|                                                                                          
|------------------------------------------------------------------------------------------
|UNITED STATES                                                                             
|SECURITIES AND EXCHANGE COMMISSION                                                        
|Washington, D.C. 20549                                                                    
|                                                                                          
|FORM 10-Q                                                                                 
|                                                                                          
|(Mark One)                                                                                
|                                                                                          
|x QUARTERLY REPORT
 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|                                                                                            |                    |  |  | 
|------------------------------------------------------------------------------------------- | ------------------ |  |  | 
|For the quarterly period ended                                                              | September 30, 2010 |  | 
|                                                                                            |                    |  |  | 
|                                                                                            | or                 |  | 
|                                                                                            |                    |  |  | 
|o TRANSITION REPORT
 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                           
|For the transition period
 from _________________ to ___________________                   

|                        |           |  |  | 
|----------------------- | --------- |  |  | 
|Commission File Number: | 000-52585 |  | 
|                        |           |  |  | 

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

|                                                                                    |  |                                      
|----------------------------------------------------------------------------------- |  | -------------------------------------
|VIRGINIA                                                                            |  | 20-2879175                           
|                                                                                    |  |                                      
|(State or other
 jurisdiction of incorporation or organization)                     |  | (I.R.S.
 Employer Identification No.)
|                                                                                    |  |                                      
|814 EAST MAIN STREET, RICHMOND, VIRGINIA                                            |  | 23219                                
|                                                                                    |  |                                      
|(Address of principal
 executive offices)                                           |  | (Zip
 Code)                          
|                                                                                    |  |                                      
|(804) 344-8121                                                                     
|                                                                                   
|(Registrants
 telephone number, including area code)                              
|                                                                                   
|                                                                                   
|(Former
 name, former address and former fiscal year, if changed since last report)

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. x Yes o No

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 during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).o Yes o No

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
the definitions 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                    | Smaller
 reporting company   o
|                             |                        | (Do
 not check if a smallerreporting company) |                               

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

As
of November 1, 2010 there were 91,656,183 outstanding shares of common stock,
no par value, of the registrant.

---



APPLE REIT SEVEN, INC.
FORM 10-QINDEX

|                               |          |                                                                                                           |  |             
|------------------------------ | -------- | --------------------------------------------------------------------------------------------------------- |  | ------------
|                               |          |                                                                                                           |  | Page
 Number
|                               |          |                                                                                                           |  |             
|PART I.
 FINANCIAL INFORMATION |          |                                                                                                          
|                               |          |                                                                                                           |  |             
|                               | Item 1.  | Financial Statements
 (Unaudited)                                                                         |  |             
|                               |          |                                                                                                           |  |             
|                               |          | Consolidated
 Balance Sheets - September 30, 2010 and December 31, 2009                                   |  | 3           
|                               |          |                                                                                                           |  |             
|                               |          | Consolidated
 Statements of Operations  For the three and nine months ended September 30,
 2010 and 2009 |  | 4           
|                               |          |                                                                                                           |  |             
|                               |          | Consolidated
 Statements of Cash Flows  For the nine months ended September 30, 2010 and
 2009           |  | 5           
|                               |          |                                                                                                           |  |             
|                               |          | Notes
 to Consolidated Financial Statements                                                               |  | 6           
|                               |          |                                                                                                           |  |             
|                               | Item
 2. | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                    |  | 10          
|                               |          |                                                                                                           |  |             
|                               | Item
 3. | Quantitative
 and Qualitative Disclosures About Market Risk                                               |  | 18          
|                               |          |                                                                                                           |  |             
|                               | Item
 4. | Controls
 and Procedures                                                                                  |  | 18          
|                               |          |                                                                                                           |  |             
|PART II. OTHER INFORMATION     |          |                                                                                                          
|                               |          |                                                                                                          
|                               | Item
 2. | Unregistered
 Sales of Equity Securities and Use of Proceeds                                              |  | 19          
|                               |          |                                                                                                           |  |             
|                               | Item
 6. | Exhibits                                                                                                  |  | 20          
|                               |          |                                                                                                           |  |             
|Signatures                     |          |                                                                                                           |  | 21          

This
Form 10-Q 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 service mark
symbol has been omitted but will be deemed to be included wherever the above
referenced terms are used.

2

---



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

|                                                                                                                                               |  |                     |          |                    |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | -------- | ------------------ | - | -------- | -
|                                                                                                                                               |  | September 30,
 2010 |          | December 31,
 2009 |  
|                                                                                                                                               |  |                     |          |                    |  
|ASSETS                                                                                                                                         |  |                     |          |                    |   |          |  
|Investment in real estate, net of accumulated depreciation of $105,779
 and $80,923, respectively                                              |  | $                   | 878,833  |                    | $ | 902,293  |  
|Cash and cash equivalents                                                                                                                      |  |                     | 296      |                    |   |         |  
|Restricted cash-furniture, fixtures and other escrows                                                                                          |  |                     | 8,256    |                    |   | 9,582    |  
|Due from third party managers                                                                                                                  |  |                     | 8,715    |                    |   | 5,639    |  
|Other assets, net                                                                                                                              |  |                     | 5,684    |                    |   | 6,373    |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|TOTAL ASSETS                                                                                                                                   |  | $                   | 901,784  |                    | $ | 923,887  |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|LIABILITIES                                                                                                                                    |  |                     |          |                    |   |          |  
|Notes payable                                                                                                                                  |  | $                   | 137,521  |                    | $ | 117,787  |  
|Accounts payable and accrued expenses                                                                                                          |  |                     | 14,073   |                    |   | 13,843   |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|TOTAL LIABILITIES                                                                                                                              |  |                     | 151,594  |                    |   | 131,630  |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|SHAREHOLDERS EQUITY                                                                                                                           |  |                     |          |                    |   |          |  
|Preferred stock, authorized 15,000,000 shares; none issued and
 outstanding                                                                    |  |                     |         |                    |   |         |  
|Series A preferred shares, no par value, authorized 200,000,000
 shares; issued and outstanding 92,535,680 and 93,521,656 shares, respectively |  |                     |         |                    |   |         |  
|Series B convertible preferred stock, no par value, authorized 240,000
 shares; issued and outstanding 240,000 shares                          |  |                     | 24       |                    |   | 24       |  
|Common stock, no par value, authorized 200,000,000 shares; issued and
 outstanding 92,535,680 and 93,521,656 shares, respectively              |  |                     | 916,049  |                    |   | 926,419  |  
|Distributions greater than net income                                                                                                          |  |                     | (165,883 | )                  |   | (134,186 | )
|                                                                                                                                               |  |                     |          |                    |   |          |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                     |  |                     | 750,190  |                    |   | 792,257  |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|                                                                                                                                               |  |                     |          |                    |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                     |  | $                   | 901,784  |                    | $ | 923,887  |  
|                                                                                                                                               |  |                     |          |                    |   |          |  

See notes to
consolidated financial statements.

