercise price of $11 per Unit. The
Company has granted no options under the Incentive Plan as of December 31,
2010. Activity in the Companys stock option plans during 2010, 2009 and 2008
is summarized in the following table:

|                                      |  |                               |         |                               |   |                               |  |   |         | 
|------------------------------------- |  | ----------------------------- | ------- | ----------------------------- | - | ----------------------------- |  | - | ------- | 
|                                      |  | Year ended
 December 31, 2010 |         | Year ended
 December 31, 2009 |   | Year ended
 December 31, 2008 | 
|                                      |  |                               |         |                               |   |                               | 
|Outstanding, beginning of
 year:      |  |                               | 220,270 |                               |   | 145,474                       |  |   | 71,450  | 
|Granted                               |  |                               | 74,224  |                               |   | 74,796                        |  |   | 74,024  | 
|Exercised                             |  |                               |        |                               |   |                              |  |   |        | 
|Expired or canceled                   |  |                               |        |                               |   |                              |  |   |        | 
|                                      |  |                               |         |                               |   |                               |  |   |         | 
|Outstanding, end of year:             |  |                               | 294,494 |                               |   | 220,270                       |  |   | 145,474 | 
|                                      |  |                               |         |                               |   |                               |  |   |         | 
|Exercisable, end of year:             |  |                               | 294,494 |                               |   | 220,270                       |  |   | 145,474 | 
|                                      |  |                               |         |                               |   |                               |  |   |         | 
|The weighted-average
 exercise price: |  | $                             | 11.00   |                               | $ | 11.00                         |  | $ | 11.00   | 

Compensation
expense associated with the issuance of stock options was approximately $117
thousand in 2010, $119 thousand in 2009 and $61 thousand in 2008.

Note 6

Management and Franchise Agreements

Each
of the Companys 51 hotels owned at December 31, 2010 are operated and
managed, under separate management agreements, by affiliates of one of the
following companies (indicates the number of hotels managed): Marriott
International, Inc. (Marriott) (3), Dimension Development Company (Dimension)
(12), Hilton Worldwide (Hilton) (2), Western International (Western) (7),
Larry Blumberg & Associates (LBA) (19), White Lodging Services
Corporation (WLS) (3), or Inn Ventures, Inc. (Inn Ventures) (5). The
agreements provide for initial terms ranging from one to twenty years. Fees
associated with the agreements generally include the payment of base management
fees, incentive management fees, accounting fees, and other fees for
centralized services which are allocated among all of the hotels that receive
the benefit of such services. Base management fees are calculated as a
percentage of gross revenues. Incentive management fees are calculated as a
percentage of operating profit in excess of a priority return to the Company,
as defined in the management agreements. The Company has the option to
terminate the management agreements if specified performance thresholds are not
satisfied. During the years ended December 31, 2010, 2009 and 2008, the
Company incurred approximately $6.6 million, $6.1 million and $7.4 million,
respectively, in management fee expense.

Dimension,
Western, LBA, WLS, and Inn Ventures are not affiliated with either Marriott or
Hilton, and as a result, these hotels (as well as the two hotels managed by
Promus Hotels, Inc., which is an affiliate of Hilton) were required to obtain
separate franchise agreements with each respective franchisor. The Hilton
franchise agreements generally provide for initial terms ranging between 10 to
20 years. Fees associated with the Hilton agreements generally include the
payment of royalty fees and program fees based on room revenues. The Marriott
franchise agreements provide for an initial term of between six and 20 years.
Fees associated with the Marriott agreements include the payment of royalty
fees, marketing fees, reservation fees and a communications support fee based
on room revenues. During the years ended December 31, 2010, 2009 and 2008
the Company incurred approximately $8.2 million, $7.8 million and $8.3 million,
respectively, in franchise fee expense.

Note 7

Related Parties

The
Company has, and is expected to continue to engage in, significant transactions
with related parties. These transactions cannot be construed to be arms length,
and the results of the Companys operations may be different if these
transactions were conducted with non-related parties. The Companys independent
members of the Board of Directors oversee and annually review the Companys
related party relationships (which include the relationships discussed in this
section) and are required to approve any significant modifications to these
contracts, as well as any new significant related

39

---



party transactions. There
were no changes to the contracts discussed in this section and no new significant
related party transactions during 2010. The Board of Directors is not required
to approve each individual transaction that falls under a related party
relationship, however under the direction of the Board of Directors, at least
one member of the Companys senior management team approves each related party
transaction.

The
Company has a contract with ASRG, a related party, to provide brokerage
services for the acquisition and disposition of the Companys real estate
assets. In accordance with the contract, ASRG is paid a fee of 2% of the gross
purchase price of any acquisitions or gross sale price of any dispositions of
real estate investments, subject to certain conditions plus certain
reimbursable costs. Payments to ASRG for services under the terms of this
contract have totaled approximately $18.0 million since inception, which were
capitalized as a part of the purchase price of the hotels. No fees were
incurred under this contract during the years ended December 31, 2010 and 2009.

The
Company is party to an advisory agreement with ASA to provide management
services to the Company. An annual fee ranging from 0.1% to 0.25% of total
equity proceeds received by the Company, in addition to certain reimbursable
expenses, are payable for these services. Total advisory fees and reimbursable
expenses incurred by the Company under the advisory agreement are included in
general and administrative expenses and totaled approximately $2.8 million,
$3.0 million and $3.4 million for the years ended December 31, 2010, 2009 and
2008, respectively. Of this total expense, approximately $1.0 million, $1.0
million and $1.5 million were paid to ASA and $1.8 million, $2.0 million and
$1.9 million were expenses reimbursed (or paid directly to Apple REIT Six, Inc.
on behalf of ASA) by ASA to Apple REIT Six, Inc. for the years ended December
31, 2010, 2009 and 2008.

The
advisors are staffed with personnel of Apple REIT Six, Inc. (AR6). AR6
provides similar staffing for Apple Six Advisors, Inc. (A6A), Apple Eight
Advisors, Inc. (A8A), Apple Nine Advisors, Inc. (A9A) and Apple Ten
Advisors, Inc. (A10A). A6A, A8A, A9A and A10A provide management services to,
respectively, AR6, Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT
Ten, Inc. Although there is a potential conflict on time allocation of
personnel due to the fact that a senior manager, officer or staff member will
provide services to more than one company, the Company believes that the
executives and staff compensation sharing arrangement allows the companies to
share costs yet attract and retain superior executives and staff. The cost
sharing structure also allows each entity to maintain a much more cost
effective structure than having separate staffing arrangements. Amounts reimbursed
to AR6 include both compensation for personnel and overhead (office rent,
utilities, benefits, office supplies, etc.) utilized by the companies. The
allocation of costs from AR6 is made by the management of the several REITs and
is reviewed at least annually by the Compensation Committees of the several
REITs. In making the allocation, management and the Compensation Committee,
consider all relevant facts related to the Companys level of business activity
and the extent to which the Company requires the services of particular
personnel of AR6. Such payments are based on the actual cost of the services
and are not based on formal record keeping regarding the time these personnel
devote to the Company, but are based on a good faith estimate by the individual
and/or his or her supervisor of the time devoted by the individual to the
Company. As part of this arrangement, the day to day transactions may result in
amounts due to or from the noted related parties. To efficiently manage cash
disbursements, the individual companies may make payments for any or all of the
related companies. The amounts due to or from the related individual companies
are reimbursed or collected and are not significant in amount.

