**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**







**FORM
      10-QSB**







**x    Quarterly
      Report under Sections 13 or 15(d) of**


**the
      Securities Exchange Act of 1934 for the quarterly period ended** **March
      31, 2007**




**o   
      Transition Report under Sections 13 or 15(d) of the Securities Exchange Act
      of
      1934**


Commission
      File Number 000-51545




**Key
      Hospitality Acquisition Corporation**


(Exact
      name of small business issuer as specified in its charter)




Delaware


(State
      of
      incorporation)





20-2742464


(IRS
      Employer Identification No.)




4
      Becker
      Farm Road


Roseland,
      New Jersey 07068


(Address
      of principal executive offices, including zip code)




(973)
      992- 3707


(Registrant's
      Telephone Number, including area code)





Check
      whether the Registrant (1) filed all reports required to be filed by Section
      13
      or 15(d) of the Exchange Act during the past 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 is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes x No o




As
      of May
      2nd, 2007, there were **** 7,949,995  outstanding
      shares of the Registrant’s Common Stock, $0.001 par value per share.




Transitional
      Small Business Disclosure Format. Yes o No x


**KEY
      HOSPITALITY ACQUISITION CORPORATION**


**March
      31, 2007 QUARTERLY REPORT ON FORM 10-QSB**


**TABLE
      OF CONTENTS**




**PAGE**





PART
                I - FINANCIAL INFORMATION
            F-1Item
                1.
            Financial
                Statements
            F-1Condensed
                Balance Sheet of March 31, 2007 (Unaudited)
            F-1Condensed
                Statement of Operations (Unaudited)
            F-2Condensed
                Statement of Cash Flows (Unaudited)
            F-3Notes
                to condensed Financial Statements
            F-4
                to F-5Item
                2.
            Management’s
                Discussion And Analysis Or Plan Of Operation
            2-3Item
                3.
            Controls
                And Procedures
            3PART
                II - OTHER INFORMATION
            4Item
                1.
            Legal
                Proceedings
            5Item
                2.
            Unregistered
                Sales Of Equity Securities And Use Of Proceeds
            5Item
                3.
            Defaults
                Upon Senior Securities
            5Item
                4.
            Submission
                Of Matters To A Vote Of Security Holders
            5Item
                5.
            Other
                Information
            5Item
                6.
            Exhibits
            5








**PART
      I -** **FINANCIAL
      INFORMATION**




**ITEM
      1.**  **FINANCIAL
      STATEMENTS**




**KEY
      HOSPITALITY ACQUISITION CORPORATION**


(a
      corporation in the development stage)


**CONDENSED
                BALANCE SHEET****BALANCE
                SHEET****ASSETS****March
                31, 2007****(Unaudited)****Current
                assets**Cash
            
            $
            424,032Prepaid
                expenses
            
            
            274,031Deferred
                tax asset
            
            
            204,000Total
                current assets
            
            
            902,063**Other
                assets,**Deferred
                acquisition costs
            
            
            158,655Cash
                and cash equivalents held in trust fund
            
            
            48,817,414Total
                assets
            
            $
            49,878,132**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liability**Warrant
                liabilty
            
            $
            8,320,500Common
                stock, subject to possible redemption, 1,289,355 shares atredemption
                value plus interest income of $374,733 (net of taxes)
            
            
            9,745,545**Stockholders’
                equity**Preferred
                stock, $.001 par value, authorized 1,000,000 shares; none
                issuedCommon
                stock, $.001 par value, authorized 50,000,000 shares; issued and
                outstanding 7,949,995 shares (which includes the 1,289,355 shares
                subject
                to possible redemption)
            
            
            7,950Paid-in
                capital in excess of par
            
            
            33,060,355Accumulated
                deficit
            
            
            (1,256,218
            )Total
                stockholders’ equity
            
            
            31,812,087$
            49,878,132


*See
      accompanying notes to financial
      statements.*


F-1


**KEY
      HOSPITALITY ACQUISITION CORPORATION**


(a
      corporation in the development stage)





