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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



FORM 10-Q



(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



OR



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



For the transition period from  to



Commission file number 0-24568



INNKEEPERS USA TRUST

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Maryland                                                       |  | 65-0503831                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification no.)



|                                             |  |           
|-------------------------------------------- |  | ----------
|306 Royal Poinciana Way, Palm Beach, Florida |  | 33480     
|(Address of principal executive offices)     |  | (Zip Code)



Registrants
telephone number, including area code: (561) 835-1800



N/A

(former name)



Indicate by check mark whether the Registrant (i) 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 report), and (ii) has been subject to such filing requirements for the past 90 days. Yes x No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes
x No ̈



The number of common shares of beneficial interest, $.01 par value, outstanding on July 23, 2004, was 37,673,256.



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##### Table of Contents

TABLE OF CONTENTS



|              |  |                       |  |                                                                                                 |  |     
|------------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------- |  | ----
|              |  |                       |  |                                                                                                 |  | Page
|Part I        |  | Financial Information |  |                                                                                                
|              |  |                       | 
|              |  | Item 1.               |  | Financial Statements (unaudited)                                                                |  | 2   
|              |  |                       | 
|              |  |                       |  | Consolidated Balance Sheets at June 30, 2004 and December 31, 2003                              |  | 2   
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 |  | 3   
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003           |  | 4   
|              |  |                       | 
|              |  |                       |  | Notes to Consolidated Financial Statements                                                      |  | 5   
|              |  |                       | 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 9   
|              |  |                       | 
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                      |  | 17  
|              |  |                       | 
|              |  | Item 4.               |  | Controls and Procedures                                                                         |  | 18  
|              |  |                      
|Part II.      |  | Other Information     |  | 19                                                                                             
|              |  |                       | 
|              |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                             |  | 19  
|              |  |                       | 
|              |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                |  | 19  
|              | 
|Signature     |  | 20                   
|              | 
|Exhibit Index |  |                      



i



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS (UNAUDITED)



Innkeepers USA Trust

Consolidated Balance Sheets

(in thousands, except share and per share data)



|                                                                                                                                     |  |              |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                     |  | June 30,2004 |          |   | December 31,2003 |  
|ASSETS                                                                                                                               |  |              |          |   |                  |   |          |  
|Investment in hotel properties:                                                                                                      |  |              |          |   |                  |   |          |  
|Land and improvements                                                                                                                |  | $            | 124,429  |   |                  | $ | 102,823  |  
|Buildings and improvements                                                                                                           |  |              | 683,220  |   |                  |   | 654,847  |  
|Furniture and equipment                                                                                                              |  |              | 96,978   |   |                  |   | 92,206   |  
|Renovations in process                                                                                                               |  |              | 12,767   |   |                  |   | 3,161    |  
|Hotels held for sale                                                                                                                 |  |              | 4,885    |   |                  |   | 2,979    |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|                                                                                                                                     |  |              | 922,279  |   |                  |   | 856,016  |  
|Accumulated depreciation                                                                                                             |  |              | (203,784 | ) |                  |   | (189,156 | )
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Net investment in hotel properties                                                                                                   |  |              | 718,495  |   |                  |   | 666,860  |  
|Cash and cash equivalents                                                                                                            |  |              | 15,142   |   |                  |   | 9,586    |  
|Restricted cash and cash equivalents                                                                                                 |  |              | 8,521    |   |                  |   | 7,586    |  
|Accounts receivable                                                                                                                  |  |              | 7,082    |   |                  |   | 8,091    |  
|Prepaids and inventory                                                                                                               |  |              | 1,639    |   |                  |   | 1,794    |  
|Deferred expenses and other                                                                                                          |  |              | 18,846   |   |                  |   | 12,823   |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                         |  | $            | 769,725  |   |                  | $ | 706,740  |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                 |  |              |          |   |                  |   |          |  
|Debt                                                                                                                                 |  | $            | 255,772  |   |                  | $ | 232,174  |  
|Accounts payable and accrued expenses                                                                                                |  |              | 18,530   |   |                  |   | 8,982    |  
|Payable to Manager                                                                                                                   |  |              | 610      |   |                  |   | 811      |  
|Franchise conversion fee obligations                                                                                                 |  |              | 10,741   |   |                  |   | 5,249    |  
|Distributions payable                                                                                                                |  |              | 4,268    |   |                  |   | 3,977    |  
|Minority interest in Partnership                                                                                                     |  |              | 51,081   |   |                  |   | 51,689   |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total liabilities                                                                                                                    |  |              | 341,002  |   |                  |   | 302,882  |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                |  |              |          |   |                  |   |          |  
|Preferred shares, $0.01 par value, 20,000,000 shares authorized, 5,800,000 and 4,630,000 shares issued and outstanding,
respectively |  |              | 145,000  |   |                  |   | 115,750  |  
|Common shares, $0.01 par value, 100,000,000 shares authorized, 37,673,256 and 37,563,499 issued and outstanding, respectively        |  |              | 377      |   |                  |   | 376      |  
|Additional paid-in capital                                                                                                           |  |              | 393,829  |   |                  |   | 393,349  |  
|Unearned compensation                                                                                                                |  |              | (954     | ) |                  |   | (897     | )
|Distributions in excess of earnings                                                                                                  |  |              | (109,529 | ) |                  |   | (104,720 | )
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total shareholders equity                                                                                                           |  |              | 428,723  |   |                  |   | 403,858  |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total liabilities and shareholders equity                                                                                           |  | $            | 769,725  |   |                  | $ | 706,740  |  
|                                                                                                                                     |  |              |          |   |                  |   |          |  



The accompanying
notes are an integral part of these consolidated financial statements.



