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

FORM 10-Q

(Mark
One)

xQUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|                                |               | 
|------------------------------- | ------------- | 
|For the quarterly period
 ended | June 30, 2010 | 
|                                |               | 
|or                             

oTRANSITION 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 smaller |                               
|                             |                        | reporting
 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 August 1, 2010 there were 92,162,954 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 - June 30, 2010 and December 31, 2009                                  |  | 3           
|                               |          |                                                                                                     |  |             
|                               |          | Consolidated
 Statements of Operations  For the three and six months ended June 30, 2010
 and 2009 |  | 4           
|                               |          |                                                                                                     |  |             
|                               |          | Consolidated
 Statements of Cash Flows  For the six months ended June 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                                         |  | 17          
|                               |          |                                                                                                     |  |             
|                               | Item
 4. | Controls
 and Procedures                                                                            |  | 17          
|                               |          |                                                                                                     |  |             
|PART II. OTHER
 INFORMATION    |          |                                                                                                    
|                               |          |                                                                                                     |  |             
|                               | Item 1.  | Legal Proceedings (not
 applicable)                                                                 |  |             
|                               |          |                                                                                                     |  |             
|                               | Item 1A. | Risk Factors (not
 applicable)                                                                      |  |             
|                               |          |                                                                                                     |  |             
|                               | Item
 2. | Unregistered
 Sales of Equity Securities and Use of Proceeds                                        |  | 18          
|                               |          |                                                                                                     |  |             
|                               | Item 3.  | Defaults Upon Senior
 Securities (not applicable)                                                   |  |             
|                               |          |                                                                                                     |  |             
|                               | Item 4.  | (Removed and Reserved)                                                                              |  |             
|                               |          |                                                                                                     |  |             
|                               | Item 5.  | Other Information (not
 applicable)                                                                 |  |             
|                               |          |                                                                                                     |  |             
|                               | Item
 6. | Exhibits                                                                                            |  | 19          
|                               |          |                                                                                                     |  |             
|Signatures                     |          | 20                                                                                                 

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)