3

---



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

|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|-------------------------------------------------------------- |  | --------------------------------------- | ------ | --------------------------------------- | - | -------------------------------------- |  | -------------------------------------- | ------- |  | - | ------- | 
|                                                               |  | Three months
 ended
 September 30, 2010 |        | Three months
 ended
 September 30, 2009 |   | Nine months
 ended
 September 30, 2010 |  | Nine months
 ended
 September 30, 2009 |        
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |        
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |        
|Revenues:                                                      |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|Room revenue                                                   |  | $                                       | 48,238 |                                         | $ | 45,225                                 |  | $                                      | 139,227 |  | $ | 134,796 | 
|Other revenue                                                  |  |                                         | 4,592  |                                         |   | 4,198                                  |  |                                        | 14,102  |  |   | 12,768  | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|Total revenue                                                  |  |                                         | 52,830 |                                         |   | 49,423                                 |  |                                        | 153,329 |  |   | 147,564 | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|Expenses:                                                      |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|Operating expense                                              |  |                                         | 13,767 |                                         |   | 13,098                                 |  |                                        | 39,889  |  |   | 38,781  | 
|Hotel administrative expense                                   |  |                                         | 3,783  |                                         |   | 3,839                                  |  |                                        | 11,336  |  |   | 11,854  | 
|Sales and marketing                                            |  |                                         | 4,098  |                                         |   | 3,844                                  |  |                                        | 11,687  |  |   | 11,589  | 
|Utilities                                                      |  |                                         | 2,570  |                                         |   | 2,528                                  |  |                                        | 6,725   |  |   | 6,808   | 
|Repair and maintenance                                         |  |                                         | 2,403  |                                         |   | 2,223                                  |  |                                        | 6,920   |  |   | 6,699   | 
|Franchise fees                                                 |  |                                         | 2,181  |                                         |   | 2,063                                  |  |                                        | 6,279   |  |   | 6,036   | 
|Management fees                                                |  |                                         | 1,695  |                                         |   | 1,526                                  |  |                                        | 5,088   |  |   | 4,752   | 
|Taxes, insurance and other                                     |  |                                         | 2,564  |                                         |   | 3,150                                  |  |                                        | 9,194   |  |   | 10,532  | 
|General and administrative                                     |  |                                         | 1,153  |                                         |   | 1,030                                  |  |                                        | 3,847   |  |   | 3,369   | 
|Depreciation expense                                           |  |                                         | 8,304  |                                         |   | 8,176                                  |  |                                        | 24,856  |  |   | 24,111  | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|Total expenses                                                 |  |                                         | 42,518 |                                         |   | 41,477                                 |  |                                        | 125,821 |  |   | 124,531 | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|Operating income                                               |  |                                         | 10,312 |                                         |   | 7,946                                  |  |                                        | 27,508  |  |   | 23,033  | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|Interest expense, net                                          |  |                                         | 1,906  |                                         |   | 1,696                                  |  |                                        | 5,578   |  |   | 4,564   | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|Net income                                                     |  | $                                       | 8,406  |                                         | $ | 6,250                                  |  | $                                      | 21,930  |  | $ | 18,469  | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|Basic and diluted net income per common share                  |  | $                                       | 0.09   |                                         | $ | 0.07                                   |  | $                                      | 0.24    |  | $ | 0.20    | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|                                                               |  |                                         |        |                                         |   |                                        |  |                                        |         |  |   |         | 
|Weighted average common shares outstanding - basic and diluted |  |                                         | 92,465 |                                         |   | 93,486                                 |  |                                        | 92,846  |  |   | 93,500  | 

See notes to
consolidated financial statements.

4

---



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

|                                                                                                   |  |                                        |         |                                        |   |         |  
|-------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------- | -------------------------------------- | - | ------- | -
|                                                                                                   |  | Nine months
 ended
 September 30, 2010 |         | Nine months
 ended
 September 30, 2009 |  
|                                                                                                   |  |                                        |         |                                        |  
|Cash flow from operating activities:                                                               |  |                                        |         |                                        |   |         |  
|Net income                                                                                         |  | $                                      | 21,930  |                                        | $ | 18,469  |  
|Adjustments to reconcile net income to cash provided by operating
 activities:                     |  |                                        |         |                                        |   |         |  
|Depreciation of real estate owned                                                                  |  |                                        | 24,856  |                                        |   | 24,111  |  
|Amortization of deferred financing costs, fair value adjustments and
 other non-cash expenses, net |  |                                        | 218     |                                        |   | (289    | )
|Changes in operating assets and liabilities:                                                       |  |                                        |         |                                        |   |         |  
|Increase in funds due from third party managers                                                    |  |                                        | (3,076  | )                                      |   | (1,798  | )
|Decrease (increase) in other assets                                                                |  |                                        | (371    | )                                      |   | 440     |  
|Increase in accounts payable and accrued expenses                                                  |  |                                        | 1,451   |                                        |   | 2,168   |  
|                                                                                                   |  |                                        |         |                                        |   |         |  
|Net
 cash provided by operating activities                                                         |  |                                        | 45,008  |                                        |   | 43,101  |  
|                                                                                                   |  |                                        |         |                                        |   |         |  
|Cash flow from investing activities:                                                               |  |                                        |         |                                        |   |         |  
|Capital improvements                                                                               |  |                                        | (2,617  | )                                      |   | (12,583 | )
|Net decrease in cash restricted for property improvements                                          |  |                                        | 1,730   |                                        |   | 287     |  
|Redemption of ownership interest in non-hotel assets                                               |  |                                        |        |                                        |   | 3,240   |  
|                                                                                                   |  |                                        |         |                                        |   |         |  
|Net cash used in investing activities                                                              |  |                                        | (887    | )                                      |   | (9,056  | )
|                                                                                                   |  |                                        |         |                                        |   |         |  
|Cash flow from financing activities:                                                               |  |                                        |         |                                        |   |         |  
|Payment of mortgage notes payable                                                                  |  |                                        | (1,903  | )                                      |   | (1,782  | )
|Net proceeds from short-term borrowings                                                            |  |                                        | 22,085  |                                        |   | 2,270   |  
|Payment of financing costs related to borrowings                                                   |  |                                        | (10     | )                                      |   | (43     | )
|Redemptions of Units                                                                               |  |                                        | (28,975 | )                                      |   | (17,521 | )
|Net proceeds from issuance of Units                                                                |  |                                        | 18,605  |                                        |   | 19,827  |  
|Cash distributions paid to common shareholders                                                     |  |                                        | (53,627 | )                                      |   | (57,405 | )
|                                                                                                   |  |                                        |         |                                        |   |         |  
|Net cash used in financing activities                                                              |  |                                        | (43,825 | )                                      |   | (54,654 | )
|                                                                                                   |  |                                        |         |                                        |   |         |  
|                                                                                                   |  |                                        |         |                                        |   |         |  
|Increase (decrease) in cash and cash equivalents                                                   |  |                                        | 296     |                                        |   | (20,609 | )
|                                                                                                   |  |                                        |         |                                        |   |         |  
|Cash and cash equivalents, beginning of period                                                     |  |                                        |        |                                        |   | 20,609  |  
|                                                                                                   |  |                                        |         |                                        |   |         |  
|Cash and cash equivalents, end of period                                                           |  | $                                      | 296     |                                        | $ |        |  
|                                                                                                   |  |                                        |         |                                        |   |         |  