2



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##### Table of Contents

Innkeepers USA Trust

Consolidated Statements of Operations

(in thousands, except share and per share data)



|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                             |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                             |  | 2004                        |            |   | 2003                      |   |            | 2004 |  |   | 2003       |  
|Revenue:                                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Hotel operating revenue                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Rooms                                                                        |  | $                           | 54,194     |   |                           | $ | 335        |      |  | $ | 90,162     |   |  | $ | 335        |  
|Food and beverage                                                            |  |                             | 294        |   |                           |   |           |      |  |   | 371        |   |  |   |           |  
|Telephone                                                                    |  |                             | 489        |   |                           |   | 1          |      |  |   | 920        |   |  |   | 1          |  
|Other                                                                        |  |                             | 1,282      |   |                           |   | 22         |      |  |   | 1,976      |   |  |   | 22         |  
|Percentage lease revenue                                                     |  |                             |           |   |                           |   | 16,532     |      |  |   | 5,073      |   |  |   | 32,867     |  
|Other revenue                                                                |  |                             | 117        |   |                           |   | 107        |      |  |   | 227        |   |  |   | 236        |  
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                                                |  |                             | 56,376     |   |                           |   | 16,997     |      |  |   | 98,729     |   |  |   | 33,461     |  
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Expenses:                                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Hotel operating expenses                                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Rooms                                                                        |  |                             | 11,995     |   |                           |   | 87         |      |  |   | 20,289     |   |  |   | 87         |  
|Food and beverage                                                            |  |                             | 284        |   |                           |   |           |      |  |   | 361        |   |  |   |           |  
|Telephone                                                                    |  |                             | 757        |   |                           |   | 2          |      |  |   | 1,224      |   |  |   | 2          |  
|Other                                                                        |  |                             | 503        |   |                           |   | 3          |      |  |   | 805        |   |  |   | 3          |  
|General and administrative                                                   |  |                             | 5,041      |   |                           |   | 33         |      |  |   | 8,635      |   |  |   | 33         |  
|Franchise and marketing fees                                                 |  |                             | 3,704      |   |                           |   | 26         |      |  |   | 6,389      |   |  |   | 26         |  
|Amortization of deferred franchise conversion fees                           |  |                             | 274        |   |                           |   |           |      |  |   | 500        |   |  |   |           |  
|Advertising and promotions                                                   |  |                             | 1,765      |   |                           |   | 18         |      |  |   | 3,006      |   |  |   | 18         |  
|Utilities                                                                    |  |                             | 2,464      |   |                           |   | 18         |      |  |   | 4,260      |   |  |   | 18         |  
|Repairs and maintenance                                                      |  |                             | 2,890      |   |                           |   | 14         |      |  |   | 4,944      |   |  |   | 14         |  
|Management and accounting fees                                               |  |                             | 1,795      |   |                           |   | 33         |      |  |   | 2,994      |   |  |   | 33         |  
|Amortization of deferred lease acquisition cost                              |  |                             | 131        |   |                           |   |           |      |  |   | 251        |   |  |   |           |  
|Insurance                                                                    |  |                             | 461        |   |                           |   | 2          |      |  |   | 740        |   |  |   | 2          |  
|Corporate expenses                                                           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Depreciation                                                                 |  |                             | 8,363      |   |                           |   | 8,358      |      |  |   | 16,655     |   |  |   | 16,661     |  