|                                                                                                                                               |  |                |          |                    |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | ------------------ | - | -------- | -
|                                                                                                                                               |  | June 30,
 2010 |          | December 31,
 2009 |  
|                                                                                                                                               |  |                |          |                    |  
|ASSETS                                                                                                                                         |  |                |          |                    |   |          |  
|Investment in real estate, net of accumulated depreciation of $97,475
 and $80,923, respectively                                               |  | $              | 886,602  |                    | $ | 902,293  |  
|Restricted cash-furniture, fixtures and other escrows                                                                                          |  |                | 7,208    |                    |   | 9,582    |  
|Due from third party managers                                                                                                                  |  |                | 10,302   |                    |   | 5,639    |  
|Other assets, net                                                                                                                              |  |                | 6,430    |                    |   | 6,373    |  
|                                                                                                                                               |  |                |          |                    |   |          |  
|                                                                                                                                               |  |                |          |                    |   |          |  
|TOTAL ASSETS                                                                                                                                   |  | $              | 910,542  |                    | $ | 923,887  |  
|                                                                                                                                               |  |                |          |                    |   |          |  
|                                                                                                                                               |  |                |          |                    |   |          |  
|LIABILITIES                                                                                                                                    |  |                |          |                    |   |          |  
|Notes payable                                                                                                                                  |  | $              | 133,216  |                    | $ | 117,787  |  
|Accounts payable and accrued expenses                                                                                                          |  |                | 13,022   |                    |   | 13,843   |  
|                                                                                                                                               |  |                |          |                    |   |          |  
|                                                                                                                                               |  |                |          |                    |   |          |  
|TOTAL LIABILITIES                                                                                                                              |  |                | 146,238  |                    |   | 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 92,967,049 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 92,967,049 and 93,521,656 shares, respectively              |  |                | 920,764  |                    |   | 926,419  |  
|Distributions greater than net income                                                                                                          |  |                | (156,484 | )                  |   | (134,186 | )
|                                                                                                                                               |  |                |          |                    |   |          |  
|                                                                                                                                               |  |                |          |                    |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                     |  |                | 764,304  |                    |   | 792,257  |  
|                                                                                                                                               |  |                |          |                    |   |          |  
|                                                                                                                                               |  |                |          |                    |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                     |  | $              | 910,542  |                    | $ | 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
 June 30, 2010 |        | Three months
 ended
 June 30, 2009 |   | Six months
 ended
 June 30, 2010 |  | Six months
 ended
 June 30, 2009 |        
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |        
|                                                              
|Revenues:                                                      |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Room revenue                                                   |  | $                                  | 47,441 |                                    | $ | 46,197                           |  | $                                | 90,989  |  | $ | 89,571 | 
|Other revenue                                                  |  |                                    | 4,822  |                                    |   | 4,386                            |  |                                  | 9,510   |  |   | 8,570  | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Total revenue                                                  |  |                                    | 52,263 |                                    |   | 50,583                           |  |                                  | 100,499 |  |   | 98,141 | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Expenses:                                                      |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Operating expense                                              |  |                                    | 13,355 |                                    |   | 13,065                           |  |                                  | 26,122  |  |   | 25,683 | 
|Hotel administrative expense                                   |  |                                    | 3,798  |                                    |   | 4,095                            |  |                                  | 7,553   |  |   | 8,015  | 
|Sales and marketing                                            |  |                                    | 3,968  |                                    |   | 3,918                            |  |                                  | 7,589   |  |   | 7,745  | 
|Utilities                                                      |  |                                    | 2,017  |                                    |   | 2,038                            |  |                                  | 4,155   |  |   | 4,280  | 
|Repair and maintenance                                         |  |                                    | 2,312  |                                    |   | 2,256                            |  |                                  | 4,517   |  |   | 4,476  | 
|Franchise fees                                                 |  |                                    | 2,116  |                                    |   | 2,027                            |  |                                  | 4,098   |  |   | 3,973  | 
|Management fees                                                |  |                                    | 1,848  |                                    |   | 1,693                            |  |                                  | 3,393   |  |   | 3,226  | 
|Taxes, insurance and other                                     |  |                                    | 3,306  |                                    |   | 3,791                            |  |                                  | 6,630   |  |   | 7,382  | 
|General and administrative                                     |  |                                    | 1,488  |                                    |   | 1,169                            |  |                                  | 2,694   |  |   | 2,339  | 
|Depreciation expense                                           |  |                                    | 8,277  |                                    |   | 8,056                            |  |                                  | 16,552  |  |   | 15,935 | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Total expenses                                                 |  |                                    | 42,485 |                                    |   | 42,108                           |  |                                  | 83,303  |  |   | 83,054 | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Operating income                                               |  |                                    | 9,778  |                                    |   | 8,475                            |  |                                  | 17,196  |  |   | 15,087 | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Interest expense, net                                          |  |                                    | 1,868  |                                    |   | 1,586                            |  |                                  | 3,672   |  |   | 2,868  | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Net income                                                     |  | $                                  | 7,910  |                                    | $ | 6,889                            |  | $                                | 13,524  |  | $ | 12,219 | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Basic and diluted net income per common share                  |  | $                                  | 0.09   |                                    | $ | 0.07                             |  | $                                | 0.15    |  | $ | 0.13   | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Weighted average common shares outstanding - basic and diluted |  |                                    | 92,882 |                                    |   | 93,532                           |  |                                  | 93,039  |  |   | 93,507 | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 
|Distributions declared and paid per common share               |  | $                                  | 0.19   |                                    | $ | 0.20                             |  | $                                | 0.39    |  | $ | 0.42   | 
|                                                               |  |                                    |        |                                    |   |                                  |  |                                  |         |  |   |        | 

See notes to consolidated financial statements.