See notes to
consolidated financial statements.

5

---



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1

Basis of Presentation

The
accompanying unaudited consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information required by
accounting principles generally accepted in the United States. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. These
unaudited financial statements should be read in conjunction with the Companys
audited financial statements included in its 2009 Annual Report on Form 10-K.
Operating results for the three and nine month periods ended September 30, 2010
are not necessarily indicative of the results that may be expected for the
twelve month period ending December 31, 2010.

General Information and Summary of Significant Accounting
Policies

Organization

Apple
REIT Seven, Inc., together with its wholly-owned subsidiaries (the Company),
is a Virginia corporation formed to invest in hotels and other selected real
estate in select metropolitan areas in the United States. The Company has
elected to be treated as a real estate investment trust (REIT) for federal
income tax purposes. Initial capitalization occurred on May 26, 2005 and
operations began on April 27, 2006 when the Company acquired its first hotel.
The Company concluded its best-efforts offering of Units (each Unit consists of
one common share and one Series A preferred share) in July 2007. 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.

Earnings
per Common Share

Basic
earnings per common share is computed based upon the weighted average number of
shares outstanding during the period. Diluted earnings per share is calculated
after giving effect to all potential common shares that were dilutive and
outstanding for the period. There were no potential common shares with a
dilutive effect for the three and nine months ended September 30, 2010 and 2009.
As a result, basic and dilutive outstanding shares were the same. Series B
convertible preferred shares are not included in earnings per common share
until such time the Series B convertible preferred shares are converted to
common shares.

Use
of Estimates

The
preparation of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.

Recent
Accounting Pronouncements

In
June 2009, the Financial Accounting Standards Board (FASB) 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

6

---



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.

Note 2

Other Assets

The
Company has a 26% ownership interest in Apple Air Holding, LLC (Apple Air).
Through its ownership interest the Company has access to two corporate Lear
jets for asset management and hotel renovation purposes. The Companys
ownership interest in Apple Air (approximately $2.3 million at September 30,
2010) is included in other assets, net in the Companys consolidated balance
sheet. 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 nine months ending September 30, 2010 and 2009,
the Company recorded a loss of approximately $372 thousand and $338 thousand,
respectively, as its share of the net loss of Apple Air which is included in
general and administrative expense in the Companys Consolidated Statements of
Operations. The losses relate primarily to the depreciation of the aircraft.

Note 3

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 at arms
length, and the results of the Companys operations may be different than if
conducted with non-related parties.

The
Company is party to an advisory agreement with Apple Seven Advisors, Inc.
(ASA), pursuant to which ASA provides management services to the Company. An
annual fee ranging from .1% to .25% of total equity proceeds received by the
Company, in addition to certain reimbursable expenses, are payable for these
services. During each of the nine month periods ended September 30, 2010 and
2009, the Company incurred approximately $0.8 million in fees related to the
advisory agreement with ASA. These fees are recorded in general and administrative
expense in the Companys Consolidated Statements of Operations.

Through
a contractual arrangement with Apple REIT Six, Inc., ASA provides the Company
with support services. The Company reimburses ASA for the cost of the services
provided by Apple REIT Six, Inc. ASA in turn reimburses Apple REIT Six, Inc.
During the nine month periods ended September 30, 2010 and 2009, the Company
incurred approximately $1.5 million and $1.4 million in costs paid to ASA that
were reimbursed to Apple REIT Six, Inc. These costs are recorded in general and
administrative expense in the Companys Consolidated Statements of Operations.

ASA
is 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the
Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT
Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten,
Inc. (a newly formed REIT). 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.

7

---



Note 4

Line of Credit Facility and Other Unsecured Borrowings

On
April 2, 2009, the Company entered into an unsecured line of credit facility,
to be utilized for working capital, hotel renovations, or other general
corporate funding purposes including the payment of redemptions and
distributions. The credit facility provides for a maximum aggregate commitment
by the lender, a commercial bank, of $30 million, and has a scheduled maturity
in April 2011. The applicable interest rate under the line of credit is equal
to LIBOR (the London Interbank Offered Rate for a one-month term, which was
approximately 0.26% at September 30, 2010) plus 1.75%, subject to a minimum
interest rate floor on the line of credit of 3.15%. Payments of interest only
are due monthly under the terms of the credit agreement, and any amount
borrowed by the Company may be repaid before maturity with no penalty. The
balance outstanding under the line of credit facility on September 30, 2010 was
approximately $24.6 million, at an annual interest rate of 3.15%. The balance
outstanding at December 31, 2009 was $11.5 million.

In
July 2010, the Company entered into an unsecured variable rate term loan
agreement with a banking institution, under which the Company borrowed $9.0
million. The interest rate of the loan is equal to the daily LIBOR interest
rate plus 2.25%; the borrowing rate under the loan agreement was approximately
2.51% at September 30, 2010. The loan has a maturity date of December 31, 2010,
and can be repaid before maturity with no penalty. Proceeds of the loan have
been used by the Company for general working capital purposes, including
payment of redemptions and distributions.

Note 5

Shareholders Equity

The
Companys annual distribution rate as of September 30, 2010 was $0.77 per
common share. For the nine months ended September 30, 2010 and 2009 the Company
made distributions of $0.58 and $0.61 per common share for a total of $53.6 million
and $57.4 million. For the three months ended September 30, 2010 and 2009 the
Company has made distributions of $0.19 and $0.19 per common share for a total
of $17.8 million and $18.0 million.