|Amortization of franchise costs                                              |  |                             | 14         |   |                           |   | 16         |      |  |   | 27         |   |  |   | 30         |  
|Ground rent                                                                  |  |                             | 120        |   |                           |   | 126        |      |  |   | 247        |   |  |   | 250        |  
|Interest expense                                                             |  |                             | 4,599      |   |                           |   | 4,400      |      |  |   | 9,093      |   |  |   | 8,715      |  
|Amortization of loan origination fees                                        |  |                             | 214        |   |                           |   | 268        |      |  |   | 483        |   |  |   | 537        |  
|Property taxes and insurance                                                 |  |                             | 2,889      |   |                           |   | 3,185      |      |  |   | 5,796      |   |  |   | 6,042      |  
|General and administrative (excluding amortization of unearned compensation) |  |                             | 1,199      |   |                           |   | 1,212      |      |  |   | 2,830      |   |  |   | 2,615      |  
|Amortization of unearned compensation                                        |  |                             | 214        |   |                           |   | 369        |      |  |   | 441        |   |  |   | 714        |  
|Other charges                                                                |  |                             | 117        |   |                           |   | 344        |      |  |   | 488        |   |  |   | 999        |  
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total expenses                                                               |  |                             | 49,793     |   |                           |   | 18,514     |      |  |   | 90,458     |   |  |   | 36,799     |  
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before minority interest                                       |  |                             | 6,583      |   |                           |   | (1,517     | )    |  |   | 8,271      |   |  |   | (3,338     | )
|Minority interest, common                                                    |  |                             | (81        | ) |                           |   | 144        |      |  |   | 76         |   |  |   | 301        |  
|Minority interest, preferred                                                 |  |                             | (1,068     | ) |                           |   | (1,068     | )    |  |   | (2,136     | ) |  |   | (2,136     | )
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations                                     |  |                             | 5,434      |   |                           |   | (2,441     | )    |  |   | 6,211      |   |  |   | (5,173     | )
|Discontinued operations                                                      |  |                             | 119        |   |                           |   | 334        |      |  |   | 1,175      |   |  |   | 512        |  
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                                            |  |                             | 5,553      |   |                           |   | (2,107     | )    |  |   | 7,386      |   |  |   | (4,661     | )
|Loss on redemption of Series A Preferred Shares                              |  |                             |           |   |                           |   |           |      |  |   | (4,249     | ) |  |   |           |  
|Preferred share dividends                                                    |  |                             | (2,900     | ) |                           |   | (2,496     | )    |  |   | (5,689     | ) |  |   | (4,992     | )
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shareholders                          |  | $                           | 2,653      |   |                           | $ | (4,603     | )    |  |   | (2,552     | ) |  |   | (9,653     | )
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Earnings (loss) per share data:                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic  continuing operations                                                |  | $                           | 0.07       |   |                           | $ | (0.13      | )    |  | $ | (0.10      | ) |  | $ | (0.27      | )
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                                        |  | $                           | 0.07       |   |                           | $ | (0.12      | )    |  | $ | (0.07      | ) |  | $ | (0.26      | )
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic  weighted average shares                                              |  |                             | 37,470,106 |   |                           |   | 37,387,194 |      |  |   | 37,450,343 |   |  |   | 37,386,755 |  
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted  continuing operations                                              |  | $                           | 0.07       |   |                           | $ | (0.13      | )    |  | $ | (0.10      | ) |  | $ | (0.27      | )
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                                                      |  | $                           | 0.07       |   |                           | $ | (0.12      | )    |  | $ | (0.07      | ) |  | $ | (0.26      | )
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted  weighted average shares                                            |  |                             | 37,559,261 |   |                           |   | 37,387,194 |      |  |   | 37,450,343 |   |  |   | 37,386,755 |  
|                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