4

---



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

|                                                                                                   |  |                                  |         |                                  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | -------------------------------- | - | ------- | -
|                                                                                                   |  | Six months
 ended
 June 30, 2010 |         | Six months
 ended
 June 30, 2009 |  
|                                                                                                   |  |                                  |         |                                  |  
|Cash flow from operating activities:                                                               |  |                                  |         |                                  |   |         |  
|Net income                                                                                         |  | $                                | 13,524  |                                  | $ | 12,219  |  
|Adjustments to reconcile net income to cash provided by operating
 activities:                     |  |                                  |         |                                  |   |         |  
|Depreciation of real estate owned                                                                  |  |                                  | 16,552  |                                  |   | 15,935  |  
|Amortization of deferred financing costs, fair value adjustments and
 other non-cash expenses, net |  |                                  | 51      |                                  |   | (194    | )
|Changes in operating assets and liabilities:                                                       |  |                                  |         |                                  |   |         |  
|Increase in funds due from third party managers                                                    |  |                                  | (4,663  | )                                |   | (2,957  | )
|Increase in other assets                                                                           |  |                                  | (322    | )                                |   | (93     | )
|Increase in accounts payable and accrued expenses                                                  |  |                                  | 176     |                                  |   | 34      |  
|                                                                                                   |  |                                  |         |                                  |   |         |  
|Net
 cash provided by operating activities                                                         |  |                                  | 25,318  |                                  |   | 24,944  |  
|                                                                                                   |  |                                  |         |                                  |   |         |  
|Cash flow from investing activities:                                                               |  |                                  |         |                                  |   |         |  
|Capital improvements                                                                               |  |                                  | (1,858  | )                                |   | (9,438  | )
|Net decrease in cash restricted for property improvements                                          |  |                                  | 2,300   |                                  |   | 832     |  
|Redemption of ownership interest in non-hotel assets                                               |  |                                  |        |                                  |   | 3,240   |  
|                                                                                                   |  |                                  |         |                                  |   |         |  
|Net
 cash provided by (used in) investing activities                                               |  |                                  | 442     |                                  |   | (5,366  | )
|                                                                                                   |  |                                  |         |                                  |   |         |  
|Cash flow from financing activities:                                                               |  |                                  |         |                                  |   |         |  
|Payment of mortgage notes payable                                                                  |  |                                  | (1,268  | )                                |   | (1,188  | )
|Net proceeds from line of credit                                                                   |  |                                  | 16,995  |                                  |   |        |  
|Payment of financing costs related to borrowings                                                   |  |                                  | (10     | )                                |   | (43     | )
|Redemptions of Units                                                                               |  |                                  | (18,119 | )                                |   | (11,107 | )
|Net proceeds from issuance of Units                                                                |  |                                  | 12,464  |                                  |   | 13,641  |  
|Cash distributions paid to common shareholders                                                     |  |                                  | (35,822 | )                                |   | (39,413 | )
|                                                                                                   |  |                                  |         |                                  |   |         |  
|Net
 cash used in financing activities                                                             |  |                                  | (25,760 | )                                |   | (38,110 | )
|                                                                                                   |  |                                  |         |                                  |   |         |  
|                                                                                                   |  |                                  |         |                                  |   |         |  
|Decrease
 in cash and cash equivalents                                                             |  |                                  |        |                                  |   | (18,532 | )
|                                                                                                   |  |                                  |         |                                  |   |         |  
|Cash and cash equivalents, beginning of period                                                     |  |                                  |        |                                  |   | 20,609  |  
|                                                                                                   |  |                                  |         |                                  |   |         |  
|Cash and cash equivalents, end of period                                                           |  | $                                |        |                                  | $ | 2,077   |  
|                                                                                                   |  |                                  |         |                                  |   |         |  

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 six month periods ended June 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 six months ended June 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 $2.6 million at June 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 six
months ending June 30, 2010 and 2009, the Company recorded a loss of
approximately $231 thousand and $221 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 six month periods ended June 30, 2010 and 2009,
the Company incurred approximately $507 thousand and $509 thousand 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 each of the six month periods ended June 30, 2010 and 2009, the Company
incurred approximately $1.0 million and $0.9 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. and Apple REIT Nine, Inc. Members of the
Companys Board of Directors are also on the boards of Apple REIT Six, Inc.,
Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

7

---



Note 4

Line of Credit Facility

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 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
0.35% at June 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 June 30, 2010 was approximately $28.5 million, at an
annual interest rate of 3.15%. The balance outstanding at December 31, 2009 was
$11.5 million. Interest expense incurred for borrowings under the line of
credit facility during the six month period ending June 30, 2010 was
approximately $403 thousand.

Note 5

Shareholders Equity

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. Shareholders may 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 six months ended June 30, 2010, the Company redeemed
approximately 1.7 million Units in the amount of $18.1 million under the
program. Since the inception of the program through June 30, 2010, the Company
has redeemed approximately 4.9 million Units in the amount of $51.8 million.
The Company has increased the maximum number of Units that may be redeemed to
five percent (from three percent) of the weighted average number of Units
outstanding during the year.