**CONDENSED
                STATEMENTS OF OPERATIONS (Unaudited)****4/25/2005****January
                1, 2007**
            
            **January
                1, 2006**
            
            **(inception)****to**
            
            **to**
            
            **to****March
                31, 2007**
            
            **March
                31, 2006**
            
            **March
                31, 2007****Interest
                income**
            
            $
            564,542
            
            $
            478,126
            
            $
            3,195,910**Loss
                from warrant liability**
            
            
            (5,353,500
            )
            
            (1,096,500
            )
            
            (2,838,000
            )**Operating
                costs**
            
            
            89,855
            
            
            49,168
            
            
            508,356**Net
                loss before income taxes**
            
            
            (4,878,813
            )
            
            (667,542
            )
            
            (150,445
            )**Income
                taxes (benefit)**
            
            
            (37,860
            )
            
            150,000
            
            
            731,040**Net
                loss**
            
            $
            (4,840,954
            )
            $
            (817,542
            )
            $
            (881,485
            )**Weighted
                average shares outstanding basic**
            
            
            7,949,995
            
            
            7,949,995
            
            
            6,236,102**Net
                loss per share basic**
            
            **$**
            **(0.61**
            **)**
            **$**
            **(0.10**
            **)**
            **$**
            **(0.14**
            **)****Weighted
                average shares outstanding diluted**
            
            
            7,949,995
            
            
            7,949,995
            
            
            6,236,102**Net
                loss per share diluted**
            
            **$**
            **(0.61**
            **)**
            **$**
            **(0.10**
            **)**
            **$**
            **(0.14**
            **)****Interest
                income attributable to common stock to possible****conversion**
            
            $
            11,773
            
            $
            81,955
            
            $
            374,733**Net
                loss allocable to common stockholders not subject
                to****possible
                conversion**
            
            $
            (4,852,726
            )
            $
            (899,497
            )
            $
            (1,256,218
            )




See
      accompanying notes to financial
      statements.





F-2


**KEY
        HOSPITALITY ACQUISITION CORPORATION**
 (a
        corporation in the development stage)


**CONDENSED
                  STATEMENT OF CASH FLOWS (Unaudited)****January
                  1, 2007**
              
              **January
                  1, 2006**
              
              **April
                  25, 2005****to**
              
              **to**
              
              **(inception)
                  to****March
                  31, 2007**
              
              **March
                  31, 2006**
              
              **March
                  31, 2007****Cash
                  flows from operating activities**Net
                  loss
              
              
              (4,840,954
              )
              
              (817,542
              )
              
              (881,485
              )Warrant
                  liability
              
              
              5,353,500
              
              
              1,096,500
              
              
              2,838,000Deferred
                  taxes
              
              
              (204,000
              )
              
              
              
              
              (204,000
              )**Adjustments
                  to reconcile net loss to net cash provided****by
                  operating activities:**Increase
                  (decrease) in cash attributable to change inPrepaid
                  assets
              
              
              (254,550
              )
              
              
              
              
              (254,550
              )Prepaid
                  expenses
              
              
              31,780
              
              
              15,028
              
              
              (19,480
              )Accrued
                  legal fees
              
              
              -
              
              
              (25,000
              )Accrued
                  accounting fees
              
              
              -
              
              
              (20,000
              )Accrued
                  franchise taxes
              
              
              -
              
              
              (52,700
              )Income
                  taxes payable
              
              
              (82,310
              )
              
              90,000
              
              
              -**Net
                  cash provided by (used in) operating activities**
              
              
              3,466
              
              
              286,286
              
              
              1,478,485**Cash
                  flows from Investing activities**Cash
                  held in trust
              
              
              (59,797
              )
              
              (409,818
              )
              
              (48,817,414
              )Deferred
                  acquisition costs
              
              
              (158,655
              )
              
              -
              
              
              (158,655
              )**Net
                  cash used in investing activities**
              
              
              (218,453
              )
              
              (409,818
              )
              
              (48,976,070
              )**Cash
                  flows from financing activities**Proceeds
                  from sale of common stock
              
              
              
              
              
              -
              
              
              25,000Proceeds
                  from notes payable, stockholders
              
              
              