The accompanying
notes are an integral part of these consolidated financial statements.



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##### Table of Contents

Innkeepers USA Trust

Consolidated Statements of Cash Flows

(in thousands)



|                                                                                         |  |                           |          |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | ------- | -
|                                                                                         |  | Six Months Ended June 30, |         
|                                                                                         |  | 2004                      |          |   | 2003 |  
|Cash flows from operating activities:                                                    |  |                           |          |   |      |   |         |  
|Net income (loss)                                                                        |  | $                         | 7,386    |   |      | $ | (4,661  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                           |          |   |      |   |         |  
|Depreciation and amortization                                                            |  |                           | 18,476   |   |      |   | 18,251  |  
|Minority interests                                                                       |  |                           | 2,060    |   |      |   | 1,835   |  
|Deferred rent revenue                                                                    |  |                           |         |   |      |   | 7,892   |  
|Gain on sale of hotel                                                                    |  |                           | (1,029   | ) |      |   |        |  
|Changes in operating assets and liabilities:                                             |  |                           |          |   |      |   |         |  
|Accounts receivable                                                                      |  |                           | 1,009    |   |      |   | (745    | )
|Prepaids and inventory                                                                   |  |                           | 155      |   |      |   | 843     |  
|Accounts payable and accrued expenses                                                    |  |                           | 9,531    |   |      |   | 1,058   |  
|Payable to Manager                                                                       |  |                           | (201     | ) |      |   |        |  
|                                                                                         |  |                           |          |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                           | 37,387   |   |      |   | 24,473  |  
|                                                                                         |  |                           |          |   |      |   |         |  
|Cash flows from investing activities:                                                    |  |                           |          |   |      |   |         |  
|Investment in hotel properties                                                           |  |                           | (71,408  | ) |      |   | (21,023 | )
|Proceeds from sale of hotels                                                             |  |                           | 4,028    |   |      |   |        |  
|Net (deposits) withdrawals into restricted cash accounts                                 |  |                           | (935     | ) |      |   | 4,440   |  
|Acquisitions of leases                                                                   |  |                           | (1,336   | ) |      |   |        |  
|Payment of franchise fees                                                                |  |                           | (192     | ) |      |   | (10     | )
|Repayment of advances                                                                    |  |                           | 25       |   |      |   |        |  
|                                                                                         |  |                           |          |   |      |   |         |  
|Net cash used by investing activities                                                    |  |                           | (69,818  | ) |      |   | (16,593 | )
|                                                                                         |  |                           |          |   |      |   |         |  
|Cash flows from financing activities:                                                    |  |                           |          |   |      |   |         |  
|Proceeds from debt issuance                                                              |  |                           | 26,000   |   |      |   |        |  
|Payments on debt                                                                         |  |                           | (2,402   | ) |      |   | (2,258  | )
|Payments on franchise conversion obligations                                             |  |                           | (204     | ) |      |   |        |  
|Distributions paid to unit holders                                                       |  |                           | (2,206   | ) |      |   | (2,416  | )
|Distributions paid to shareholders                                                       |  |                           | (7,654   | ) |      |   | (13,989 | )
|Redemption of shares or units                                                            |  |                           | (115,730 | ) |      |   |        |  
|Net proceeds from issuance of preferred shares                                           |  |                           | 140,251  |   |      |   |        |  
|Loan origination fees and costs paid                                                     |  |                           | (68      | ) |      |   | (181    | )
|                                                                                         |  |                           |          |   |      |   |         |  
|Net cash provided (used) by financing activities                                         |  |                           | 37,987   |   |      |   | (18,844 | )
|                                                                                         |  |                           |          |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                           | 5,556    |   |      |   | (10,964 | )
|Cash and cash equivalents at beginning of year                                           |  |                           | 9,586    |   |      |   | 21,367  |  
|                                                                                         |  |                           |          |   |      |   |         |  
|Cash and cash equivalents at end of year                                                 |  | $                         | 15,142   |   |      | $ | 10,403  |  
|                                                                                         |  |                           |          |   |      |   |         |  
|Supplemental cash flow information:                                                      |  |                           |          |   |      |   |         |  
|Interest paid                                                                            |  | $                         | 8,636    |   |      | $ | 8,749   |  



Supplemental disclosure
of non-cash information  See Note 1 for a description of the assumption of liabilities for non-cash consideration in connection with the Marriott Takeback Transaction.



The accompanying notes are an integral part of these consolidated financial statements.



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Innkeepers USA Trust

Notes to Consolidated Financial Statements



|1. | Organization and Recent Developments
|-- | ------------------------------------



Innkeepers USA Trust (Innkeepers) is a self-administered real estate investment trust (REIT), which at June 30, 2004, owned 69
hotels with an aggregate of 8,729 rooms/suites (the Hotels) through its partnership interests in Innkeepers USA Limited Partnership (with its subsidiary partnerships, the Partnership). The Company has a series of indirect,
wholly-owned taxable REIT subsidiaries that lease the Hotels from the Partnership (the TRSs, and collectively with Innkeepers and the Partnership, the Company). Innkeepers Hospitality Management Inc. (the IH
Manager) manages 68 hotels, and a third party manages two of the hotels.



TRS Transaction.From January 1, 2003 through November 30, 2003, 61 of the Companys hotels were leased to Innkeepers Hospitality, Inc. or its affiliates (collectively, the IH Lessee) under
separate percentage leases (collectively, the Percentage Leases) providing for rent equal to (a) a fixed base amount (Base Rent) or, (b) if greater, percentage rent based on the room revenues of the hotel (Percentage
Rent). The IH Lessee operated 44 hotels for that entire 11-month period (except the Residence Inn by Marriott hotel located in Winston Salem, NC, which was sold on September 10, 2003). Affiliates of Marriott International, Inc.
(Marriott) operated 17 hotels for part of 2003, under management agreements with the IH Lessee. Between April and July 2003, the IH Lessee terminated the Marriott management agreements for those 17 hotels and began managing those hotels.
This transaction is discussed in more detail under Management Conversion of Marriott-Managed Hotels below. A Hotel acquired in June 2003 was leased by the Company to a TRS, and the TRS engaged the IH Manager to manage the Hotel.
Between December 1, 2003 and March 1, 2004, TRSs acquired from the IH Lessee the Percentage Leases for all of the hotels then leased by the IH Lessee, and simultaneously entered into management agreements with the IH Manager to manage those Hotels.
All of the IH Lessees Percentage Leases were acquired by the TRSs without any modification to existing rent formulas or other economic terms. The acquisition of Percentage Leases from the IH Lessee is referred to as the TRS
Transaction.