The
Company has a partial ownership interest in Apple Air Holdings, LLC (Apple
Air). A 50% interest was originally purchased by the Company for approximately
$7.5 million in 2007 to allow the Company access to two corporate Lear jets for
asset management and hotel renovation purposes. In January 2009, the Companys
ownership interest in Apple Air was reduced from 50% to 26% through the
redemption of a 24% ownership interest by Apple Air. The Company received
approximately $3.2 million for the ownership interest redeemed, which
approximated the Companys carrying value of the 24% ownership interest at the
date of redemption. No gain or loss from the redemption was recognized by the
Company. The Companys ownership interest in Apple Air is included in other
assets, net on the Companys consolidated balance sheet, and was approximately
$2.0 million and $2.8 million at December 31, 2010 and 2009, respectively. The
other members of Apple Air are Apple REIT Six, Inc., Apple REIT Eight, Inc. and
Apple REIT Nine, Inc. The Company records its share of income or loss of the
entity under the equity method of accounting, adjusting its investment
accordingly. For the years ended December 31, 2010 and 2009, the Company
recorded a loss of approximately $0.9 million and $0.5 million, respectively,
as its share of the net loss of Apple Air which is included in general and
administrative expense. The losses relate primarily to the depreciation of the
aircraft and in 2010 the reduction in basis of the two jets due to the planned
trade in for one new jet.

Including
ASRG, ASA, A6A, A8A, A9A and A10A discussed above, Mr. Knight is also
Chairman and CEO of Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT
Nine, Inc. and Apple REIT Ten, Inc. Members of the Companys Board of Directors
are also on the boards of Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple
REIT Nine, Inc. and Apple REIT Ten, Inc.

40

---



Note 8

Gain from Settlement of Contingency

The
Company recorded other income of $3.1 million in November 2010 arising from the
de-recognition of a liability for taxes, previously assessed by the Broad
Street Community Development Authority of Richmond, VA (CDA). Upon the
Companys purchase in January 2008 of the full service Marriott hotel in
Richmond, VA (MRV), the Company assumed all remaining obligations of the MRV
under a multi-year minimum tax assessment on hotels operating within the CDAs
jurisdiction. The MRV was obligated for minimum annual tax payments to the CDA
of $257 thousand, which related to the 2003 issuance by the CDA of tax-exempt
revenue bonds with maturities extending through 2033. Annual tax payments to
the CDA were effective through the earlier of a) a period extending through
2033, or b) payment or defeasance in full of all applicable CDA revenue bonds.
In November 2010, the CDA provided for the full defeasance or redemption of the
applicable CDA revenue bonds. Accordingly, the CDA announced that assessments
and collections of the prior tax have ceased as of November 2010. The Companys
net present value of the previously required minimum annual tax assessments,
originally projected to extend through 2033, was $3.1 million at the date of
the CDAs bond defeasance and redemption in November 2010.

Note 9

Commitments

The
Company leases the underlying land for six hotel properties as of December 31,
2010. These land leases have remaining terms available to the Company ranging
from 17 to 92 years, excluding any potential option periods to extend the
initial lease term.

The
initial term for the land lease for the Residence Inn in Seattle, WA extends
through February 2049, with an additional three consecutive 10-year extensions
available to the Company (the lessee under the assumed lease). The lease is
subject to various payment adjustments during the lease term, including
potential periodic increases in lease payments based on the appraised market
value of the underlying land at time of adjustment. Based on an assessment of
the fair value of the assumed land lease at the date of the hotel acquisition, the
Company recorded an initial land lease liability. This liability will be
amortized over the life of the lease, and is included in accrued expenses on
the Companys consolidated balance sheet; the amount of the liability at
December 31, 2010 and 2009 was approximately $2.1 million and $2.2 million
respectively.

The
initial term for the land lease for the full-service Marriott hotel in
Richmond, VA extends through December 2102. The lease is subject to payment
adjustments, based on the Consumer Price Index, at stated intervals during its
term. A fair value adjustment was recorded by the Company upon the assumption
of the below market rate ground lease. This favorable lease asset will be
amortized over the remaining term of the ground lease. The unamortized balance
of the land leases fair value adjustment was approximately $0.9 million at
December 31, 2010 and 2009, and is included in other assets, net on the
Companys consolidated balance sheet. Upon assumption of the MRV land lease,
the Company also assumed certain contingent responsibilities of the hotels
predecessor owner, with respect to the third-party lessor of the land.
Dependent on conditions which include the hotel exceeding stated revenue per
available room (RevPAR) thresholds for a trailing twelve month period (with
thresholds adjusting upward by 3% annually), the Company may be obligated to
construct an addition to the MRV hotel containing a minimum of 209 rooms. As of
December 31, 2010, there is no requirement to commence an expansion of the MRV
hotel.

The
Company has also assumed land leases pertaining to the Columbus, GA Fairfield
Inn; Macon, GA Hilton Garden Inn; Columbus, GA TownePlace Suites; and the
Miami, FL Courtyard hotel properties. Based on an assessment of each of these
leases, no material land lease liability, or favorable lease asset, was assumed
at date of acquisition.

The
aggregate amounts of the estimated minimum lease payments pertaining to the
Companys land leases, for the five years subsequent to December 31,
2010 and thereafter are as follows (in thousands):

|           |  |       |        | 
|---------- |  | ----- | ------ | 
|           |  | Total |       
|           |  |       |       
|2011       |  | $     | 934    | 
|2012       |  |       | 934    | 
|2013       |  |       | 1,037  | 
|2014       |  |       | 1,126  | 
|2015       |  |       | 1,144  | 
|Thereafter |  |       | 89,887 | 
|           |  |       |        | 
|Total      |  | $     | 95,062 | 
|           |  |       |        | 

41

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Note 10

Industry Segments

The
Company owns hotel properties throughout the United States that generate rental
and other property related income. The Company separately evaluates the
performance of each of its hotel properties. However, because each of the
hotels has similar economic characteristics, facilities, and services, the
properties have been aggregated into a single operating segment. All segment
disclosures are included in, or can be derived from, the Companys consolidated
financial statements.

Note 11

Quarterly Financial Data (unaudited)

The
following is a summary of quarterly results of operations for the years ended
December 31, 2010 and 2009.

|                                           |  |                |        |                 |   |                |  |                 |        |  |   |        | 
|------------------------------------------ |  | -------------- | ------ | --------------- | - | -------------- |  | --------------- | ------ |  | - | ------ | 
|2010(in thousands except per share data)   |  | First
 Quarter |        | Second
 Quarter |   | Third
 Quarter |  | Fourth
 Quarter |       
|                                           |  |                |        |                 |   |                |  |                 |       
|Revenues                                   |  | $              | 48,236 |                 | $ | 52,263         |  | $               | 52,830 |  | $ | 47,202 | 
|Net income                                 |  | $              | 5,614  |                 | $ | 7,910          |  | $               | 8,406  |  | $ | 6,388  | 
|Basic and diluted income
 per common share |  | $              | 0.06   |                 | $ | 0.09           |  | $               | 0.09   |  | $ | 0.07   | 
|Distributions declared and
 paid per share |  | $              | 0.193  |                 | $ | 0.193          |  | $               | 0.193  |  | $ | 0.193  | 
|                                           |  |                |        |                 |   |                |  |                 |        |  |   |        | 
|2009(in thousands except per share data)   |  | First
 Quarter |        | Second
 Quarter |   | Third
 Quarter |  | Fourth
 Quarter |       
|                                           |  |                |        |                 |   |                |  |                 |       
|Revenues                                   |  | $              | 47,558 |                 | $ | 50,583         |  | $               | 49,423 |  | $ | 44,151 | 
|Net income                                 |  | $              | 5,330  |                 | $ | 6,889          |  | $               | 6,250  |  | $ | 2,244  | 
|Basic and diluted income
 per common share |  | $              | 0.06   |                 | $ | 0.07           |  | $               | 0.07   |  | $ | 0.02   | 
|Distributions declared and
 paid per share |  | $              | 0.220  |                 | $ | 0.202          |  | $               | 0.193  |  | $ | 0.193  | 

Net
income for the fourth quarter of 2010 includes other income of $3.1 million, or
$.03 per basic and diluted income per common share, arising from the gain on
settlement of an acquisition contingency.

Note 12

Subsequent Events

In
January 2011, the Company declared and paid $5.9 million or $0.064167 per
common share, in a distribution to its common shareholders. Under the Companys
Dividend Reinvestment Plan, $2.0 million were reinvested, resulting in the
issuance of 184,047 Units.