              
              
              -
              
              
              151,000Payment
                  of notes payable, stockholders
              
              
              
              
              
              -
              
              
              (151,000
              )Gross
                  proceeds of public offering
              
              
              
              
              
              -
              
              
              51,600,000Payments
                  of costs of public offering
              
              
              
              
              
              -
              
              
              (3,703,483
              )Sale
                  of option
              
              
              -
              
              
              -
              
              
              100**Net
                  cash provided by financing activities**
              
              
              -
              
              
              -
              
              
              47,921,617**Net
                  (decrease) increase in cash**
              
              
              (214,987
              )
              
              (123,532
              )
              
              424,032**Cash,
                  beginning of period**
              
              
              639,019
              
              
              930,836
              
              
              -**Cash,
                  end of period**
              
              
              424,032
              
              
              807,304
              
              
              424,032**Supplemental
                  Schedule of non-cash financing activity:**Warrant
                  liability
              
              $
              2,967,000
              
              $
              6,570,000
              
              $
              2,967,000**Supplemental
                  cash flow disclosure:**Income
                  Taxes Paid
              
              $
              503,000
              
              $
              -
              
              $
              857,753.70





See
      accompanying notes to financial
      statements.


F-3
 **KEY
          HOSPITALITY ACQUISITION CORPORATION**
 (a
          corporation in the development stage)
 **NOTES
                      TO CONDENSED FINANCIAL
                      STATEMENTS**


**1.**
            **Basis
                of presentation**





The
      accompanying unaudited condensed financial statements have been prepared by
      the
      Company and reflect all adjustments, consisting only of normal recurring
      adjustments, which are, in the opinion of management, necessary for a fair
      presentation of the financial position as of March 31, 2007 and the financial
      results for the three months ended March 31, 2007, in accordance with accounting
      principles generally accepted in the United States of America for interim
      financial statements and pursuant to Form 10-QSB and Regulation SB.





Certain
      information and footnote disclosures normally included in the Company’s annual
      audited financial statements have been condensed or omitted pursuant to such
      rules and regulations. The results of operations for the three ended March
      31,
      2007 are not necessarily indicative of the results of operations to be expected
      for a full fiscal year. These interim condensed financial statements should
      be
      read in conjunction with the financial statements for the fiscal year ended
      December 31, 2006, which are included in the Company’s Annual Report on Form
      10-KSB filed with the Securities and Exchange Commission.




**2.**
            **Nature
                of operations and summary of significant accounting
                policies**





*Nature
      of Operations*





Key
      Hospitality Acquisition Corporation (the “Company”) was incorporated in Delaware
      on April 25, 2005 as a blank check company whose objective is to acquire through
      a merger, capital stock exchange, asset acquisition or other similar business
      combination, an unidentified operating business in the hospitality
      industry.





Most
      of
      the activity from April 25, 2005 (inception) to March 31, 2007 relates to the
      Company’s formation and public offering described below.





*Warrant
      Liability*





The
      Company has outstanding warrants which provide for the Company to register
      the
      shares underlying the warrants and is silent as to the penalty to be incurred
      in
      the absence of the Company’s ability to deliver registered shares to the warrant
      holders upon warrant exercise. Under ElTF No. 00-19 *"Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in
      a
      Company’s Own Stock* "
      (“EITF
      00-19”), registration of the common stock underlying the warrants is not within
      the Company’s control. As a result, the Company must assume that it may be
      required to settle the warrants on a net cash basis, thereby necessitating
      the
      treatment of the potential settlement obligation as a liability. Furthermore,
      EITF 00-19 requires the Company to record the potential settlement liability
      at
      each recording date using the current estimated fair value of the warrants,
      with
      any charges being recorded through the Company’s statement of operations. The
      potential settlement obligation will continue to be reported as a liability
      until such time that the warrants are exercised, expire or the Company is
      otherwise able to modify registration requirements to remove the provisions
      that
      require this treatment. The fair value of the warrant liability is determined
      using the trading value of the warrants.