Wyndham Lease Termination Transaction.During 2003, six Hotels were leased to affiliates of Wyndham International, Inc. (the Summerfield Lessee) and affiliates of the Summerfield Lessee operated those Hotels. The IH Lessee and the Summerfield Lessee are sometimes referred
to as the Lessees. The Company terminated one Percentage Lease with the Summerfield Lessee on March 1, 2004 and five Percentage Leases with the Summerfield Lessee on April 1, 2004. The Company then (i) entered into new Percentage Leases
for the six Hotels with TRSs on economic terms substantially similar to those in the terminated Percentage Leases, (ii) caused the TRSs to enter into management agreements with the IH Manager for the six Hotels (which agreements have terms
substantially similar to the management agreements entered into with the IH Manager in connection with the TRS Transaction) and (iii) caused the TRSs to enter into franchise agreements with an affiliate of Wyndham with respect to the five Hotels
operating under the Summerfield Suites by Wyndham brand. No consideration was paid to the Summerfield Lessee or its affiliates in connection with the termination of the Summerfield Lessees Percentage Leases. This transaction is referred to as
the Wyndham Lease Termination Transaction.



Under
the new TRS structure, hotel-level revenue and expenses are recognized in the Companys financial statements. Because the Company had hotels operating under the previous structure during most of 2003, the accompanying statements of operations
for 2003 still reflect Percentage Lease revenue. Under the new structure, because the Company controls the TRS, payments under the Percentage Leases are eliminated in consolidation (and therefore are not separately reflected in the
Companys financial statements.



Management
Conversion of Marriott-Managed Hotels.In March 2003, the Company, the IH Lessee, Marriott and various affiliates thereof entered into an agreement for a transaction under which the IH Lessee would (1) convert the agreements under which 17 of
the Hotels were franchised and managed by Marriott into long-term franchise agreements with Marriott and (2) become the manager of the hotels. Under the terms of the converted agreements, the franchisee will (1) pay a franchise royalty of 61⁄2%
of room revenues to Marriott for the first ten years of each franchise agreement and a royalty of 5% of room revenue thereafter (as compared to 5% of gross revenues under the previous management agreements with Marriott) and (2) pay Marriott
$850,000 plus 50% of aggregate available cash flow (as defined in the agreement with Marriott) in excess of a specified threshold each year for nine years, beginning in 2005 (the Conversion Fee). Marriott has agreed that the franchisee
will receive a $750,000 credit against the Conversion Fee that is otherwise payable to Marriott. In addition, a portion of the Conversion Fee will be waived for a year if the converted hotels room revenues decline below certain levels and
certain other conditions are met. The other fees required under the franchise agreements are generally similar to the fees (other than management fees) that were required by the previous Marriott management agreements.



5



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##### Table of Contents

This transaction is referred to as the Marriott Takeback Transaction. As of July 25, 2003, the conversion of all 17 hotels from Marriott-managed
to Marriott-franchised was completed. In connection with the TRS Transaction, the TRSs assumed the obligations to Marriott under the new franchise agreements, including payment of the Conversion Fee, and the IH Manager assumed the management of
these 17 Hotels. On February 1, 2004 (when a TRS acquired the Percentage Leases for certain formerly Marriott-managed hotels), the Company recorded an additional franchise conversion fee liability of $5,696,000 and a deferred franchise
conversion fees asset in the same amount.



Acquisitions. On May 19, 2004, the Company acquired an existing 216-room Four Points by Sheraton hotel located in Ft. Walton Beach, FL for $30.0 million, which was funded by borrowing on the Companys unsecured line of credit
and available cash. The Company leased the hotel to a TRS and has a contract with Dimension Development Company, Inc. (Dimension) to manage the property. In consideration for helping the Company acquire the hotel and for managing certain
capital projects, including projects mandated by the franchiser, Dimension will also receive a project management fee of $125,000 plus a carried interest in the ownership of the hotel. Dimensions carried interest entitles it to cash
distributions equal to 20% of the net (a) operating cash flow after the Company receives a cumulative return of 7.875% on its invested capital and (b) capital proceeds after the Company has received its cumulative preferred return and a return of
its invested capital.



On May 26, 2004, the Company
acquired an existing 146-suite Homewood Suites hotel located on the Riverwalk in San Antonio, TX for $21.0 million from Dimension, which was funded with available cash. The Company leased the hotel to a TRS and contracted with the IH Manager to
manage the property.



On June 28, 2004, the Company acquired an
existing 182-room Clarion Hotel located in Louisville, KY for $6.4 million, which was funded by borrowing on the Companys unsecured line of credit. The Company anticipates closing the hotel in the fourth quarter of 2004 and beginning a $4.5
million renovation project to convert the hotel to a Hampton Inn hotel. The renovations will be funded by the Companys available cash and borrowing on the unsecured line of credit. The Company anticipates the renovation project to be completed
by April 2005. The hotel is leased to a TRS and a third party will manage the hotel until it is closed for renovation. The Company expects to contract with the IH Manager to manage the hotel when it re-opens as a Hampton Inn. In consideration for
helping the Company acquire the hotel and for managing certain capital projects, including projects mandated by the franchiser, Summit Hospitality Group (and/or its affiliates, Summit) will receive a development fee equal to 3.5% of the
cost of converting the hotel to a Hampton Inn. Summit will also be entitled to a carried interest in the ownership of the hotel, entitling it to cash distributions equal to 20% of the net (a) operating cash flow after the Company receives a
cumulative return of 10% on its invested capital and (b) capital proceeds after the Company has received its cumulative preferred return and a return of its invested capital. In 2004, IH Manager and Summit formed a venture to manage four hotels in
which the Company has no interest. These management contracts helped IH Manager qualify as an eligible independent contractor under applicable federal tax law, and thereby enabled the completion of the TRS Transaction.