In
January 2011, under the guidelines of the Companys Unit Redemption Program,
728,135 Units were repurchased from shareholders at a cost of $8.0 million. As
contemplated in the Program, the Company redeemed Units on a pro-rata basis.
This redemption was approximately 63% of the requested redemption amount.

In
February 2011, the Company declared and paid $5.9 million or $0.064167 per
common share, in a distribution to its common shareholders. Under the Companys
Dividend Reinvestment Plan, $2.1 million were reinvested, resulting in the
issuance of 187,137 Units.

On
February 28, 2011, the Company entered into a term loan agreement, secured by
the Companys Houston, TX Residence Inn property, for $10.5 million. The loan
has a stated maturity of five years, at an annual interest rate of 5.71%, and
has scheduled payments of interest and principal due monthly. Funds from the
loan were used for general corporate purposes, including the reduction in the
outstanding balance of the Companys revolving credit facility.

42

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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 9. | Changes
 in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

|         |                         
|-------- | ------------------------
|Item 9A. | Controls
 and Procedures

Senior
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the Companys disclosure controls and procedures
as of the end of the period covered by this report. Based on this evaluation
process, the Chief Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures are effective and that
there have been no changes in the Companys internal control over financial
reporting that occurred during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting. Since that evaluation process was completed,
there have been no significant changes in internal controls or in other factors
that could significantly affect these controls.

See
Item 8 for the Report of Management on Internal Control over Financial
Reporting and the Companys Independent Registered Public Accounting Firms
attestation report regarding internal control over financial reporting.

|         |                   
|-------- | ------------------
|Item 9B. | Other
 Information

None.

43

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PART III

|         |                                                        
|-------- | -------------------------------------------------------
|Item 10. | Directors,
 Executive Officers and Corporate Governance

The
information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and
(d)(5) of Regulation S-K will be set forth in the Companys 2011 Proxy
Statement. For the limited purpose of providing the information necessary to
comply with this Item 10, the 2011 Proxy Statement is incorporated herein
by this reference.

|         |                        
|-------- | -----------------------
|Item 11. | Executive
 Compensation

The
information required by Items 402 and 407(e)(4) and (e)(5) of
Regulation S-K will be set forth in the Companys 2011 Proxy Statement. For the
limited purpose of providing the information necessary to comply with this
Item 11, the 2011 Proxy Statement is incorporated herein by this
reference.

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

The
information required by Items 201(d) and 403 of Regulation S-K will be set
forth in the Companys 2011 Proxy Statement. For the limited purpose of
providing the information necessary to comply with this Item 12, the 2011
Proxy Statement is incorporated herein by this reference.

|         |                                                                           
|-------- | --------------------------------------------------------------------------
|Item 13. | Certain
 Relationships and Related Transactions, and Director Independence

The
information required by Items 404 and 407(a) of Regulation S-K will
be set forth in the Companys 2011 Proxy Statement. For the limited purpose of
providing the information necessary to comply with this Item 13, the 2011
Proxy Statement is incorporated herein by this reference.

|         |                                        
|-------- | ---------------------------------------
|Item 14. | Principal
 Accounting Fees and Services

The
information required by Item 9(e) of Schedule 14A will be set forth in the
Companys 2011 Proxy Statement. For the limited purpose of providing the
information necessary to comply with this Item 14, the 2011 Proxy
Statement is incorporated herein by this reference.

44

---



PART IV

|         |                                         
|-------- | ----------------------------------------
|Item 15. | Exhibits,
 Financial Statement Schedules

1.
Financial Statements of Apple REIT Seven, Inc.

| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Report of Management on
 Internal Control Over Financial Reporting                                                        
| |                                                                                                                           
| | Report of Independent
 Registered Public Accounting Firm on Internal Control over Financial
 Reporting  Ernst & Young LLP
| |                                                                                                                           
| | Report of Independent
 Registered Public Accounting Firm  Ernst & Young LLP                                              
| |                                                                                                                           
| | Consolidated Balance
 Sheets as of December 31, 2010 and 2009                                                             
| |                                                                                                                           
| | Consolidated Statements of
 Operations for the years ended December 31, 2010, 2009 and 2008                               
| |                                                                                                                           
| | Consolidated Statement of
 Shareholders Equity for the years ended December 31, 2010, 2009 and
 2008                     
| |                                                                                                                           
| | Consolidated Statements of
 Cash Flows for the years ended December 31, 2010, 2009 and 2008                               
| |                                                                                                                           
| | Notes to Consolidated
 Financial Statements                                                                               
| |                                                                                                                           
| | These financial statements
 are set forth in Item 8 of this report and are hereby incorporated by
 reference.             

2.
Financial Statement Schedules

| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Schedule IIIReal Estate
 and Accumulated Depreciation (Included at the end of this Part IV of this
 report.)                                                                                 
| |                                                                                                                                                                                               
| | Financial statement
 schedules not listed are either omitted because they are not applicable or
 the required information is shown in the consolidated financial statements or
 notes thereto.

3.
Exhibits

| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Incorporated
 herein by reference are the exhibits listed under Exhibits Index to this
 Report available at www.sec.gov.

45

---



SCHEDULE III
Real Estate and Accumulated Depreciation 
As of December 31, 2010 
(dollars in thousands)