*Net
      Income Per Common Share*





The
      Company complies with SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires
      dual presentation of basic and diluted income per share for all periods
      presented. Basic income per share excludes dilution and is computed by dividing
      income available to common stockholders by the weighted average number of common
      shares outstanding for the period. Diluted income per share reflects the
      potential dilution that could occur if securities or other contracts to issue
      common stock were exercised or converted into common stock or resulted in the
      issuance of common stock that then share in the income of the
      Company.





F-4


**KEY
        HOSPITALITY ACQUISITION CORPORATION**
 (a
        corporation in the development stage)
 **NOTES
                    TO CONDENSED FINANCIAL
                    STATEMENTS**


*Use
      of Estimates*





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





**3.**
            **Initial
                public offering**





On
      October 28, 2005, the Company sold 6,000,000 units (“Units”) at a price of $8
      per share in the Offering. On November 16, 2005, the Company sold an additional
      450,000 Units at a price of $8 per share to cover the over-allotment granted
      to
      the underwriters. Each Unit consists of one share of the Company’s common stock,
      $.001 par value, and one Redeemable common Stock Purchase Warrant (“Warrant”).
      Each Warrant will entitle the holder to purchase from the Company one share
      of
      common stock at an exercise price of $6.00 commencing the later of the
      completion of a business combination with a target business or one year from
      the
      effective date of the Offering and expiring four years from the date of the
      prospectus.





**4.**
            **Related
                Party**





The
      Company has agreed to pay up to $7,500 a month in total for office space and
      general and administrative expenses to related entities of two stockholders.
      Upon completion of a business combination or liquidation, the Company will
      no
      longer be required to pay these monthly fees.





**5.**
            **Income
                taxes**





E ffective
      January 1, 2007, the Company adopted the provisions of the Financial
      Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”
(“FIN 48”). There were no unrecognized tax benefits as of January 1, 2007 and as
      of March 31, 2007.  FIN 48 prescribes a recognition threshold and a
      measurement attribute for the financial statement recognition and measurement
      of
      tax positions taken or expected to be taken in a tax return.  For those
      benefits to be recognized, a tax position must be more-likely-than-not to be
      sustained upon examination by taxing authorities.  The Company recognizes
      accrued interest and penalties related to unrecognized tax benefits as income
      tax expense.  No amounts were accrued for the payment of interest and
      penalties at January 1, 2007. There was no change to this balance at March
      31,
      2007.  Management is currently unaware of any issues under review that
      could result in significant payments, accruals or material deviations from
      its
      position. The adoption of the provisions of FIN 48 did not have a material
      impact on the Company’s financial position, results of operations and cash
      flows.





Income
      tax expense (benefit) for the three months ended March 31, 2007 and 2006 was
      approximately ($38,000) and $150,000 respectively. The expense is for current
      federal and state income taxes. The effective tax rate of 0.8% for the three
      months ended March 31, 2007, differs from the federal statutory rate of
      approximantly 35% as a result of the loss on the warrant liability which is
      a
      permanent difference and the deferred tax asset.




Deferred
      income taxes are provided for the differences between the bases of assets and
      liabilities for financial reporting and income tax purposes. As of March 31,
      2007, the Company has a deferred tax asset of approximately $204,000. As of
      December 31, 2006, the deferred tax asset was approximately $167,000 and had
      a
      full valuation allowance on it. Management has changed its position at year
      end
      and feels that the deferred tax asset will be fully utilized.




F-5


**KEY
        HOSPITALITY ACQUISITION CORPORATION**
 (a
        corporation in the development stage)
 **NOTES
                    TO CONDENSED FINANCIAL
                    STATEMENTS**


**6.**
            **Proposed
                Acquisition of Cay Clubs**





On
      March
      22, 2007, the Company entered into an agreement and plan of merger (“Merger
      Agreement”) by which it will acquire Cay Clubs LLC and its affiliated companies
      (collectively, “Cay Clubs”). Since its founding in December 2004, Cay Clubs has
      focused on creating exclusive full-amenity destination resorts for guests and
      lifestyle communities for its member-owners. These include 14 properties and
      marinas in desirable locations, nine of which are in the Florida Keys. Cay
      Clubs
      has over 900 wet and dry boat slips and 12 restaurants on its properties. The
      properties include three Cay Clubs related to its strategic partnership with
      IMG
      sports/educational academies, the largest school created for young athletes
      and
      a leading provider of comprehensive sports training for all ages - in Bradenton
      and Orlando, Florida, and Crested Butte, Colorado. The newest Cay Club, in
      Las
      Vegas, is currently in the opening phase and there are several additional Cay
      Clubs in the development pipeline.