Issuance of Preferred Shares.On January 20, 2004, the Company
completed an offering of 5,800,000 new 8.0% Series C cumulative preferred shares (Series C Preferred Shares). The Series C Preferred Shares may be redeemed at the $25 per share liquidation preference at the election of the Company on or
after January 20, 2009. The Series C Preferred Shares have no stated maturity, sinking fund or mandatory redemption and are not convertible into any other securities of the Company. The net proceeds from the offering were approximately $140.3
million. The Company used approximately $115.7 million to redeem all of the Companys outstanding 8.625% Series A Preferred Shares and the balance was used for general corporate purposes. In connection with the redemption of the Series A
Preferred Shares, the Company expensed the offering costs of $4,249,000 related to the initial issuance of the Series A Preferred Shares.



Jeffrey H. Fisher, the Companys Chief Executive Officer, President and Chairman of the Board of Trustees, controlled the IH Lessee and controls the
IH Manager. Rolf E. Ruhfus, a trustee of the Company, is also a director of Wyndham International, Inc.



These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC) and should be read in conjunction with the financial statements and notes thereto of the Company and the IH Lessee included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003 (the
10-K). The notes to the financial statements included herein highlight significant changes to the notes included in the 10-K and present interim disclosures required by the SEC. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have been included. The results of any interim period are not necessarily indicative of results for the full year.



6



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##### Table of Contents

|2. | Stock Based Compensation
|-- | ------------------------



The Company accounts for share option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and related Interpretations. Under APB 25, no compensation expense is recognized for employee share option grants because the exercise price of the options granted to date has equaled the market price of the underlying shares on the date
of grant (the intrinsic value method).



If the
Company had recognized compensation cost for options granted to employees and trustees based on the fair value method, the Company would have recognized compensation expense of less than $50,000 for the six months ended June 30, 2004 and
2003. This would have reduced net income (loss) available to common shareholders per share by less than $0.01 in each of these periods.



|3. | Earnings per Share
|-- | ------------------



The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2004 and 2003
(in thousands, except share and per share data):



|                                                                                                      |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|----------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | ---------- | - | ---- | ---------- | - | ---- | ---------- | -
|                                                                                                      |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |           
|                                                                                                      |  | 2004                        |            |   | 2003                      |            |   | 2004 |            |   | 2003 |           
|Numerator:                                                                                            |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Income (loss) from continuing operations                                                              |  | $                           | 5,434      |   |                           | ($2,441    | ) |      | 6,211      |   |      | ($5,173    | )
|Loss on redemption of Series A Preferred Shares                                                       |  |                             |           |   |                           |           |   |      | (4,249     | ) |      |           |  
|Preferred share dividends                                                                             |  |                             | (2,900     | ) |                           | (2,496     | ) |      | (5,689     | ) |      | (4,992     | )
|                                                                                                      |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Income (loss) applicable to common shareholders from continuing operations                            |  |                             | 2,534      |   |                           | (4,937     | ) |      | (3,727     | ) |      | (10,165    | )
|Discontinued operations                                                                               |  |                             | 119        |   |                           | 334        |   |      | 1,175      |   |      | 512        |  
|                                                                                                      |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Net income (loss) applicable to common shareholders                                                   |  | $                           | 2,653      |   |                           | ($4,603    | ) |      | ($2,552    | ) |      | ($9,653    | )
|                                                                                                      |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Denominator:                                                                                          |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Denominator for basic earnings (loss) per share  weighted average shares                             |  |                             | 37,470,106 |   |                           | 37,387,194 |   |      | 37,450,343 |   |      | 37,386,755 |  
|Effect of dilutive securities:                                                                        |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Share options                                                                                         |  |                             | 3,510      |   |                           |           |   |      |           |   |      |           |  
|Restricted shares                                                                                     |  |                             | 85,645     |   |                           |           |   |      |           |   |      |           |  
|                                                                                                      |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Denominator for diluted earnings per share  adjusted weighted average shares and assumed conversions |  |                             | 37,559,261 |   |                           | 37,387,194 |   |      | 37,450,343 |   |      | 37,386,755 |  
|                                                                                                      |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Earnings (loss) per share data:                                                                       |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Basic-continuing operations                                                                           |  | $                           | 0.07       |   |                           | ($0.13     | ) |      | ($0.10     | ) |      | ($0.27     | )
|Basic-discontinued operations                                                                         |  |                             | 0.00       |   |                           | 0.01       |   |      | 0.03       |   |      | 0.01       |  
|                                                                                                      |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Basic                                                                                                 |  | $                           | 0.07       |   |                           | ($0.12     | ) |      | ($0.07     | ) |      | ($0.26     | )
|                                                                                                      |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Diluted-continuing operations                                                                         |  | $                           | 0.07       |   |                           | ($0.13     | ) |      | ($0.10     | ) |      | ($0.27     | )
|Diluted-discontinued operations                                                                       |  |                             | 0.00       |   |                           | 0.01       |   |      | 0.03       |   |      | 0.01       |  
|                                                                                                      |  |                             |            |   |                           |            |   |      |            |   |      |            |  
|Diluted                                                                                               |  | $                           | 0.07       |   |                           | ($0.12     | ) |      | ($0.07     | ) |      | ($0.26     | )
|                                                                                                      |  |                             |            |   |                           |            |   |      |            |   |      |            |  