|                |  |       |  |                         |  |              |         |      |              |            |                           |                    |         |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |        |  |  |              |  |  |       | 
|--------------- |  | ----- |  | ----------------------- |  | ------------ | ------- | ---- | ------------ | ---------- | ------------------------- | ------------------ | ------- | ---------------------- | - | -------------------------- |  | --------------------- | -------- | -------------- | ---- | ----------------- | ---- | ----------- | ------- | - |  | ------ |  |  | ------------ |  |  | ----- | 
|                |  |       |  |                         |  |              |         |      | Initial Cost |            | Subsequently
 Capitalized |                    |         |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |        |  | 
|                |  |       |  |                         |  |              |         |      |              |            |                           |                    |         |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |        |  | 
|City            |  | State |  | Brand                   |  | Encumbrances |         | Land |              | Bldg./FF&E |                           | Bldg 
 Imp. & FF&E |         | Total 
 Gross Cost (1) |   | Acc
 Deprec                |  | Date of
 Construction |          | Date
 Acquired |      | Depreciable
 Life |      | # of
 Rooms |        
|                |  |       |  |                         |  |              |         |      |              |            |                           |                    |         |                        |   |                            |  |                       |          |                |      |                   |      |             |        
|Montgomery      |  | AL    |  | Homewood Suites         |  | $            |        |      | $            | 978        |                           | $                  | 10,032  |                        | $ | 270                        |  | $                     | 11,280   |                | $    | (1,530            | )    |             | 2004    |   |  | Aug-06 |  |  | 3
 - 39 yrs. |  |  | 91    | 
|Montgomery      |  | AL    |  | Hilton Garden Inn       |  |              |        |      |              | 765        |                           |                    | 9,960   |                        |   | 509                        |  |                       | 11,234   |                |      | (1,523            | )    |             | 2003    |   |  | Aug-06 |  |  | 3
 - 39 yrs. |  |  | 97    | 
|Troy            |  | AL    |  | Hampton Inn             |  |              |        |      |              | 502        |                           |                    | 5,867   |                        |   | 109                        |  |                       | 6,478    |                |      | (929              | )    |             | 2003    |   |  | Aug-06 |  |  | 3
 - 39 yrs. |  |  | 82    | 
|Auburn          |  | AL    |  | Hilton Garden Inn       |  |              |        |      |              | 643        |                           |                    | 9,879   |                        |   | 1,454                      |  |                       | 11,976   |                |      | (1,900            | )    |             | 2001    |   |  | Aug-06 |  |  | 3
 - 39 yrs. |  |  | 101   | 
|Huntsville      |  | AL    |  | Hilton Garden Inn       |  |              |        |      |              | 740        |                           |                    | 9,887   |                        |   | 100                        |  |                       | 10,727   |                |      | (1,514            | )    |             | 2005    |   |  | Aug-06 |  |  | 3
 - 39 yrs. |  |  | 101   | 
|Huntsville      |  | AL    |  | Homewood Suites         |  |              |        |      |              | 1,092      |                           |                    | 10,889  |                        |   | 48                         |  |                       | 12,029   |                |      | (1,632            | )    |             | 2006    |   |  | Oct-06 |  |  | 3
 - 39 yrs. |  |  | 107   | 
|Prattville      |  | AL    |  | Courtyard               |  |              |        |      |              | 1,170      |                           |                    | 8,407   |                        |   | 5                          |  |                       | 9,582    |                |      | (1,110            | )    |             | 2007    |   |  | Apr-07 |  |  | 3
 - 39 yrs. |  |  | 84    | 
|Dothan          |  | AL    |  | Fairfield Inn           |  |              |        |      |              | 570        |                           |                    | 4,243   |                        |   | 65                         |  |                       | 4,878    |                |      | (488              | )    |             | 1993    |   |  | May-07 |  |  | 3
 - 39 yrs. |  |  | 63    | 
|Trussville      |  | AL    |  | Courtyard               |  |              |        |      |              | 1,088      |                           |                    | 8,744   |                        |   | 1                          |  |                       | 9,833    |                |      | (989              | )    |             | 2007    |   |  | Oct-07 |  |  | 3
 - 39 yrs. |  |  | 84    | 
|Huntsville      |  | AL    |  | TownePlace Suites       |  |              |        |      |              | 804        |                           |                    | 8,384   |                        |   | 8                          |  |                       | 9,196    |                |      | (902              | )    |             | 2007    |   |  | Dec-07 |  |  | 3
 - 39 yrs. |  |  | 86    | 
|Dothan          |  | AL    |  | Residence Inn           |  |              |        |      |              | 821        |                           |                    | 9,097   |                        |   | 2                          |  |                       | 9,920    |                |      | (967              | )    |             | 2008    |   |  | Apr-08 |  |  | 3
 - 39 yrs. |  |  | 84    | 
|Tucson          |  | AZ    |  | Residence Inn           |  |              |        |      |              | 998        |                           |                    | 15,960  |                        |   |                           |  |                       | 16,958   |                |      | (1,646            | )    |             | 2008    |   |  | Jan-08 |  |  | 3
 - 39 yrs. |  |  | 124   | 
|San Diego       |  | CA    |  | Hilton Garden Inn       |  |              |        |      |              | 5,021      |                           |                    | 30,345  |                        |   | 539                        |  |                       | 35,905   |                |      | (4,660            | )    |             | 2004    |   |  | May-06 |  |  | 3
 - 39 yrs. |  |  | 200   | 
|Rancho Bernardo |  | CA    |  | Courtyard               |  |              |        |      |              | 4,669      |                           |                    | 32,271  |                        |   | 224                        |  |                       | 37,164   |                |      | (4,080            | )    |             | 1987    |   |  | Dec-06 |  |  | 3
 - 39 yrs. |  |  | 210   | 
|Agoura Hills    |  | CA    |  | Homewood Suites         |  |              |        |      |              | 4,511      |                           |                    | 21,434  |                        |   | 32                         |  |                       | 25,977   |                |      | (2,460            | )    |             | 2007    |   |  | May-07 |  |  | 3
 - 39 yrs. |  |  | 125   | 
|San Diego       |  | CA    |  | Residence Inn           |  |              | 14,490  |      |              | 7,354      |                           |                    | 26,215  |                        |   | 468                        |  |                       | 34,037   |                |      | (2,873            | )    |             | 1999    |   |  | Jun-07 |  |  | 3
 - 39 yrs. |  |  | 121   | 
|San Diego       |  | CA    |  | Hampton Inn             |  |              |        |      |              | 5,694      |                           |                    | 37,938  |                        |   | 2,149                      |  |                       | 45,781   |                |      | (4,316            | )    |             | 2001    |   |  | Jul-07 |  |  | 3
 - 39 yrs. |  |  | 177   | 
|Highlands Ranch |  | CO    |  | Residence Inn           |  |              | 11,048  |      |              | 2,345      |                           |                    | 17,333  |                        |   | 523                        |  |                       | 20,201   |                |      | (2,015            | )    |             | 1996    |   |  | Feb-07 |  |  | 3
 - 39 yrs. |  |  | 117   | 
|Highlands Ranch |  | CO    |  | Hilton Garden Inn       |  |              |        |      |              | 2,518      |                           |                    | 18,545  |                        |   | 82                         |  |                       | 21,145   |                |      | (2,324            | )    |             | 2007    |   |  | Mar-07 |  |  | 3
 - 39 yrs. |  |  | 128   | 
|Sarasota        |  | FL    |  | Homewood Suites         |  |              |        |      |              | 1,785      |                           |                    | 12,277  |                        |   | 605                        |  |                       | 14,667   |                |      | (1,911            | )    |             | 2005    |   |  | Sep-06 |  |  | 3
 - 39 yrs. |  |  | 100   | 
|Miami           |  | FL    |  | Homewood Suites         |  |              | 8,951   |      |              | 3,215      |                           |                    | 22,152  |                        |   | 1,975                      |  |                       | 27,342   |                |      | (3,227            | )    |             | 2000    |   |  | Feb-07 |  |  | 3
 - 39 yrs. |  |  | 159   | 
|Tallahassee     |  | FL    |  | Fairfield Inn           |  |              | 3,195   |      |              | 910        |                           |                    | 6,202   |                        |   | 180                        |  |                       | 7,292    |                |      | (712              | )    |             | 2000    |   |  | Apr-07 |  |  | 3
 - 39 yrs. |  |  | 79    | 
|Lakeland        |  | FL    |  | Courtyard               |  |              | 3,850   |      |              | 1,557      |                           |                    | 8,836   |                        |   | 158                        |  |                       | 10,551   |                |      | (1,024            | )    |             | 2000    |   |  | Apr-07 |  |  | 3
 - 39 yrs. |  |  | 78    | 
|Miami           |  | FL    |  | Courtyard               |  |              |        |      |              |           |                           |                    | 15,463  |                        |   | 134                        |  |                       | 15,597   |                |      | (1,333            | )    |             | 2008    |   |  | Sep-08 |  |  | 3
 - 39 yrs. |  |  | 118   | 
|Columbus        |  | GA    |  | Fairfield Inn           |  |              |        |      |              |           |                           |                    | 7,620   |                        |   | 30                         |  |                       | 7,650    |                |      | (863              | )    |             | 2003    |   |  | Apr-07 |  |  | 3
 - 39 yrs. |  |  | 79    | 
|Macon           |  | GA    |  | Hilton Garden Inn       |  |              |        |      |              |           |                           |                    | 10,115  |                        |   | 26                         |  |                       | 10,141   |                |      | (1,288            | )    |             | 2007    |   |  | Jun-07 |  |  | 3
 - 39 yrs. |  |  | 101   | 
|Columbus        |  | GA    |  | SpringHill Suites       |  |              |        |      |              | 1,195      |                           |                    | 8,751   |                        |   | 6                          |  |                       | 9,952    |                |      | (904              | )    |             | 2008    |   |  | Mar-08 |  |  | 3
 - 39 yrs. |  |  | 85    | 
|Columbus        |  | GA    |  | TownePlace Suites       |  |              |        |      |              |           |                           |                    | 8,643   |                        |   | 10                         |  |                       | 8,653    |                |      | (902              | )    |             | 2008    |   |  | May-08 |  |  | 3
 - 39 yrs. |  |  | 86    | 
|Boise           |  | ID    |  | SpringHill Suites       |  |              |        |      |              | 2,024      |                           |                    | 19,580  |                        |   | 426                        |  |                       | 22,030   |                |      | (2,474            | )    |             | 1992    |   |  | Sep-07 |  |  | 3
 - 39 yrs. |  |  | 230   | 