In
2007, the Company instituted a Unit Redemption Program to provide limited
interim liquidity to its shareholders who have held their Units for at least
one year. Through September 30, 2010, shareholders could request redemption of
Units for a purchase price equal to the lesser of: (1) the purchase price per
Unit that the shareholder actually paid for the Unit, or (2) $11.00 per Unit.
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. During the nine months ended September
30, 2010, the Company redeemed approximately 2.7 million Units in the amount of
$29.0 million under the program. Since the inception of the program through
September 30, 2010, the Company has redeemed approximately 5.9 million Units in
the amount of $62.7 million. The maximum number of Units that may be redeemed
during any twelve month period is five percent of the weighted average number
of Units outstanding during the twelve month period prior to redemption.

In
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 distributions to purchase additional
Units of the Company. The uses of the 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.
During the nine months ended September 30, 2010, approximately 1.7 million
Units, representing $18.5 million in proceeds to the Company, were issued under
the plan. During the nine months ended September 30, 2009, approximately 1.8
million Units, representing $19.7 million in proceeds to the Company, were
issued under the plan. Since the inception of the plan through September 30,
2010, approximately 7.3 million Units, representing approximately $80.4 million
in proceeds to the Company, have been issued.

8

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Note 6

Fair Value of Financial Instruments

The
Company estimates the fair value of its fixed rate debt and the credit spreads
over variable market rates on its variable rate debt by discounting the future
cash flows of each instrument at estimated market rates or credit spreads
consistent with the maturity of the debt obligation with similar credit
policies. Credit spreads take into consideration general market conditions and
maturity. As of September 30, 2010, the carrying value and estimated fair value
of the Companys debt was $137.5 million and $141.2 million, respectively. 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, respectively. The
carrying value of the Companys other financial instruments approximates fair
value due to the short-term nature of these financial instruments.

Note 7

Subsequent Events

On
October 15, 2010, the Company paid $0.064167 per common share, totaling $5.9
million, in a distribution to its common shareholders. Under the Companys
Dividend Reinvestment Plan, $2.1 million were reinvested, resulting in the
issuance of 186,453 Units.

In
October 2010, the Company redeemed 1,065,949 Units for approximately $11.7
million under its Unit Redemption Program.

On
October 18, 2010, the Company entered into a new 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 either a) LIBOR plus
3.5%, subject to a minimum LIBOR interest rate floor of 1.5%, or b) the banks
commercial prime rate plus 3.5%. Payments of interest 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.
The credit facility contains representations, financial and other covenants
typical for this type of commercial 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.

9

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Item 2.  Managements Discussion
and Analysis of Financial Condition and Results of Operations

This
quarterly 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 including the current economic recession throughout the United States,
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 the quarterly 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. Any forward-looking statement that the
Company makes speaks only as of the date of this report. The Company undertakes
no obligation to publically update or revise any forward-looking statements or
cautionary factors, as a result of new information, future events, or
otherwise, except as required by law.

Overview

The
Company is a Virginia corporation formed to invest in hotels and other selected
real estate in select metropolitan areas in the United States. The Company was
initially capitalized on May 26, 2005, with its first investor closing on March
15, 2006. The best-efforts offering was completed in July 2007. The Company
owned 51 hotels as of September 30, 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. 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 as compared to other
hotels within their respective local market, in general, has met the Companys
expectations for the period owned. With the significant decline in economic conditions
throughout the United States over the past two years, overall performance of
the Companys hotels have not met expectations since acquisition. Although
there is no way to predict future general economic conditions, the hotel
industrys and the Companys revenues are improving and the Company anticipates
low single digit percentage increases for the remainder of 2010 as compared to
2009, with continued mid single digit percentage increases expected in revenue
projected for 2011.

In
evaluating financial condition and operating performance, the most important
indicators 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
others in its local market, and expenses, such as hotel operating expenses,
general and administrative and other expenses described below. The following is
a summary of the Companys results (in thousands, except statistical data):

10

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|                                    |  |                                  |         |                                 |  |      |   |               |         |                 |  |      |   |               |     |      |   |               |   |                 |     |   |   |           |   |  |     |   |  |     |  
|----------------------------------- |  | -------------------------------- | ------- | ------------------------------- |  | ---- | - | ------------- | ------- | --------------- |  | ---- | - | ------------- | --- | ---- | - | ------------- | - | --------------- | --- | - | - | --------- | - |  | --- | - |  | --- | -
|                                    |  | Three months ended September 30, |         | Nine months ended September 30, | 
|                                    |  |                                  |         |                                 | 
|                                    |  | 2010                             |         | % of
 Revenue                   |  | 2009 |   | % of
 Revenue |         | Percent
 change |  | 2010 |   | % of
 Revenue |     | 2009 |   | % of
 Revenue |   | Percent
 change |    
|                                    |  |                                  |         |                                 |  |      |   |               |         |                 |  |      |   |               |     |      |   |               |   |                 |    
|Total
 revenues                     |  | $                                | 52,830  |                                 |  | 100  | % | $             | 49,423  |                 |  | 100  | % |               | 7   | %    | $ | 153,329       |   |                 | 100 | % | $ | 147,564   |   |  | 100 | % |  | 4   | %
|Hotel
 operating expenses           |  |                                  | 30,497  |                                 |  | 58   | % |               | 29,121  |                 |  | 59   | % |               | 5   | %    |   | 87,924        |   |                 | 57  | % |   | 86,519    |   |  | 59  | % |  | 2   | %
|Taxes,
 insurance and other expense |  |                                  | 2,564   |                                 |  | 5    | % |               | 3,150   |                 |  | 6    | % |               | -19 | %    |   | 9,194         |   |                 | 6   | % |   | 10,532    |   |  | 7   | % |  | -13 | %
|General
 and administrative expense |  |                                  | 1,153   |                                 |  | 2    | % |               | 1,030   |                 |  | 2    | % |               | 12  | %    |   | 3,847         |   |                 | 3   | % |   | 3,369     |   |  | 2   | % |  | 14  | %
|Depreciation                        |  |                                  | 8,304   |                                 |  |      |   |               | 8,176   |                 |  |      |   |               | 2   | %    |   | 24,856        |   |                 |     |   |   | 24,111    |   |  |     |   |  | 3   | %
|Interest
 expense, net              |  |                                  | 1,906   |                                 |  |      |   |               | 1,696   |                 |  |      |   |               | 12  | %    |   | 5,578         |   |                 |     |   |   | 4,564     |   |  |     |   |  | 22  | %
|                                    |  |                                  |         |                                 |  |      |   |               |         |                 |  |      |   |               |     |      |   |               |   |                 |     |   |   |           |   |  |     |   |  |     |  
|Average
 Market Yield (1)           |  |                                  | 128     |                                 |  |      |   |               | 125     |                 |  |      |   |               | 2   | %    |   | 125           |   |                 |     |   |   | 123       |   |  |     |   |  | 2   | %
|Number of
 hotels                   |  |                                  | 51      |                                 |  |      |   |               | 51      |                 |  |      |   |               |    |      |   | 51            |   |                 |     |   |   | 51        |   |  |     |   |  |    |  
|Average
 Daily Rate (ADR)           |  | $                                | 108     |                                 |  |      |   | $             | 109     |                 |  |      |   |               | -1  | %    | $ | 109           |   |                 |     |   | $ | 112       |   |  |     |   |  | -3  | %
|Occupancy                           |  |                                  | 76      | %                               |  |      |   |               | 70      | %               |  |      |   |               | 9   | %    |   | 73            | % |                 |     |   |   | 68        | % |  |     |   |  | 7   | %
|RevPAR                              |  | $                                | 82      |                                 |  |      |   | $             | 77      |                 |  |      |   |               | 6   | %    | $ | 79            |   |                 |     |   | $ | 77        |   |  |     |   |  | 3   | %
|Total
 Rooms Sold (2)               |  |                                  | 443,743 |                                 |  |      |   |               | 413,264 |                 |  |      |   |               | 7   | %    |   | 1,268,345     |   |                 |     |   |   | 1,193,018 |   |  |     |   |  | 6   | %
|Total
 Rooms Available (3)          |  |                                  | 587,416 |                                 |  |      |   |               | 587,252 |                 |  |      |   |               |    |      |   | 1,744,512     |   |                 |     |   |   | 1,743,436 |   |  |     |   |  |    |  