In
      exchange for all of the membership interests of Cay Clubs LLC outstanding
      immediately prior to the acquisition, the Company will issue 50,000,000 shares
      of its common stock and, provided that the transactions contemplated by the
      Sunvest agreement are completed, an additional amount of 24,666,666 shares,
      which will be placed in escrow at closing pursuant to an escrow agreement as
      described below and may be subject to forfeiture to the Company in accordance
      with the following performance criteria:





·
            For
                2007, 4,333,333 shares will be earned if net income exceeds $50 million;
                an additional 5,333,333 shares if net income exceeds $60 million;
                and
                5,333,333 shares if the Company common stock trades above $11.24
                for 30
                consecutive days. However, the maximum number of shares earned in
                2007 is
                capped at 12,333,333 shares even if all three milestones are
                met.





·
            For
                2008, 4,333,333 shares will be earned if net income exceeds $70 million;
                an additional 5,333,333 shares if net income exceeds $78 million;
                and
                5,333,333 shares if the Company common stock trades above $13.99
                for 30
                consecutive days. However, the maximum number of shares earned in
                2008 is
                capped at 12,333,333 shares even if all three milestones are
                met.





Except
      for those shares retained in the escrow for the purpose of setting aside certain
      earned shares for the possible satisfaction of indemnification obligations,
      any
      shares in escrow that become earned shares based on the achievement of the
      performance criteria set forth above shall be released from escrow and delivered
      to the Clark Trust and Mr. Schwarz, the principals of Cay Clubs LLC, pro rata
      in
      accordance with the distribution of the merger consideration.





The
      Company also will adopt a stock plan under which an aggregate of approximately
      3,000,000 shares will be available for grant under options and restricted stock
      awards to employees of the combined company.





Funds
      raised by the Company in its initial public offering in October 2005 currently
      being held in trust totaling approximately $48.7 million will be used to fund
      Cay Clubs’ future growth.





The
      combined company will operate as Cay Clubs Inc. and will seek to list its common
      stock for trading on a national stock exchange effective upon closing.





The
      proposed merger has been unanimously approved by the Board of Directors of
      the
      Company and the Members of Cay Clubs. It is subject to the approval by a
      majority of the shareholders of the Company in person or by proxy at a meeting
      to be held for that purpose as well as certain closing conditions. In addition,
      the Company will not complete the merger if its stockholders holding 20% or
      more
      of the stock issued in its initial public offering both vote against the merger
      and elect to convert their shares of common stock into a pro rata share of
      the
      funds in the Company’s trust account, as set forth in the Company’s certificate
      of incorporation.


F-6




**ITEM
      2.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**




This
      Quarterly Report on Form 10-QSB includes 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. We have based these
      forward-looking statements on our current expectations and projections about
      future events. These forward-looking statements are subject to known and unknown
      risks, uncertainties and assumptions about us that may cause our actual results,
      levels of activity, performance or achievements to be materially different
      from
      any future results, levels of activity, performance or achievements expressed
      or
      implied by such forward-looking statements. In some cases, you can identify
      forward-looking statements by terminology such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or
      the negative of such terms or other similar expressions. Factors that might
      cause or contribute to such a discrepancy include, but are not limited to,
      those
      described in our other Securities and Exchange Commission filings. The following
      discussion should be read in conjunction with our Financial Statements and
      related Notes thereto included elsewhere in this report.