|New Orleans     |  | LA    |  | Homewood Suites         |  |              | 15,720  |      |              | 4,586      |                           |                    | 39,500  |                        |   | 1,100                      |  |                       | 45,186   |                |      | (4,955            | )    |             | 2002    |   |  | Dec-06 |  |  | 3
 - 39 yrs. |  |  | 166   | 
|Hattiesburg     |  | MS    |  | Courtyard               |  |              |        |      |              | 877        |                           |                    | 8,914   |                        |   | 16                         |  |                       | 9,807    |                |      | (1,291            | )    |             | 2006    |   |  | Oct-06 |  |  | 3
 - 39 yrs. |  |  | 84    | 
|Tupelo          |  | MS    |  | Hampton Inn             |  |              | 3,616   |      |              | 336        |                           |                    | 4,928   |                        |   | 1,184                      |  |                       | 6,448    |                |      | (1,008            | )    |             | 1994    |   |  | Jan-07 |  |  | 3
 - 39 yrs. |  |  | 96    | 
|Omaha           |  | NE    |  | Courtyard               |  |              | 11,573  |      |              | 2,731      |                           |                    | 19,498  |                        |   | 3,672                      |  |                       | 25,901   |                |      | (3,082            | )    |             | 1999    |   |  | Nov-06 |  |  | 3
 - 39 yrs. |  |  | 181   | 
|Cranford        |  | NJ    |  | Homewood Suites         |  |              |        |      |              | 2,618      |                           |                    | 11,364  |                        |   | 1,871                      |  |                       | 15,853   |                |      | (1,970            | )    |             | 2000    |   |  | Mar-07 |  |  | 3
 - 39 yrs. |  |  | 108   | 
|Mahwah          |  | NJ    |  | Homewood Suites         |  |              |        |      |              | 3,676      |                           |                    | 16,470  |                        |   | 2,156                      |  |                       | 22,302   |                |      | (2,414            | )    |             | 2001    |   |  | Mar-07 |  |  | 3
 - 39 yrs. |  |  | 110   | 
|Ronkonkoma      |  | NY    |  | Hilton Garden Inn       |  |              |        |      |              | 3,161      |                           |                    | 24,420  |                        |   | 522                        |  |                       | 28,103   |                |      | (3,076            | )    |             | 2003    |   |  | Dec-06 |  |  | 3
 - 39 yrs. |  |  | 164   | 
|Cincinnati      |  | OH    |  | Homewood Suites         |  |              |        |      |              | 556        |                           |                    | 6,817   |                        |   | 109                        |  |                       | 7,482    |                |      | (1,044            | )    |             | 2005    |   |  | Dec-06 |  |  | 3
 - 39 yrs. |  |  | 76    | 
|Memphis         |  | TN    |  | Homewood Suites         |  |              |        |      |              | 1,722      |                           |                    | 9,747   |                        |   | 2,088                      |  |                       | 13,557   |                |      | (1,835            | )    |             | 1989    |   |  | May-07 |  |  | 3
 - 39 yrs. |  |  | 140   | 
|Houston         |  | TX    |  | Residence Inn           |  |              |        |      |              | 1,098      |                           |                    | 13,049  |                        |   | 220                        |  |                       | 14,367   |                |      | (2,183            | )    |             | 2006    |   |  | Apr-06 |  |  | 3
 - 39 yrs. |  |  | 129   | 
|Brownsville     |  | TX    |  | Courtyard               |  |              |        |      |              | 1,135      |                           |                    | 7,739   |                        |   | 9                          |  |                       | 8,883    |                |      | (1,174            | )    |             | 2006    |   |  | Jun-06 |  |  | 3
 - 39 yrs. |  |  | 90    | 
|Stafford        |  | TX    |  | Homewood Suites         |  |              |        |      |              | 501        |                           |                    | 7,575   |                        |   | 62                         |  |                       | 8,138    |                |      | (1,206            | )    |             | 2006    |   |  | Aug-06 |  |  | 3
 - 39 yrs. |  |  | 78    | 
|San Antonio     |  | TX    |  | TownePlace Suites       |  |              |        |      |              | 703        |                           |                    | 11,522  |                        |   | 2                          |  |                       | 12,227   |                |      | (1,377            | )    |             | 2007    |   |  | Jun-07 |  |  | 3
 - 39 yrs. |  |  | 106   | 
|Addison         |  | TX    |  | SpringHill Suites       |  |              |        |      |              | 1,545      |                           |                    | 11,312  |                        |   | 771                        |  |                       | 13,628   |                |      | (1,305            | )    |             | 2003    |   |  | Aug-07 |  |  | 3
 - 39 yrs. |  |  | 159   | 
|San Antonio     |  | TX    |  | TownePlace Suites       |  |              |        |      |              | 1,130      |                           |                    | 13,089  |                        |   | 2                          |  |                       | 14,221   |                |      | (1,484            | )    |             | 2007    |   |  | Sep-07 |  |  | 3
 - 39 yrs. |  |  | 123   | 
|El Paso         |  | TX    |  | Homewood Suites         |  |              |        |      |              | 1,174      |                           |                    | 14,651  |                        |   | 37                         |  |                       | 15,862   |                |      | (1,456            | )    |             | 2008    |   |  | Apr-08 |  |  | 3
 - 39 yrs. |  |  | 114   | 
|Provo           |  | UT    |  | Residence Inn           |  |              | 5,091   |      |              | 1,358      |                           |                    | 10,388  |                        |   | 2,783                      |  |                       | 14,529   |                |      | (1,934            | )    |             | 1996    |   |  | Jun-07 |  |  | 3
 - 39 yrs. |  |  | 114   | 
|Alexandria      |  | VA    |  | Courtyard               |  |              |        |      |              | 4,010      |                           |                    | 32,832  |                        |   | 4,296                      |  |                       | 41,138   |                |      | (4,013            | )    |             | 1987    |   |  | Jul-07 |  |  | 3
 - 39 yrs. |  |  | 178   | 
|Richmond        |  | VA    |  | Marriott                |  |              | 23,686  |      |              |           |                           |                    | 59,614  |                        |   | 15,041                     |  |                       | 74,655   |                |      | (10,122           | )    |             | 1984    |   |  | Jan-08 |  |  | 3
 - 39 yrs. |  |  | 410   | 
|Seattle         |  | WA    |  | Residence Inn           |  |              |        |      |              |           |                           |                    | 60,489  |                        |   | 6,783                      |  |                       | 67,272   |                |      | (9,871            | )    |             | 1991    |   |  | Sep-06 |  |  | 3
 - 39 yrs. |  |  | 234   | 
|Vancouver       |  | WA    |  | SpringHill Suites       |  |              |        |      |              | 1,314      |                           |                    | 15,122  |                        |   | 23                         |  |                       | 16,459   |                |      | (1,957            | )    |             | 2007    |   |  | Jun-07 |  |  | 3
 - 39 yrs. |  |  | 119   | 
|Kirkland        |  | WA    |  | Courtyard               |  |              |        |      |              | 3,514      |                           |                    | 28,500  |                        |   | 58                         |  |                       | 32,072   |                |      | (2,844            | )    |             | 2006    |   |  | Oct-07 |  |  | 3
 - 39 yrs. |  |  | 150   | 
|                |  |       |  |                         |  |              |         |      |              |            |                           |                    |         |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |        |  |  |              |  |  |       | 
|                |  |       |  |                         |  |              |         |      |              |            |                           |                    |         |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |        |  |  |              |  |  |       | 
|                |  |       |  |                         |  | $            | 101,220 |      | $            | 90,714     |                           | $                  | 842,609 |                        | $ | 52,943                     |  | $                     | 986,266  |                | $    | (114,097          | )    |             |         |   |  |        |  |  |              |  |  | 6,426 | 
|                |  |       |  |                         |  |              |         |      |              |            |                           |                    |         |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |        |  |  |              |  |  |       | 
|                |  |       |  |                         |  |              |         |      |              |            |                           |                    |         |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |        |  |  |              |  |  |       | 
|                |  |       |  |                         |  |              |         |      | 2010         |            | 2009                      |                    | 2008    |                        |   |                            |  |                       |          |                | 2010 |                   | 2009 |             | 2008    |   |  |        | 
|                |  |       |  |                         |  |              |         |      |              |            |                           |                    |         |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |        | 
|                |  |       |  | Real
 estate owned:     |  |              |         |      |              |            |                           |                    |         |                        |   | Accumulated
 depreciation: |  |                       |          |                |      |                   |      |             |         |   |  |        | 
|                |  |       |  | Balance as of January 1 |  | $            | 983,216 |      | $            | 969,185    |                           | $                  | 806,828 |                        |   | Balance as of January 1    |  | $                     | (80,923  | )              | $    | (48,497           | )    | $           | (20,063 | ) |  |        | 
|                |  |       |  | Acquisitions            |  |              |        |      |              | 23         |                           |                    | 136,296 |                        |   | Depreciation expense       |  |                       | (33,174  | )              |      | (32,425           | )    |             | (28,434 | ) |  |        | 
|                |  |       |  | Improvements            |  |              | 3,050   |      |              | 14,011     |                           |                    | 26,061  |                        |   | Disposals                  |  |                       |         |                |      | (1                | )    |             |        |   |  |        | 
|                |  |       |  | Disposals               |  |              |        |      |              | (3         | )                         |                    |        |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |       
|                |  |       |  |                         |  |              |         |      |              |            |                           |                    |         |                        |   | Balance at December 31     |  | $                     | (114,097 | )              | $    | (80,923           | )    | $           | (48,497 | ) |  |        | 
|                |  |       |  | Balance at December 31  |  | $            | 986,266 |      | $            | 983,216    |                           | $                  | 969,185 |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |       
|                |  |       |  |                         |  |              |         |      |              |            |                           |                    |         |                        |   |                            |  |                       |          |                |      |                   |      |             |         |   |  |       