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

(2) Represents actual number of room nights sold during the
period.

(3) Represents number of rooms owned by the Company
multiplied by the number of nights in the period.

Hotels Owned

The following table
summarizes the location, brand, manager, date acquired, number of rooms and
gross purchase price for each of the 51 hotels the Company owned at September
30, 2010 (all dollar amounts are in thousands):

|                |  |       |  |                   |  |              |  |                |  |       |  |   |                        | 
|--------------- |  | ----- |  | ----------------- |  | ------------ |  | -------------- |  | ----- |  | - | ---------------------- | 
|City            |  | State |  | Brand             |  | Manager      |  | Date
 Acquired |  | Rooms |  |   | Gross
 Purchase
 Price | 
|                |  |       |  |                   |  |              |  |                |  |       |  |   |                        | 
|Montgomery      |  | AL    |  | Homewood Suites   |  | LBA          |  | 8/17/2006      |  | 91    |  | $ | 10,660                 | 
|Montgomery      |  | AL    |  | Hilton Garden Inn |  | LBA          |  | 8/17/2006      |  | 97    |  |   | 10,385                 | 
|Troy            |  | AL    |  | Hampton Inn       |  | LBA          |  | 8/17/2006      |  | 82    |  |   | 6,130                  | 
|Auburn          |  | AL    |  | Hilton Garden Inn |  | LBA          |  | 8/17/2006      |  | 101   |  |   | 10,185                 | 
|Huntsville      |  | AL    |  | Hilton Garden Inn |  | LBA          |  | 8/17/2006      |  | 101   |  |   | 10,285                 | 
|Huntsville      |  | AL    |  | Homewood Suites   |  | LBA          |  | 10/27/2006     |  | 107   |  |   | 11,606                 | 
|Prattville      |  | AL    |  | Courtyard         |  | LBA          |  | 4/24/2007      |  | 84    |  |   | 9,304                  | 
|Dothan          |  | AL    |  | Fairfield Inn     |  | LBA          |  | 5/16/2007      |  | 63    |  |   | 4,584                  | 
|Trussville      |  | AL    |  | Courtyard         |  | LBA          |  | 10/4/2007      |  | 84    |  |   | 9,510                  | 
|Huntsville      |  | AL    |  | TownePlace Suites |  | LBA          |  | 12/10/2007     |  | 86    |  |   | 8,927                  | 
|Dothan          |  | AL    |  | Residence Inn     |  | LBA          |  | 4/16/2008      |  | 84    |  |   | 9,669                  | 
|Tucson          |  | AZ    |  | Residence Inn     |  | Western      |  | 1/17/2008      |  | 124   |  |   | 16,640                 | 
|San Diego       |  | CA    |  | Hilton Garden Inn |  | Inn Ventures |  | 5/9/2006       |  | 200   |  |   | 34,500                 | 
|Rancho Bernardo |  | CA    |  | Courtyard         |  | Dimension    |  | 12/12/2006     |  | 210   |  |   | 36,000                 | 
|Agoura Hills    |  | CA    |  | Homewood Suites   |  | Dimension    |  | 5/8/2007       |  | 125   |  |   | 25,250                 | 
|San Diego       |  | CA    |  | Residence Inn     |  | Dimension    |  | 6/13/2007      |  | 121   |  |   | 32,500                 | 
|San Diego       |  | CA    |  | Hampton Inn       |  | Dimension    |  | 7/19/2007      |  | 177   |  |   | 42,000                 | 