*Overview*




We
      were
      formed on April 25, 2005, to serve as a vehicle to effect a merger, capital
      stock exchange, asset acquisition or other similar business combination with
      an
      operating business in the hospitality industry. Our initial business combination
      must be with a target business or businesses whose fair market value is at
      least
      equal to 80% of net assets at the time of such acquisition. We intend to utilize
      cash derived from the proceeds of our recently completed public offering, our
      capital stock, debt or a combination of cash, capital stock and debt, in
      effecting a business combination.





Since
      our
      initial public offering, we have been actively engaged in sourcing a suitable
      business combination candidate. We have met with target companies, service
      professionals and other intermediaries to discuss with them our company, the
      background of our management and our combination preferences. In the course
      of
      these discussions, we have also spent time explaining the capital structure
      of
      the initial public offering, the combination approval process, and the timeline
      under which we are operating before the proceeds of the offering are returned
      to
      investors.





Most
      of
      the activity from April 25, 2005 (inception) to March 31, 2007 relates to our
      formation and public offering described below.





*Proposed
      Acquisition of Cay Clubs*





On
      March
      22, 2007, we entered into an agreement and plan of merger (“Merger Agreement”)
      by which we will acquire Cay Clubs LLC and its affiliated companies
      (collectively, “Cay Clubs”). Since its founding in December 2004, Cay Clubs has
      focused on creating exclusive full-amenity destination resorts for guests and
      lifestyle communities for its member-owners. In exchange for all of the
      membership interests of Cay Clubs LLC outstanding immediately prior to the
      acquisition, we will issue 50,000,000 shares of our common stock and, provided
      that the transactions contemplated by an agreement with Sunvest are completed,
      an additional amount of 24,666,666 shares, which will be placed in escrow at
      closing pursuant to an escrow agreement as described below and may be subject
      to
      forfeiture to us in accordance with the following performance criteria:





·
            For
                2007, 4,333,333 shares will be earned if net income exceeds $50 million;
                an additional 5,333,333 shares if net income exceeds $60 million;
                and
                5,333,333 shares if the Key Hospitality common stock trades above
                $11.24
                for 30 consecutive days. However, the maximum number of shares earned
                in
                2007 is capped at 12,333,333 shares even if all three milestones
                are
                met.





·
            For
                2008, 4,333,333 shares will be earned if net income exceeds $70 million;
                an additional 5,333,333 shares if net income exceeds $78 million;
                and
                5,333,333 shares if the Key Hospitality common stock trades above
                $13.99
                for 30 consecutive days. However, the maximum number of shares earned
                in
                2008 is capped at 12,333,333 shares even if all three milestones
                are met.








Except
      for those shares retained in the escrow for the purpose of setting aside certain
      earned shares for the possible satisfaction of indemnification obligations,
      any
      shares in escrow that become earned shares based on the achievement of the
      performance criteria set forth above shall be released from escrow and delivered
      to the Clark Trust and Mr. Schwarz, the principals of Cay Clubs LLC, pro rata
      in
      accordance with the distribution of the merger consideration.





The
      merger is subject to the approval by our stockholders representing a majority
      of
      our common stock in person or by proxy at a meeting to be held for that purpose
      as well as certain closing conditions. In addition, we will not complete the
      merger if our stockholders holding 20% or more of the stock issued in our
      initial public offering both vote against the merger and elect to convert their
      shares of common stock into a pro rata share of the funds in the trust account.
      If we do not consummate the merger with Cay Clubs, we will dissolve and
      liquidate.





**Comparison
      of Three Months Ended March 30, 2007 with Three Months Ended March 31,
      200** **6**




For
      the
      three months ended March 31, 2007, we had a net loss of approximately
      $5,055,954, consisting of interest income of $564,542, a loss from warrant
      liability of $5,353,500, operating costs of $89,855 and income taxes of
      $166,140, as compared to a loss of $817,542 derived from formation, loss from
      warrant liability and pre-offering expenses for the same period the previous
      year. Interest income is derived primarily from investment of our cash balances
      held in trust, which aggregated approximately $48,817,414 at March 31, 2007.
      The
      cash balance held in trust is invested primarily in treasury bills.