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

46

---



SIGNATURES

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

|                       |                                                        |  |                     
|---------------------- | ------------------------------------------------------ |  | --------------------
|Apple Reit Seven, Inc.
|                       |                                                        |  |                     
|By:                    | /s/Glade M. Knight                                     |  | Date: March
 8, 2011
|                       |                                                        |  |                     
|                       | Glade
M. Knight,                                       |  |                     
|                       | Chairman
of the Board and                              |  |                     
|                       | Chief
Executive Officer                                |  |                     
|                       | (Principal
Executive Officer)                          |  |                     
|                       |                                                        |  |                     
|By:                    | /s/Bryan Peery                                         |  | Date: March
 8, 2011
|                       |                                                        |  |                     
|                       | Bryan
Peery,                                           |  |                     
|                       | Chief
Financial Officer                                |  |                     
|                       | (Principal
Financial and Principal Accounting Officer) |  |                     

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the date indicated.

|    |                            |  |                     
|--- | -------------------------- |  | --------------------
|By: | /s/Glade M. Knight         |  | Date: March
 8, 2011
|    |                            |  |                     
|    | Glade M. Knight, Director  |  |                     
|    |                            |  |                     
|By: | /s/Glenn W. Bunting        |  | Date: March
 8, 2011
|    |                            |  |                     
|    | Glenn
W. Bunting, Director |  |                     
|    |                            |  |                     
|By: | /s/Kent W. Colton          |  | Date: March
 8, 2011
|    |                            |  |                     
|    | Kent
W. Colton, Director   |  |                     
|    |                            |  |                     
|By: | /s/Lisa B. Kern            |  | Date: March
 8, 2011
|    |                            |  |                     
|    | Lisa
B. Kern, Director     |  |                     
|    |                            |  |                     
|By: | /s/Bruce H. Matson         |  | Date: March
 8, 2011
|    |                            |  |                     
|    | Bruce
H. Matson, Director  |  |                     

47

---



EXHIBIT INDEX

|                 |  |                                                                                                                                                                                                                                                                                                             
|---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 
 Number |  | Description
 of Documents                                                                                                                                                                                                                                                                                   
|                 |  |                                                                                                                                                                                                                                                                                                             
|                 |  |                                                                                                                                                                                                                                                                                                             
|3.1              |  | Amended and
 Restated Articles of Incorporation of the Registrant. (Incorporated by
 reference to Exhibit 3.3 to the amendment no. 3 to the registrants
 registration statement on Form S-11 (SEC File No. 333-125546) effective March
 3, 2006)                                                           
|                 |  |                                                                                                                                                                                                                                                                                                             
|3.2              |  | Bylaws of
 the Registrant. (Incorporated by reference to Exhibit 3.2 to the registrants
 registration statement on Form S-11 (SEC File No. 333-125546) effective March
 3, 2006)                                                                                                                           
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.1             |  | Advisory
 Agreement between the Registrant and Apple Seven Advisors, Inc. (Incorporated
 by reference to Exhibit 10.1 to the registrants quarterly report on Form
 10-Q (SEC File No. 333-125546) filed April 28, 2006)                                                                                    
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.2             |  | Property
 Acquisition/Disposition Agreement between the Registrant and Apple Suites
 Realty Group, Inc. (Incorporated by reference to Exhibit 10.2 to the
 registrants quarterly report on Form 10-Q (SEC File No. 333-125546) filed
 April 28, 2006)                                                      
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.3             |  | Apple REIT
 Seven, Inc. 2005 Incentive Plan. (Incorporated by reference to Exhibit 10.3
 to the registrants quarterly report on Form 10-Q (SEC File No. 333-125546)
 filed April 28, 2006) *                                                                                                               
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.4             |  | Apple REIT
 Seven, Inc. 2005 Non-Employee Directors Stock Option Plan. (Incorporated by
 reference to Exhibit 10.4 to the registrants quarterly report on Form 10-Q
 (SEC File No. 333-125546) filed April 28, 2006) *                                                                                     
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.5             |  | Guaranty and
 Reimbursement Agreement made by Glade M. Knight. (Incorporated by reference
 to Exhibit 10.5 to the registrants registration statement on Form S-11 (SEC
 File No. 333-125546) effective March 3, 2006)                                                                                      
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.6             |  | Purchase
 Contract dated as of September 29, 2004 between Midway Eldridge Hotel
 Partners, L.P. and Apple Six Hospitality, Inc. (Incorporated by reference to
 Exhibit 10.6 to the registrants Post-Effective Amendment No. 1 to Form S-11
 (SEC File No. 333-125546) filed July 26, 2006)                 
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.7             |  | Assignment
 of Contract dated as of April 25, 2006 between Apple Six Hospitality, Inc.,
 and Apple Seven Hospitality Texas, L.P. (Incorporated by reference to Exhibit
 10.7 to the registrants Post-Effective Amendment No. 1 to Form S-11 (SEC
 File No. 333-125546) filed July 26, 2006)                
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.8             |  | Management
 Agreement dated as of April 26, 2006 between Texas Western Management
 Partners, L.P. and Apple Seven Services, L.P. (Incorporated by reference
 to Exhibit 10.8 to the registrants Post-Effective Amendment No. 1 to Form
 S-11 (SEC File No. 333-125546) filed July 26, 2006)                
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.9             |  | Residence
 Inn by Marriott Relicensing Agreement dated as of April 26, 2006 between
 Marriott International, Inc. and Apple Seven Services, L.P. (Incorporated by
 reference to Exhibit 10.9 to the registrants Post-Effective Amendment No. 1
 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.10            |  | Hotel Lease
 Agreement effective as of April 26, 2006 between Apple Seven Hospitality
 Texas, L.P. and Apple Seven Services, L.P. (Incorporated by reference to
 Exhibit 10.10 to the registrants Post-Effective Amendment No. 1 to Form S-11
 (SEC File No. 333-125546) filed July 26, 2006)              
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.11            |  | Purchase
 Contract dated as of April 27, 2006 between Briggs Renewal Limited
 Partnership and Apple Seven Hospitality Ownership, Inc. (Incorporated by
 reference to Exhibit 10.11 to the registrants Post-Effective Amendment No. 1
 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)          
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.12            |  | Purchase
 Contract dated as of March 6, 2006 between Hospitality Ventures DMCY, LLC and
 Apple Six Hospitality Ownership, Inc. (Incorporated by reference to Exhibit
 10.12 to the registrants Post-Effective Amendment No. 1 to Form S-11 (SEC
 File No. 333-125546) filed July 26, 2006)                 
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.13            |  | Assignment
 of Contract dated as of April 27, 2006 between Apple Six Hospitality
 Ownership, Inc. and Apple Seven Hospitality Ownership, Inc. (Incorporated by
 reference to Exhibit 10.13 to the registrants Post-Effective Amendment No. 1
 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)  
|                 |  |                                                                                                                                                                                                                                                                                                             
|10.14            |  | Agreement of
 Purchase and Sale and Joint Escrow Instructions Hilton Garden Inn, Rancho
 Bernardo dated as of March 9, 2006 between Bernardo Ventures and Apple Suites
 Realty Group, Inc. (Incorporated by reference to                                                                                    