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 dividends 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
six months ended June 30, 2010, approximately 1.1 million Units, representing
$12.3 million in proceeds to the Company, were issued under the plan. During
the six months ended June 30, 2009, approximately 1.2 million Units,
representing $13.5 million in proceeds to the Company, were issued under the
plan. Since the inception of the plan through June 30, 2010, approximately 6.7
million Units, representing approximately $74.2 million in proceeds to the
Company, have been issued.

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
June 30, 2010, the carrying value and estimated fair value of the Companys
debt was $133.2 million and $131.0 million, respectively. As of December 31,
2009, the carrying value and estimated fair value of the Companys debt was
$117.8 million and

8

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$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
July 15, 2010, the Company paid $0.064167 per common share, totaling $6.0
million, in a dividend distribution to its common shareholders. Under the
Companys Dividend Reinvestment Plan, $2.0 million were reinvested, resulting
in the issuance of 185,515 Units.

In
July 2010, the Company redeemed 989,610 Units for approximately $10.9 million
under its Unit Redemption Program.

In
July 2010, the Company entered into a 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
percentage points. The loan has a maturity date of December 31, 2010, and can
be repaid before maturity with no penalty. Proceeds of the loan will be used by
the Company for general working capital purposes, including payment of
redemptions and distributions.

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 June 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, overall performance of the Companys
hotels have not met expectations. Although there is no way to predict future
general economic conditions, many industry analysts believe that hotel industry
revenues are improving and will see low single digit increases in 2010 as
compared to 2009.

In
evaluating financial condition and operating performance, the most important matters
on which the Company focuses are revenue measurements, such as average
occupancy, average daily rate (ADR), revenue per available room (RevPAR)
and market yield which compares an individual hotels results to 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 June 30, |        | Six months ended June 30, |    
|                                   |  |                             |        |                           |    
|                                   |  | 2010                        |        | % of
 Revenue             |     | 2009 |   | % of
 Revenue |   | Percent
 change |   | 2010 |   | % of
 Revenue |         | 2009 |     | % of
 Revenue |   | Percent
 change |  
|                                   |  |                             |        |                           |     |      |   |               |   |                 |   |      |   |               |         |      |     |               |   |                 |   |     |   |     |  
|Total revenues                     |  | $                           | 52,263 |                           | 100 | %    | $ | 50,583        |   | 100             | % | 3    | % | $             | 100,499 |      | 100 | %             | $ | 98,141          |   | 100 | % | 2   | %
|Hotel operating expenses           |  |                             | 29,414 |                           | 56  | %    |   | 29,092        |   | 58              | % | 1    | % |               | 57,427  |      | 57  | %             |   | 57,398          |   | 58  | % | 0   | %
|Taxes, insurance and other expense |  |                             | 3,306  |                           | 6   | %    |   | 3,791         |   | 7               | % | -13  | % |               | 6,630   |      | 7   | %             |   | 7,382           |   | 8   | % | -10 | %
|General and administrative expense |  |                             | 1,488  |                           | 3   | %    |   | 1,169         |   | 2               | % | 27   | % |               | 2,694   |      | 3   | %             |   | 2,339           |   | 2   | % | 15  | %
|Depreciation                       |  |                             | 8,277  |                           |     |      |   | 8,056         |   |                 |   | 3    | % |               | 16,552  |      |     |               |   | 15,935          |   |     |   | 4   | %
|Interest expense, net              |  |                             | 1,868  |                           |     |      |   | 1,586         |   |                 |   | 18   | % |               | 3,672   |      |     |               |   | 2,868           |   |     |   | 28  | %
|                                   |  |                             |        |                           |     |      |   |               |   |                 |   |      |   |               |         |      |     |               |   |                 |   |     |   |     |  
|Average Market Yield (1)           |  |                             | 125    |                           |     |      |   | 122           |   |                 |   | 2    | % |               | 124     |      |     |               |   | 123             |   |     |   | 1   | %
|Number of hotels                   |  |                             | 51     |                           |     |      |   | 51            |   |                 |   |     |   |               | 51      |      |     |               |   | 51              |   |     |   |    |  
|Average Daily Rate (ADR)           |  | $                           | 109    |                           |     |      | $ | 113           |   |                 |   | -4   | % | $             | 110     |      |     |               | $ | 114             |   |     |   | -4  | %
|Occupancy                          |  |                             | 74     | %                         |     |      |   | 70            | % |                 |   | 6    | % |               | 71      | %    |     |               |   | 67              | % |     |   | 6   | %
|RevPAR                             |  | $                           | 81     |                           |     |      | $ | 79            |   |                 |   | 3    | % | $             | 78      |      |     |               | $ | 77              |   |     |   | 1   | %

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

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 June
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 | 
|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  | 

11

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|            |  |    |  |                   |  |              |  |            |  |       |  |   |         | 
|----------- |  | -- |  | ----------------- |  | ------------ |  | ---------- |  | ----- |  | - | ------- | 
|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 June
30, 2010.