11

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|                |  |    |  |                   |  |              |  |            |  |       |  |   |         | 
|--------------- |  | -- |  | ----------------- |  | ------------ |  | ---------- |  | ----- |  | - | ------- | 
|Highlands Ranch |  | CO |  | Residence Inn     |  | Dimension    |  | 2/22/2007  |  | 117   |  |   | 19,000  | 
|Highlands Ranch |  | CO |  | Hilton Garden Inn |  | Dimension    |  | 3/9/2007   |  | 128   |  |   | 20,500  | 
|Sarasota        |  | FL |  | Homewood Suites   |  | Hilton       |  | 9/15/2006  |  | 100   |  |   | 13,800  | 
|Miami           |  | FL |  | Homewood Suites   |  | Dimension    |  | 2/21/2007  |  | 159   |  |   | 24,300  | 
|Tallahassee     |  | FL |  | Fairfield Inn     |  | LBA          |  | 4/24/2007  |  | 79    |  |   | 6,647   | 
|Lakeland        |  | FL |  | Courtyard         |  | LBA          |  | 4/24/2007  |  | 78    |  |   | 9,805   | 
|Miami           |  | FL |  | Courtyard         |  | Dimension    |  | 9/5/2008   |  | 118   |  |   | 15,000  | 
|Columbus        |  | GA |  | Fairfield Inn     |  | LBA          |  | 4/24/2007  |  | 79    |  |   | 7,333   | 
|Macon           |  | GA |  | Hilton Garden Inn |  | LBA          |  | 6/28/2007  |  | 101   |  |   | 10,660  | 
|Columbus        |  | GA |  | SpringHill Suites |  | LBA          |  | 3/6/2008   |  | 85    |  |   | 9,675   | 
|Columbus        |  | GA |  | TownePlace Suites |  | LBA          |  | 5/22/2008  |  | 86    |  |   | 8,428   | 
|Boise           |  | ID |  | SpringHill Suites |  | Inn Ventures |  | 9/14/2007  |  | 230   |  |   | 21,000  | 
|New Orleans     |  | LA |  | Homewood Suites   |  | Dimension    |  | 12/15/2006 |  | 166   |  |   | 43,000  | 
|Hattiesburg     |  | MS |  | Courtyard         |  | LBA          |  | 10/5/2006  |  | 84    |  |   | 9,455   | 
|Tupelo          |  | MS |  | Hampton Inn       |  | LBA          |  | 1/23/2007  |  | 96    |  |   | 5,245   | 
|Omaha           |  | NE |  | Courtyard         |  | Marriott     |  | 11/4/2006  |  | 181   |  |   | 23,100  | 
|Cranford        |  | NJ |  | Homewood Suites   |  | Dimension    |  | 3/7/2007   |  | 108   |  |   | 13,500  | 
|Mahwah          |  | NJ |  | Homewood Suites   |  | Dimension    |  | 3/7/2007   |  | 110   |  |   | 19,500  | 
|Ronkonkoma      |  | NY |  | Hilton Garden Inn |  | White        |  | 12/15/2006 |  | 164   |  |   | 27,000  | 
|Cincinnati      |  | OH |  | Homewood Suites   |  | White        |  | 12/1/2006  |  | 76    |  |   | 7,100   | 
|Memphis         |  | TN |  | Homewood Suites   |  | Hilton       |  | 5/15/2007  |  | 140   |  |   | 11,100  | 
|Houston         |  | TX |  | Residence Inn     |  | Western      |  | 4/27/2006  |  | 129   |  |   | 13,600  | 
|Brownsville     |  | TX |  | Courtyard         |  | Western      |  | 6/19/2006  |  | 90    |  |   | 8,550   | 
|Stafford        |  | TX |  | Homewood Suites   |  | Western      |  | 8/15/2006  |  | 78    |  |   | 7,800   | 
|San Antonio     |  | TX |  | TownePlace Suites |  | Western      |  | 6/29/2007  |  | 106   |  |   | 11,925  | 
|Addison         |  | TX |  | SpringHill Suites |  | Marriott     |  | 8/10/2007  |  | 159   |  |   | 12,500  | 
|San Antonio     |  | TX |  | TownePlace Suites |  | Western      |  | 9/27/2007  |  | 123   |  |   | 13,838  | 
|El Paso         |  | TX |  | Homewood Suites   |  | Western      |  | 4/23/2008  |  | 114   |  |   | 15,390  | 
|Provo           |  | UT |  | Residence Inn     |  | Dimension    |  | 6/13/2007  |  | 114   |  |   | 11,250  | 
|Alexandria      |  | VA |  | Courtyard         |  | Marriott     |  | 7/13/2007  |  | 178   |  |   | 36,997  | 
|Richmond        |  | VA |  | Marriott          |  | White        |  | 1/25/2008  |  | 410   |  |   | 53,300  | 
|Seattle         |  | WA |  | Residence Inn     |  | Inn Ventures |  | 9/1/2006   |  | 234   |  |   | 56,173  | 
|Vancouver       |  | WA |  | SpringHill Suites |  | Inn Ventures |  | 6/1/2007   |  | 119   |  |   | 15,988  | 
|Kirkland        |  | WA |  | Courtyard         |  | Inn Ventures |  | 10/23/2007 |  | 150   |  |   | 31,000  | 
|                |  |    |  |                   |  |              |  |            |  |       |  |   |         | 
|                |  |    |  |                   |  |              |  | Total      |  | 6,426 |  | $ | 901,594 | 
|                |  |    |  |                   |  |              |  |            |  |       |  |   |         | 

With
the exception of assumed mortgage loans on certain hotel properties,
substantially all of the purchase price of the hotels was funded by proceeds
from the Companys best-efforts offering of Units, completed in July 2007. The Company
also used the proceeds of its offering to pay 2% of the gross purchase price
for these hotels, which was approximately $18.0 million, as a brokerage
commission to Apple Suites Realty Group, Inc. (ASRG), wholly-owned by Glade
M. Knight, the Companys Chairman and Chief Executive Officer. The Company
leased all of its hotels to wholly-owned taxable REIT subsidiaries under master
hotel lease agreements. No hotels have been purchased since September 2008, and
there are no outstanding purchase contracts for additional hotels as of
September 30, 2010.

Results of Operations

As
of September 30, 2010, the Company owned 51 hotels with 6,426 rooms. The
Companys portfolio of hotels owned is unchanged since 2008. Hotel performance
is impacted by many factors including economic conditions in the United States,
as well as each locality. During the past two years, the overall weakness in
the

12

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U.S. economy has had a considerable negative impact on both consumer and
business travel. As a result, revenue in most markets in the United States has
declined from 2007 and 2008 levels. Although economic conditions appear to be
stabilizing and showing evidence of improvement, the Company expects revenue
for the industry as a whole to continue to be below pre-recession levels through the remainder
of 2010 and into 2011. 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 three months ended September 30, 2010 and 2009, the Company
had total revenue of $52.8 and $49.4 million, respectively, with average
occupancy of 76% and 70%, ADR of $108 and $109, and RevPAR of $82 and $77 for
each period. For the nine months ended September 30, 2010 and 2009, the Company
had total revenue of $153.3 and $147.6 million, respectively, with average
occupancy of 73% and 68%, ADR of $109 and $112, and RevPAR of $79 and $77 for
each period. ADR is calculated as room revenue divided by the number of rooms
sold, and RevPAR is calculated as occupancy multiplied by ADR. Since the
beginning of 2010 the Company has experienced an increase in demand 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. As reflected in the modest decline in ADR (-1%) during the third
quarter of 2010 as compared to the third quarter of 2009, the Company believes
room rate has stabilized and should begin to improve slightly in the coming
months. 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 levels of
economic activity, the Companys hotels continue to be leaders in their
respective markets. The Companys average Market Yield for the first nine
months of 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).

Expenses

For
the three month periods ended September 30, 2010 and 2009, hotel direct
expenses totaled $30.5 and $29.1 million, or 58% and 59% of total revenue,
respectively. For the nine month periods ended September 30, 2010 and 2009,
hotel direct expenses totaled $87.9 and $86.5 million or 57% and 59% of total
revenue for each respective period. Hotel direct expenses consist of operating
expense, hotel administrative expense, sales and marketing expense, utilities
expense, repair and maintenance expense, franchise fees and management fees.