48

---



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | Exhibit 2.1
 to the registrants quarterly report on Form 10-Q (SEC File No. 333-125546)
 filed April 28, 2006)                                                                                                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.15 |  | Assignment
 of Purchase and Sale and Joint Escrow Instructions Hilton Garden Inn, Rancho
 Bernardo dated as of April 11, 2006 between Apple Suites Realty Group, Inc.
 and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to
 Exhibit 2.2 to the registrants quarterly report on Form 10-Q (SEC File
 No. 333-125546) filed April 28, 2006)                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.16 |  | Management
 Agreement dated as of May 9, 2006 between Inn Ventures, Inc. and Apple Seven
 Hospitality Management, Inc. (Incorporated by reference to Exhibit 10.16 to
 the registrants Post-Effective Amendment No. 1 to Form S-11 (SEC File No.
 333-125546) filed July 26, 2006)                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.17 |  | Franchise
 License Agreement dated as of May 9, 2006 between Hilton Hotels Corporation
 and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to
 Exhibit 10.17 to the registrants Post-Effective Amendment No. 1 to Form S-11
 (SEC File No. 333-125546) filed July 26, 2006)                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.18 |  | Schedule of
 information for an additional and substantially identical Hotel Lease
 Agreement dated as of May 9, 2006 (substantially identical to Exhibit
 10.10 listed above) (Incorporated by reference to Exhibit 10.18 to the
 registrants Post-Effective Amendment No. 1 to Form S-11 (SEC File
 No. 333-125546) filed July 26, 2006)                                                              
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.19 |  | Purchase
 Contract dated as of June 21, 2005 between BMC Hotel Property, LTD and Apple
 Six Hospitality Texas, L.P. (Incorporated by reference to Exhibit 10.19 to
 the registrants Post-Effective Amendment No. 1 to Form S-11 (SEC File No.
 333-125546) filed July 26, 2006)                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.20 |  | Assignment
 of Contract dated as of June 6, 2006 between Apple Six Hospitality Texas,
 L.P. and Apple Seven Hospitality Texas, L.P. (Incorporated by reference to
 Exhibit 10.20 to the registrants Post-Effective Amendment No. 1 to Form S-11
 (SEC File No. 333-125546) filed July 26, 2006)                                                                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.21 |  | Management
 Agreement dated as of June 6, 2006 between Texas Western Management
 Partners, L.P. and Apple Seven Services, L.P. (Incorporated by reference
 to Exhibit 10.21 to the registrants Post-Effective Amendment No. 1 to Form
 S-11 (SEC File No. 333-125546) filed July 26, 2006)                                                                                                              
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.22 |  | Schedule of
 information for an additional and substantially identical Hotel Lease Agreement
 effective as of June 6, 2006 (substantially identical to Exhibit 10.10 listed
 above) (Incorporated by reference to Exhibit 10.22 to the registrants
 Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546)
 filed July 26, 2006)                                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.23 |  | Courtyard by
 Marriott Relicensing Agreement dated as of June 19, 2006 between Marriott
 International, Inc. and Apple Seven Services, L.P. (Incorporated by reference
 to Exhibit 10.23 to the registrants Post-Effective Amendment No. 1 to Form
 S-11 (SEC File No. 333-125546) filed July 26, 2006)                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.24 |  | Purchase
 Contract dated as of June 27, 2006 between Napstak II, LLC and Apple Seven
 Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.24 to
 the registrants Post-Effective Amendment No. 1 to Form S-11 (SEC File No.
 333-125546) filed July 26, 2006)                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.25 |  | Purchase
 Contract dated as of June 27, 2006 between Lake Union Hotel Associates
 Limited Partnership and Apple Seven Hospitality Ownership, Inc. (Incorporated
 by reference to Exhibit 10.25 to the registrants Post-Effective Amendment
 No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)                                                                                           
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.26 |  | Purchase
 Contract dated as of June 29, 2006 among Montgomery Hotels LLC; Montgomery
 Hotels II, LLC; Troy Hotels, LLC; Auburn Hotels, L.L.C.; Huntsville
 Hotel I, LLC; HoPo/Tupelo Hotels LLC and Apple Seven Hospitality Ownership,
 Inc. (Incorporated by reference to Exhibit 10.26 to the registrants
 Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed
 July 26, 2006)
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.27 |  | Purchase
 Contract dated as of June 29, 2006 between IRNM Hotel Investors, L.L.C and
 Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit
 10.27 to the registrants Post-Effective Amendment No. 1 to Form S-11 (SEC
 File No. 333-125546) filed July 26, 2006)                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.28 |  | Master
 Purchase Agreement dated as of September 27, 2006 among Apple Seven
 Hospitality Ownership, Inc. and the parties named therein. (Incorporated by
 reference to Exhibit 10.28 to the registrants Post-Effective Amendment No. 2
 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.29 |  | Purchase
 Contract dated as of September 27, 2006 between Sunbelt-CTR, L.L.C. and Apple
 Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.29
 to the registrants Post-Effective Amendment No. 2 to Form S-11 (SEC File No.
 333-125546) filed October 26, 2006)                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|10.30 |  | Purchase
 Contract dated as of September 27, 2006 between Sunbelt-CPA, L.L.C. and Apple
 Seven Hospitality                                                                                                                                                                                                                                                                                               