**Liquidity
      and Capital Resources**





On
      October 28, 2005, we consummated our initial public offering of 6,000,000 units.
      On November 16, 2005, we consummated the closing of an additional 450,000 units
      that were subject to the underwriters’ over-allotment option. Each unit consists
      of one share of common stock and one redeemable common stock purchase warrant.
      Each warrant entitles the holder to purchase from us one share of our common
      stock at an exercise price of $6.00.




Our
      net
      proceeds from the sale of the 6,450,000 units, after deducting certain offering
      expenses of approximately $1,117,000, including $600,000 evidencing the
      underwriters’ non-accountable expense allowance of 1.25% of the gross proceeds
      (excluding the proceeds from the underwriters’ over-allotment), and underwriting
      discounts of approximately $2,400,000, were approximately $47,897,000. Of this
      amount, $46,942,000 was placed in the trust account (including deferred
      underwriting fees of $903,000) and interest on this amount is also held in
      the
      trust account. The remaining $955,000 is being held outside of the trust. The
      remaining proceeds are available to be used by us to provide for business,
      legal
      and accounting due diligence on prospective acquisitions and continuing general
      and administrative expenses. We will use substantially all of the net proceeds
      of the initial public offering to acquire a target business, including
      identifying and evaluating prospective acquisition candidates, selecting the
      target business, and structuring, negotiating and consummating the business
      combination. At March 31, 2007, we had cash and cash equivalents outside of
      the
      trust account of $424,033 and cash and cash equivalents held in the trust
      account of $48,817,414. To the extent that our capital stock is used in whole
      or
      in part as consideration to effect a business combination, the proceeds held
      in
      the trust fund as well as any other net proceeds not expended will be used
      to
      finance the operations of the target business. We believe we have sufficient
      available funds outside of the trust fund to operate through October 28, 2007,
      assuming that a business combination is not consummated during that time. We
      do
      not believe we will need to raise additional funds in order to meet the
      expenditures required for operating our business. However, we may need to raise
      additional funds through a private offering of debt or equity securities if
      such
      funds are required to consummate a business combination that is presented to
      us.
      We would only consummate such a financing simultaneously with the consummation
      of a business combination.




We
      pay
      Millennium 3 Capital, Inc., an affiliate of our president, an aggregate fee
      of
      $7,500 per month which includes the cost of the office space and the cost of
      other general and administrative services provided to us by such
      affiliate.




3


**ITEM
      3.**  **CONTROLS
      AND PROCEDURES**




Our
      management carried out an evaluation, with the participation of our principal
      executive, financial, and accounting officers, of the effectiveness of our
      disclosure controls and procedures as of March 31, 2007. Based upon that
      evaluation, our chief executive officer concluded that our disclosure controls
      and procedures were effective to ensure that information required to be
      disclosed by us in reports that we file or submit under the Securities Exchange
      Act of 1934 is recorded, processed, summarized, and reported within the time
      periods specified in the rules and forms of the Securities and Exchange
      Commission.




There
      has
      not been any change in our internal control over financial reporting in
      connection with the evaluation required by Rule 13a-15(d) under the Exchange
      Act
      that occurred during the quarter ended March 31, 2007, that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.




4


**PART
        II - OTHER INFORMATION**
  **ITEM
        1.****LEGAL
        PROCEEDINGS**




There
      are
      no material legal proceedings pending against us.




**ITEM
      2.**  **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




None.




**ITEM
      3.**  **DEFAULTS
      UPON SENIOR SECURITIES**




Not
      Applicable.




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




Not
      Applicable.




**ITEM
      5.**  **OTHER
      INFORMATION**




Not
      Applicable.




**ITEM
      6.**  **EXHIBITS**





**Exhibit
              No.**
            **Description
              of
              Exhibits**31.1
            Section
                302 Certification of Principal Executive Officer31.2
            Section
                302 Certification of Principal Financial Officer32.1
            Section
                906 Certification







5




**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.




**KEY
                HOSPITALITY ACQUISITION CORPORATION**Date:
                May 15, 2007
            
            By:
            
            /s/
                Jeffrey S.
                DavidsonJeffrey
                S. Davidson*Co-Chairman
                of the Board and*
              *Chief
                Executive Officer*