Results of Operations

As
of June 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
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. Although economic conditions appear to be stabilizing and improving
slightly, the Company expects revenue for the industry as a whole to continue
to be below pre-recession levels until general economic conditions improve. The
Companys hotels in general have shown results consistent with industry and
brand averages for the period of ownership.

12

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Revenues

The
Companys principal source of revenue is hotel room revenue and other related
revenue. For the three months ended June 30, 2010 and 2009, the Company had
total revenue of $52.3 and $50.6 million, respectively, with average occupancy of
74% and 70%, ADR of $109 and $113, and RevPAR of $81 and $79 for each period.
For the six months ended June 30, 2010 and 2009, the Company had total revenue
of $100.5 and $98.1 million, respectively, with average occupancy of 71% and
67%, ADR of $110 and $114, and RevPAR of $78 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.
While reflecting the impact of declining economic activity, the Companys
hotels continue to be leaders in their respective markets. The Companys
average Market Yield for the first six months of 2010 and 2009 was 124 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 June 30, 2010 and 2009, hotel direct expenses
totaled $29.4 and $29.1 million, or 56% and 58% of total revenue, respectively.
Hotel direct expenses totaled $57.4 million in each of the six month periods
ended June 30, 2010 and 2009, or 57% and 58% 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 six months periods ended June 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 certain
labor costs, food and supply costs and utility costs by continually monitoring
and sharing utilization data across its hotels and management companies. With
the weakened economic conditions, the Company has and will continue to work
with its management companies to reduce costs as aggressively as possible while
maintaining quality and service levels at each property, however it is not
anticipated these reductions will offset revenue declines from pre-recessionary
periods of operation.

Taxes,
insurance, and other expense for the three months ended June 30, 2010 and 2009
were $3.3 and $3.8 million, or 6% and 7% of total revenue for the applicable
period. For the six months ended June 30, 2010 and 2009, taxes, insurance, and
other expense totaled $6.6 and $7.4 million, or 7% and 8% of total revenue for
the applicable period. Decreases in these expenses for the comparable three and
six month periods ending June 20, 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 June 30, 2010 and 2009
were approximately $1.5 and $1.2 million. For the six months ended June 30,
2010 and 2009, general and administrative expenses were $2.7 and $2.3 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 June 30, 2010 and 2009 was $8.3 million and
$8.1 million. For the six months ended June 30, 2010 and 2009, depreciation
expense totaled $16.6 million and $15.9 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 June 30, 2010 and 2009 totaled $1.9 and
$1.6 million, respectively, and $3.7 and $2.9 million for the six months ended
June 30, 2010 and 2009. Interest expense

13

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primarily
represents interest incurred on mortgage loans assumed on acquired hotels and
interest on the Companys line of credit (originated in April 2009). As of June
30, 2010, mortgage loans were outstanding on ten of the Companys hotel
properties, totaling $104.7 million, and the outstanding balance of the line of
credit was $28.5 million. Interest expense for the six month period ended June
30, 2009 is net of capitalized interest of approximately $0.4 million,
associated with hotel renovations. No capitalized interest was recorded during
the six month period ended June 30, 2010.

Liquidity and Capital Resources

The
Companys operating cash flow from the hotel properties owned and borrowings
under its line of credit facility are the Companys principal sources of
liquidity. To minimize its outstanding balance on its line of credit, the
Company maintains minimal cash balances. The Company anticipates that cash flow
from operations and credit availability will be adequate to meet substantially
all of its anticipated liquidity requirements, including required distributions
to shareholders, capital expenditures and debt service. The Company is pursuing
additional financing so that it can make distributions in excess of
distributions required to maintain its REIT status. Historically, the Company
has maintained a relatively stable monthly dividend rate instead of raising and
lowering the distribution with varying economic cycles. With the depressed
financial results of the Company and the lodging industry, the Company will
attempt to utilize additional financing to achieve this objective. Although the
Company has relatively low levels of debt, there can be no assurances it will
be successful with this strategy and may need to reduce its distribution to
levels required to maintain its REIT status. 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 six months of 2010 totaled
$35.8 million and were paid monthly at a rate of $0.064167 per common share.
For the same six month period, the Companys cash generated from operations was
approximately $25.3 million. This shortfall includes a return of capital and
was funded primarily by additional borrowings under 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 dividend 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, 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 June 30, 2010, the Company held $6.1 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 six months of 2010. No major
renovation projects were in progress at June 30, 2010. With the depressed
economic environment, the Company will only complete the most cost effective
renovation projects. Total capital expenditures incurred in the first six
months of 2010 were approximately $0.9 million; the Company expects total 2010
capital improvements to be approximately $5 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. Shareholders may 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