49

---



|      |  |                                                                                                                                                                                                                                                                                                                    
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | Ownership,
 Inc. (Incorporated by reference to Exhibit 10.30 to the registrants
 Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed
 October 26, 2006)                                                                                                                                   
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.31 |  | Purchase
 Contract dated as of September 27, 2006 between Sunbelt-CHM, L.L.C. and Apple
 Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.31
 to the registrants Post-Effective Amendment No. 2 to Form S-11 (SEC File No.
 333-125546) filed October 26, 2006)                         
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.32 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between RGT-HB San Diego,
 L.P. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference
 to Exhibit 10.32 to the registrants Post-Effective Amendment No. 2 to Form
 S-11 (SEC File No. 333-125546) filed October 26, 2006)          
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.33 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between Barrone Hotel
 Investors, L.L.C. and Apple Seven Hospitality Ownership, Inc.
 (Incorporated by reference to Exhibit 10.33 to the registrants
 Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed
 October 26, 2006)
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.34 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between RT-Rancho B.
 Associates, L.P. and Apple Seven Hospitality Ownership, Inc. (Incorporated by
 reference to Exhibit 10.34 to the registrants Post-Effective Amendment No. 2
 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)   
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.35 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between RT-SD Provo, L.P. and
 Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit
 10.35 to the registrants Post-Effective Amendment No. 2 to Form S-11 (SEC
 File No. 333-125546) filed October 26, 2006)               
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.36 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between FTRC Hotel Partners,
 L.P. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference
 to Exhibit 10.36 to the registrants Post-Effective Amendment No. 2 to Form
 S-11 (SEC File No. 333-125546) filed October 26, 2006)       
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.37 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between Coachman Hotel, LLC
 and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to
 Exhibit 10.37 to the registrants Post-Effective Amendment No. 2 to Form S-11
 (SEC File No. 333-125546) filed October 26, 2006)             
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.38 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between RT-HR Hotel
 Partners, LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated
 by reference to Exhibit 10.38 to the registrants Post-Effective Amendment
 No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)       
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.39 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between RT-BL Associates,
 L.C. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference
 to Exhibit 10.39 to the registrants Post-Effective Amendment No. 2 to Form
 S-11 (SEC File No. 333-125546) filed October 26, 2006)          
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.40 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between Mahwah Hotel, LLC and
 Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit
 10.40 to the registrants Post-Effective Amendment No. 2 to Form S-11 (SEC
 File No. 333-125546) filed October 26, 2006)               
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.41 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between RT-CO Hotel Partners,
 LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to
 Exhibit 10.41 to the registrants Post-Effective Amendment No. 2 to Form S-11
 (SEC File No. 333-125546) filed October 26, 2006)       
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.42 |  | Agreement of
 Purchase and Sale dated October 17, 2006 by and between RT-AH Associates,
 L.P. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference
 to Exhibit 10.42 to the registrants Post-Effective Amendment No. 2 to Form
 S-11 (SEC File No. 333-125546) filed October 26, 2006)          
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.43 |  | Purchase
 Contract dated October 30, 2006 by and between Linchris Hotel Partners of
 L.I., LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by
 reference to Exhibit 10.43 to the registrants Post-Effective Amendment No. 3
 to Form S-11 (SEC File No. 333-125546) filed January 26, 2007)         
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.44 |  | Purchase
 Contract dated November 3, 2006 by and between Tucairri Property, L.P. and
 Apple Seven Hospitality, Inc. (Incorporated by reference to Exhibit 10.44 to
 the registrants Post-Effective Amendment No. 3 to Form S-11 (SEC File No.
 333-125546) filed January 26, 2007)                                
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.45 |  | Purchase
 Contract dated November 3, 2006 by and between HWELP Property, L.P. and Apple
 Seven Hospitality, Inc. (Incorporated by reference to Exhibit 10.45 to the
 registrants Post-Effective Amendment No. 3 to Form S-11 (SEC File No.
 333-125546) filed January 26, 2007)                                   
|      |  |                                                                                                                                                                                                                                                                                                                    
|10.46 |  | Purchase
 Contract dated November 3, 2006 by and between SATX-TPS-NW Property, L.P. and
 Apple Seven                                                                                                                                                                                                               

50

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|      |  |                                                                                                                                                                                                                                                                                                    
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | Hospitality,
 Inc. (Incorporated by reference to Exhibit 10.46 to the registrants
 Post-Effective Amendment No. 3 to Form S-11 (SEC File No. 333-125546) filed
 January 26, 2007)                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                    
|10.47 |  | Purchase
 Contract dated November 3, 2006 by and between SAT-TPS-AIR Property, L.P. and
 Apple Seven Hospitality, Inc. (Incorporated by reference to Exhibit 10.47 to
 the registrants Post-Effective Amendment No. 3 to Form S-11 (SEC File No.
 333-125546) filed January 26, 2007)             
|      |  |                                                                                                                                                                                                                                                                                                    
|10.48 |  | Loan
 Agreement dated December 14, 2006 by and between Wachovia Bank, N.A. and
 Apple REIT Seven Inc. (Incorporated by reference to Exhibit 10.48 to the
 registrants Post-Effective Amendment No. 3 to Form S-11 (SEC File No.
 333-125546) filed January 26, 2007)                              
|      |  |                                                                                                                                                                                                                                                                                                    
|10.49 |  | Purchase
 Contract dated January 16, 2007 by and between Sunbelt-Columbus, L.L.C. and
 Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit
 10.49 to the registrants Post-Effective Amendment No. 3 to Form S-11 (SEC
 File No. 333-125546) filed January 26, 2007)     
|      |  |                                                                                                                                                                                                                                                                                                    
|10.50 |  | Purchase
 Contract dated January 16, 2007 by and between Blumberg-Dothan Motel, L.L.C.
 and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to
 Exhibit 10.50 to the registrants Post-Effective Amendment No. 3 to Form S-11
 (SEC File No. 333-125546) filed January 26, 2007)
|      |  |                                                                                                                                                                                                                                                                                                    
|10.51 |  | Purchase
 Contract dated January 16, 2007 by and between Sunbelt-Lakeland., L.L.C. and
 Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit
 10.51 to the registrants Post-Effective Amendment No. 3 to Form S-11 (SEC
 File No. 333-125546) filed January 26, 2007)    
|      |  |                                                                                                                                                                                                                                                                                                    
|10.52 |  | Purchase
 Contract dated January 16, 2007 by and between Sunbelt-Tallahassee, L.L.C.
 and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to
 Exhibit 10.52 to the registrants Post-Effective Amendment No. 3 to Form S-11
 (SEC File No. 333-125546) filed January 26, 2007)  
|      |  |                                                                                                                                                                                                                                                                                                    
|10.53 |  | Agreement of
 Purchase and Sale dated April 4, 2007 by and between Hampton Inns, Inc. and
 Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit
 10.53 to the registrants Post-Effective Amendment No. 4 to Form S-11 (SEC
 File No. 333-125546) filed April 26, 2007)   
|      |  |                                                                                                                                                                                                                                                                                                    
|10.54 |  | Purchase
 Contract dated May 4, 2007 by and between Alexandria Hotel and Apple Seven
 Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.54 to
 the registrants quarterly report on Form 10-Q (SEC File 000-52585) filed
 August 3, 2007)                                       
|      |  |                                                                                                                                                                                                                                                                                                    
|10.55 |  | Purchase
 Contract dated June 19, 2007 by and between Sunbelt-SCG, LLC and Apple Seven
 Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.55 to
 the registrants quarterly report on Form 10-Q (SEC File 000-52585) filed
 August 3, 2007)                                     
|      |  |                                                                                                                                                                                                                                                                                                    
|10.56 |  | Purchase
 Contract dated June 19, 2007 by and between Sunbelt-TCG, LLC and Apple Seven
 Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.56 to
 the registrants quarterly report on Form 10-Q (SEC File 000-52585) filed
 August 3, 2007)                                     
|      |  |                                                                                                                                                                                                                                                                                                    
|10.57 |  | Purchase
 Contract dated June 19, 2007 by and between Sunbelt-RDA, LLC and Apple Seven
 Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.57 to
 the registrants quarterly report on Form 10-Q (SEC File 000-52585) filed
 August 3, 2007)                                     
|      |  |                                                                                                                                                                                                                                                                                                    
|10.58 |  | Purchase
 Contract dated June 19, 2007 by and between Sunbelt-THA, LLC and Apple Seven
 Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.58 to
 the registrants quarterly report on Form 10-Q (SEC File 000-52585) filed
 August 3, 2007)                                     
|      |  |                                                                                                                                                                                                                                                                                                    
|10.59 |  | Purchase
 Contract dated September 24, 2007 by and between PRVA II, L.P. and Apple
 Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.59
 to the registrants quarterly report on Form 10-Q (SEC File 000-52585) filed
 November 2, 2007)                                 
|      |  |                                                                                                                                                                                                                                                                                                    
|21.1  |  | Subsidiaries
 of the Registrant (FILED HEREWITH).                                                                                                                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                    
|23.1  |  | Consent of
 Ernst & Young LLP (FILED HEREWITH).                                                                                                                                                                                                                                                    
|      |  |                                                                                                                                                                                                                                                                                                    
|31.1  |  | Certification
 of the Companys Chief Executive Officer pursuant to Section 302 of the
 Sarbanes-Oxley Act of 2002 (FILED
 HEREWITH).                                                                                                                                                              

51

---



|     |  |                                                                                                                                                                                                                 
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.2 |  | Certification
 of the Companys Chief Financial Officer pursuant to Section 302 of the
 Sarbanes-Oxley Act of 2002 (FILED
 HEREWITH).                                                                           
|     |  |                                                                                                                                                                                                                 
|32.1 |  | Certification
 of the Companys Chief Executive Officer and Chief Financial Officer pursuant
 to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
 Sarbanes-Oxley Act of 2002 (FILED
 HEREWITH).

|  |                           
|- | --------------------------
| 
|* | Denotes Compensation Plan.

52

---