The conversion of
Common Units into common shares has no effect on earnings (loss) per share. The conversion of the Series A Preferred Shares (which were redeemed in January 2004), the Class B Preferred Units and 1,316,500 outstanding options are anti-dilutive (i.e.,
assuming that they were converted into common shares would reduce the loss per share) and, therefore, are not included in the calculation of diluted earnings (loss) per share.



|4. | Other Charges
|-- | -------------



Other charges for the three and six months ended June 30, 2004 and 2003 include the following (in thousands):



|                      |  |                             |     |                           |   |      |  |      |     |  |   |    
|--------------------- |  | --------------------------- | --- | ------------------------- | - | ---- |  | ---- | --- |  | - | ---
|                      |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                      |  | 2004                        |     | 2003                      |   | 2004 |  | 2003
|Litigation settlement |  | $                           |    |                           | $ | 21   |  | $    |    |  | $ | 42 
|Advisory services     |  |                             |    |                           |   | 189  |  |      | 32  |  |   | 605
|TRS Transaction costs |  |                             | 107 |                           |   | 134  |  |      | 446 |  |   | 352
|Defeasance costs      |  |                             | 10  |                           |   |     |  |      | 10  |  |   |   
|                      |  |                             |     |                           |   |      |  |      |     |  |   |    
|                      |  | $                           | 117 |                           | $ | 344  |  | $    | 488 |  | $ | 999
|                      |  |                             |     |                           |   |      |  |      |     |  |   |    



The litigation
settlement is related to litigation with the Companys former Chief Operating Officer, and the advisory services (which include legal fees to the special committee of the Board of Trustees) and TRS



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##### Table of Contents

Transaction costs are related to the TRS Transaction. Included in TRS Transaction costs for 2004 is a $250,000 reimbursement to the IH Lessee for costs it
incurred in assuming management of 17 hotels formerly managed by Marriott (see Marriott Takeback Transaction under Note 1 above).



|5. | Discontinued Operations
|-- | -----------------------



The Company sold its Residence Inn by Marriot hotel located in Winston-Salem, NC for net proceeds of $1,990,000 in September 2003 and recognized a $57,000
loss on the sale.



In 2002, the Company recognized an
impairment loss of $6,500,000 related to its Residence Inn by Marriott located in Eden Prairie, MN. During the fourth quarter of 2003, the Company classified this hotel as held for sale. The Company sold this hotel for net proceeds of
$4,028,000 on January 30, 2004 and recognized a $1,029,000 gain on the sale.



In 2003, the Company recognized an impairment loss of $3,870,000 related to its Hampton Inn hotel located in Norcross, GA. During the first quarter of 2004, the Company classified this hotel as held for
sale. On July 20, 2004, the Company sold this hotel for net proceeds of approximately $4.7 million and recognized a loss on the sale of approximately $250,000.



The results of operations from these hotel properties are classified as discontinued operations in the accompanying
statements of operations. The previously reported 2003 results of operations have been reclassified to reflect the classification of these hotels as held for sale.



The following table sets forth the components of discontinued operations for the three and six months ended June 30, 2004
and 2003 (in thousands):



|                               |  |                             |      |   |                          |   |      |      |  |   |       |   |  |   |       |  
|------------------------------ |  | --------------------------- | ---- | - | ------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                               |  | Three Months Ended June 30, |      |   | Six Months EndedJune 30, |  
|                               |  | 2004                        |      |   | 2003                     |   |      | 2004 |  |   | 2003  |  
|Hotel operating revenue        |  | $                           | 478  |   |                          |   |     |      |  |   | 901   |   |  |   |      |  
|Percentage Lease revenue       |  |                             |     |   |                          | $ | 581  |      |  |   | 74    |   |  | $ | 1,033 |  
|Other income                   |  |                             |     |   |                          |   | 1    |      |  |   | 1     |   |  |   | 2     |  
|Hotel operating expenses       |  |                             | (342 | ) |                          |   |     |      |  |   | (653  | ) |  |   |      |  
|Depreciation                   |  |                             |     |   |                          |   | (154 | )    |  |   | (119  | ) |  |   | (308  | )
|Amortization of franchise fees |  |                             | (1   | ) |                          |   | (1   | )    |  |   | (2    | ) |  |   | (1    | )
|Property taxes and insurance   |  |                             | (16  | ) |                          |   | (93  | )    |  |   | (54   | ) |  |   | (211  | )
|General and administrative     |  |                             |     |   |                          |   |     |      |  |   | (2    | ) |  |   | (3    | )
|Gain on sale of hotel          |  |                             |     |   |                          |   |     |      |  |   | 1,029 |   |  |   |      |  
|                               |  |                             |      |   |                          |   |      |      |  |   |       |   |  |   |       |  
|                               |  | $                           | 119  |   |                          | $ | 334  |      |  | $ | 1,175 |   |  | $ | 512   |  
|                               |  |                             |      |   |                          |   |      |      |  |   |       |   |  |   |       |  