Results
for the three and nine months periods ended September 30, 2010 reflect the
impact of a continuing recessionary climate at most of the Companys hotels,
and the Companys efforts to control costs in such an economic environment.
However, certain operating costs such as management costs, certain utility
costs and minimum supply and maintenance costs are relatively fixed in nature,
and cannot be curtailed or eliminated. The Company has been successful in
reducing relative to revenue increases 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 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 expense for the three months ended September 30, 2010 and
2009 were $2.6 and $3.2 million, or 5% and 6% of total revenue for the
applicable periods. For the nine months ended September 30, 2010 and 2009,
taxes, insurance, and other expense totaled $9.2 and $10.5 million, or 6% and
7% of total revenue for the applicable periods. Decreases in these expenses for
the comparable three and nine month periods ending September 30, 2010 and 2009
reflect lower real estate property tax assessments at selected hotels,
including the results of successful appeals of initial assessments for some
locations. In addition, the Company has experienced slightly lower property
insurance expense for most hotel properties, in comparison to insurance rates
in effect during 2009.

General
and administrative expense for the three months ended September 30, 2010 and
2009 were approximately $1.2 and $1.0 million. For the nine months ended
September 30, 2010 and 2009, general and

13

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administrative
expenses were $3.8 and $3.4 million. 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.

Depreciation
expense for the three months ended September 30, 2010 and 2009 was $8.3 million
and $8.2 million. For the nine months ended September 30, 2010 and 2009,
depreciation expense totaled $24.9 million and $24.1 million. These amounts
represent depreciation expense of the Companys hotel buildings and related
improvements, and associated furniture, fixtures and equipment, for the
respective periods owned.

Interest
expense during the three months ended September 30, 2010 and 2009 totaled $1.9
and $1.7 million, respectively, and $5.6 and $4.6 million for the nine months
ended September 30, 2010 and 2009. Interest expense primarily represents
interest incurred on mortgage loans assumed on acquired hotels, interest on the
Companys line of credit (originated in April 2009), and interest on an
unsecured term loan (originated in July 2010). As of September 30, 2010,
mortgage loans were outstanding on ten of the Companys hotel properties,
totaling $103.9 million, the outstanding balance of the line of credit was
$24.6 million, and the Companys unsecured term loan balance was $9.0 million.
Interest expense for the nine month period ended September 30, 2009 is net of
capitalized interest of approximately $0.4 million, associated with hotel
renovations. No capitalized interest was recorded during the nine month period
ended September 30, 2010.

Liquidity and Capital Resources

The
Companys operating cash flow from the hotel properties owned and borrowings
under its $30 line of credit facility are the Companys principal sources of
liquidity. With the availability of this line of credit, the Company generally
maintains little cash on hand, accessing the line as necessary. As a result,
cash on hand was $0 at December 31, 2009, and $296 thousand at September 30,
2010. The outstanding balance on the line of credit was approximately $24.6
million at September 30, 2010 and its interest rate was 3.15%. The Company
anticipates that cash flow from operations and the line of credit facility will
be adequate to meet its liquidity requirements, including required
distributions to shareholders (the Company is not required to make any
distributions at this time), capital expenditures and debt service. As
discussed further in Subsequent Events below, the Company has obtained additional
financing so that it can make distributions in excess of required amounts to
maintain its REIT status. The Company intends to maintain a relatively stable
distribution rate instead of raising and lowering the distribution rate with
varying economic cycles. With the depressed financial results of the Company
and the lodging industry as compared to pre-recession levels, the Company will
utilize 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 distributions to required levels.
If the Company was unsuccessful in the extension of debt maturing in 2011, 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. Distributions in the first nine months of 2010 totaled
$53.6 million and were paid monthly at a rate of $0.064167 per common share.
For the same nine month period, the Companys cash generated from operations
was approximately $45.0 million. This shortfall includes a return of capital and
was funded primarily by increases in the Companys unsecured borrowings,
including the Companys line of credit facility. The Company intends to
continue paying distributions on a monthly basis. However, since there can be
no assurance of the ability of the Companys properties to provide income at
this level, there can be no assurance as to the classification or duration of
distributions at the current monthly rate. In consideration of the weakness in
economic conditions throughout the United States, the Board of Directors
monitors the Companys distribution rate relative to the performance of the
hotels on an ongoing basis and may make adjustments to the distribution rate as
determined to be prudent in relation to other cash requirements of the Company.
In April 2009, the Board of Directors approved a reduction in the Companys
annual distribution rate from $0.88 to $0.77 per common share. The reduction of
the distribution was effective beginning with the May 15, 2009 distribution.

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,

14

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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. As of September 30, 2010, the Company held $6.6 million in
restricted cash accounts for capital improvement purposes as required by
certain loan or hotel management agreements. The Company substantially
completed significant renovations to one hotel property during the first nine
months of 2010. Two major renovation projects are planned for late 2010 into
early 2011. With the depressed economic environment, the Company will only
complete the most cost effective renovation projects. Total capital
expenditures incurred in the first nine months of 2010 were approximately $1.4
million; the Company expects total 2010 capital improvements to be
approximately $3 million.

In
2007, the Company instituted a Unit Redemption Program to provide limited
interim liquidity to its shareholders who have held their Units for at least
one year. Through September 30, 2010, shareholders could request redemption of
Units for a purchase price equal to the lesser of: (1) the purchase price per
Unit that the shareholder actually paid for the Unit, or (2) $11.00 per unit.
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. During the nine months ended September
30, 2010, the Company redeemed approximately 2.7 million Units in the amount of
$29.0 million under the program. Since the inception of the program through
September 30, 2010, the Company has redeemed approximately 5.9 million Units in
the amount of $62.7 million. The maximum number of Units that may be redeemed
during any twelve month period is five percent of the weighted average number of
Units outstanding during the twelve month period prior to redemption.

In
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 distributions to purchase additional
Units of the Company. The uses of the 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.
During the nine months ended September 30, 2010, approximately 1.7 million
Units, representing $18.5 million in proceeds to the Company, were issued under
the plan. During the nine months ended September 30, 2009, approximately 1.8
million Units, representing $19.7 million in proceeds to the Company, were
issued under the plan. Since the inception of the plan through September 30,
2010, approximately 7.3 million Units, representing approximately $80.4 million
in proceeds to the Company, have been issued.

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 at arms
length, and the results of the Companys operations may be different than if
conducted with non-related parties.