14

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Program.
During the six months ended June 30, 2010, the Company redeemed approximately
1.7 million Units in the amount of $18.1 million under the program. Since the
inception of the program through June 30, 2010, the Company has redeemed
approximately 4.9 million Units in the amount of $51.8 million. The Company has
increased the maximum number of Units that may be redeemed to five percent
(from three percent) of the weighted average number of Units outstanding during
a year.

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 dividends 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 six months ended
June 30, 2010, approximately 1.1 million Units, representing $12.3 million in
proceeds to the Company, were issued under the plan. During the six months
ended June 30, 2009, approximately 1.2 million Units, representing $13.5
million in proceeds to the Company, were issued under the plan. Since the
inception of the plan through June 30, 2010, approximately 6.7 million Units,
representing approximately $74.2 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 six month periods ended June 30, 2010 and 2009,
the Company incurred approximately $507 thousand and $509 thousand 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 each of the six month periods ended June 30, 2010 and 2009, the Company
incurred approximately $1.0 million and $0.9 million in costs paid to ASA that
were reimbursed to Apple REIT Six, Inc. These reimbursed 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. and Apple REIT Nine, Inc. Members of the
Companys Board of Directors are also on the boards of Apple REIT Six, Inc.,
Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

Subsequent Events

On
July 15, 2010, the Company paid $0.064167 per common share, totaling $6.0
million, in a dividend distribution to its common shareholders. Under the
Companys Dividend Reinvestment Plan, $2.0 million were reinvested, resulting
in the issuance of 185,515 Units.

In
July 2010, the Company redeemed 989,610 Units for approximately $10.9 million
under its Unit Redemption Program.

In
July 2010, the Company entered into a 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
percentage points. The loan has a maturity date of December 31, 2010, and can
be repaid

15

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before
maturity with no penalty. Proceeds of the loan will be used by the Company for
general working capital purposes, including the payment of redemptions and
distributions.

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 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.

16

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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 June 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 line
of credit facility. The Company had an outstanding balance of approximately
$28.5 million on its $30 million line of credit at June 30, 2010, and to the
extent it utilizes the line of credit, the Company will be exposed to changes
in short term interest rates. Based on the outstanding balance at June 30,
2010, every 100 basis point change in interest rates can potentially impact the
Companys annual net income by $285 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. The Companys cash balance at June 30, 2010
was not material.

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.

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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. If Units are held for the required one-year period, the Units may be
redeemed for a purchase price equal to 92% of the price paid per Unit if the
Units have been owned less than three years, or 100% of the price paid per Unit
if the Units have been owned for three years or more. The board of directors
reserves the right, in its sole discretion, at any time and from time to time,
to waive the one-year holding period, 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 second quarter of 2010 (no redemptions occurred in May
and June 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
|                                       |  |                                      |  |                                |  |                                                                                          |  |                                                                                       
|April
 2010                            |  | 906,094                              |  | $ 10.80                        |  | 4,906,840                                                                                |  | (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).                              

19

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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: August 3, 2010
|                       |                                                         |  |                     
|                       | Glade M.
 Knight,                                       |  |                     
|                       | Chairman of
 the Board and                              |  |                     
|                       | Chief
 Executive Officer                                |  |                     
|                       | (Principal
 Executive Officer)                          |  |                     
|                       |                                                         |  |                     
|By:                    | /s/
 BRYAN PEERY                                        |  | Date: August 3, 2010
|                       |                                                         |  |                     
|                       | Bryan
 Peery,                                           |  |                     
|                       | Chief
 Financial Officer                                |  |                     
|                       | (Principal
 Financial and Principal Accounting Officer) |  |                     

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