The
Company is party to an advisory agreement with Apple Seven Advisors, Inc. (ASA),
pursuant to which ASA provides management services to the Company. An annual
fee ranging from .1% to .25% of total equity proceeds received by the Company,
in addition to certain reimbursable expenses, are payable for these services.
During each of the nine month periods ended September 30, 2010 and 2009, the
Company incurred approximately $0.8 million in fees related to the advisory
agreement with ASA. These fees are recorded in general and administrative
expense in the Companys Consolidated Statements of Operations.

Through
a contractual arrangement with Apple REIT Six, Inc., ASA provides the Company
with support services. The Company reimburses ASA for the cost of the services
provided by Apple REIT Six, Inc. ASA in turn reimburses Apple REIT Six, Inc.
During the nine month periods ended September 30, 2010 and 2009, the Company
incurred approximately $1.5 million and $1.4 million in costs paid to ASA that
were reimbursed to Apple REIT Six, Inc. These costs are recorded in general and
administrative expense in the Companys Consolidated Statements of Operations.

15

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ASA
is 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the
Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple
REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT
Ten, Inc. (a newly formed REIT). 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.

Subsequent Events

On
October 15, 2010, the Company paid $0.064167 per common share, totaling $5.9
million, in a distribution to its common shareholders. Under the Companys
Dividend Reinvestment Plan, $2.1 million were reinvested, resulting in the
issuance of 186,453 Units.

In
October 2010, the Company redeemed 1,065,949 Units for approximately $11.7
million under its Unit Redemption Program.

On
October 18, 2010, the Company entered into a new 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 either a) LIBOR plus
3.5%, subject to a minimum LIBOR interest rate floor of 1.5%, or b) the banks
commercial prime rate plus 3.5%. Payments of interest 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.
The credit facility contains representations, financial and other covenants
typical for this type of commercial 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.

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 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. The Company may utilize short-term borrowings in certain periods in
order to offset these fluctuations in revenues and to make distributions to
shareholders.

Recent Accounting
Pronouncements

In
June 2009, the Financial Accounting Standards Board (FASB) 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

16

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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.

17

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Item 3.  Quantitative and Qualitative Disclosures About
Market Risk

The
Company does not engage in transactions in derivative financial instruments or
derivative commodity instruments. As of September 30, 2010, the Companys
financial instruments were not exposed to significant market risk due to
interest rate risk, 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 under its variable rate line of credit facility and variable rate term
loan agreement. The Company had an outstanding balance of approximately $24.6
million on its $30 million line of credit at September 30, 2010, and had
borrowed $9.0 million at September 30, 2010 under a variable rate term loan
agreement. To the extent the Company utilizes the line of credit and term loan
funding sources, the Company will be exposed to changes in short term interest
rates. Based on the outstanding balances at September 30, 2010 under the two
variable rate credit agreements, every 100 basis point change in interest rates
can potentially impact the Companys annual net income by $336 thousand,
subject to the conditions of the interest rate floor provisions of the line of
credit facility, and with all other factors remaining the same. With the
availability of the line of credit facility, the Company generally maintains
little cash on hand; the Companys cash balance at September 30, 2010 was
approximately $0.3 million.

Item 4.  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.

18

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|         |                  
|-------- | -----------------
|PART II. | OTHER INFORMATION

|                                                                     | 
|-------------------------------------------------------------------- | 
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Unit Redemption Program

The
Company has instituted a Unit Redemption Program to provide its shareholders
who have held their Units for at least one year with the benefit of limited
interim liquidity, by presenting for redemption all or any portion of their
Units. As of September 30, 2010, shareholders could request redemption
of Units for a purchase price equal to the lesser of: (1) the purchase price
per Unit that the shareholder actually paid for the Unit, or (2) $11.00 per
unit. The board of directors
reserves the right, in its sole discretion, at any time and from time to time,
to reject any request for redemption, change the purchase price for redemptions
or otherwise amend the terms of, suspend, or terminate the Unit Redemption
Program. The following is a summary of redemptions during the third quarter of
2010 (no redemptions occurred in August and September 2010):

|                                       |  |                                     |  |                                |  |                                                                                        |  |                                                                                      
|-------------------------------------- |  | ----------------------------------- |  | ------------------------------ |  | -------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------
|Issuer
 Purchases of Equity Securities
|                                       |  |                                     |  |                                |  |                                                                                        |  |                                                                                      
|                                       |  | (a)                                 |  | (b)                            |  | (c)                                                                                    |  | (d)                                                                                  
|Period                                 |  | Total
 Number 
 of Units
 Purchased |  | Average
 Price Paid 
 per Unit |  | Total
 Number of 
 Units Purchased as
 Part of Publicly
 Announced Plans 
 or Programs |  | Maximum
 Number 
 of Units that May 
 Yet Be Purchased
 Under the Plans 
 or Programs
|                                       |  |                                     |  |                                |  |                                                                                        |  |                                                                                      
|July
 2010                             |  | 989,610                             |  | $10.97                         |  | 5,896,450                                                                              |  | (1)                                                                                  

(1) The maximum number of Units that may be
redeemed in any 12 month period is limited to five percent (5.0%) of the
weighted average number of Units outstanding from the beginning of the 12 month
period.

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|                  | 
|----------------- | 
|Item 6.  Exhibits

|Exhibit 
 Number |  | Description                                                                                                                                                                                                                                  
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 |  |                                                                                                                                                                                                                                              
|                 |  |                                                                                                                                                                                                                                              
|3.1              |  | Amended and
 Restated Articles of Incorporation of the Registrant. (Incorporated by
 reference to Exhibit 3.3 to 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).                                                           
|                 |  |                                                                                                                                                                                                                                              
|31.1             |  | Certification
 of the Companys Chief Executive Officer pursuant to Section 302 of the
 Sarbanes-Oxley Act of 2002 (FILED
 HEREWITH).                                                                                                        
|                 |  |                                                                                                                                                                                                                                              
|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).                             

20

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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: November 5, 2010
|                       |                                                         |  |                       
|                       | Glade M.
 Knight,                                       |  |                       
|                       | Chairman of
 the Board and                              |  |                       
|                       | Chief
 Executive Officer                                |  |                       
|                       | (Principal
 Executive Officer)                          |  |                       
|                       |                                                         |  |                       
|By:                    | /s/
 BRYAN PEERY                                        |  | Date: November 5, 2010
|                       |                                                         |  |                       
|                       | Bryan
 Peery,                                           |  |                       
|                       | Chief
 Financial Officer                                |  |                       
|                       | (Principal
 Financial and Principal Accounting Officer) |  |                       

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