|6. | Income Taxes
|-- | ------------



The Companys TRSs are subject to federal and state income taxes. The TRSs have cumulative future income tax deductions of approximately $2.4 million
(related primarily to accumulated net operating losses) at June 30, 2004 and the gross deferred tax asset associated with these future tax deductions was approximately $0.9 million. The TRSs have recorded a valuation allowance equal to 100% of the
gross deferred tax asset due to the uncertainty of realizing the benefit of this asset due to the TRSs limited operating history and the taxable losses incurred by the TRSs since their inception.



|7. | Subsequent Events
|-- | -----------------



On July 23, 2004, the Company entered into a new $135,000,000 Line of Credit with a majority of its existing line of credit lenders on substantially the
same terms as the maturing credit facility. The new Line of Credit matures on July 23, 2007. The interest rate on the Line of Credit is LIBOR plus 122.5 to 225 basis points, depending on certain financial ratios. The Companys prior Line on
Credit with Bank of America had a maturity date of July 31, 2004.



8



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##### Table of Contents

ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



General



The following discussion and analysis should be read in conjunction with (a) the financial statements and accompanying notes included in this report and (b) Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements and related notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003 (the 10-K). Capitalized terms used but
not defined in this section have the meanings ascribed in the notes to the consolidated financial statements included in this Report on Form 10-Q. An investment in the Company is subject to significant risks, which the Company discloses in reports
filed from time to time with the SEC, including a discussion of Risk Factors included in the 10-K. The Companys 2003 annual report (including the 10-K) is posted on the Companys website at www.innkeepersusa.com, and the 10-K
may be found at the SECs EDGAR website at www.sec.gov.



The following chart sets forth certain information with respect to the Hotels at June 30, 2004:



|                              |  |                 |  |                      
|----------------------------- |  | --------------- |  | ---------------------
|Franchise Affiliation         |  | Number ofHotels |  | Number ofRooms/Suites
|Upscale Extended-Stay         |  |                 |  |                      
|Residence Inn by Marriott     |  | 44              |  | 5,275                
|Summerfield Suites by Wyndham |  | 5               |  | 650                  
|Sunrise Suites                |  | 1               |  | 96                   
|Homewood Suites               |  | 1               |  | 146                  
|                              |  |                 |  |                      
|                              |  | 51              |  | 6,167                
|                              |  |                 |  |                      
|Upscale                       |  |                 |  |                      
|Four Points by Sheraton       |  | 1               |  | 216                  
|Courtyard by Marriott         |  | 1               |  | 136                  
|                              |  |                 |  |                      
|                              |  | 2               |  | 352                  
|                              |  |                 |  |                      
|Mid-Priced                    |  |                 |  |                      
|Hampton Inn                   |  | 12              |  | 1,526                
|TownePlace Suites by Marriott |  | 1               |  | 95                   
|Holiday Inn Express           |  | 1               |  | 204                  
|Quality Inn (Note 1)          |  | 1               |  | 203                  
|Clarion Hotel (Note 2)        |  | 1               |  | 182                  
|                              |  |                 |  |                      
|                              |  | 16              |  | 2,210                
|                              |  |                 |  |                      
|                              |  | 69              |  | 8,729                
|                              |  |                 |  |                      



Note 1: The Company intends to
renovate this hotel and convert it to a Courtyard by Marriott hotel.

Note 2: The Company intends to renovate this hotel and convert it to a Hampton Inn.



Occupancy, average daily rate (ADR) and revenue
per available room (RevPAR) for 67 of the Hotels are presented in the following table.



|                                |  |                            |        |   |                                |   |        |                          |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|------------------------------- |  | -------------------------- | ------ | - | ------------------------------ | - | ------ | ------------------------ | ---- | ---- | ------------------------------ | ---- | - | ------ | - |  | - | ------ | - |  | ---- | -
|                                |  | Three Months EndedJune 30, |        |   | Percentage increase (decrease) |   |        | Six Months EndedJune 30, |      |      | Percentage increase (decrease) |     
|                                |  | 2004                       |        |   | 2003                           |   |        |                          | 2004 |      |                                | 2003 |   |       
|Portfolio(1)                    |  |                            |        |   |                                |   |        |                          |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                             |  | $                          | 94.57  |   |                                | $ | 91.64  |                          |      | 3.2  | %                              |      | $ | 94.13  |   |  | $ | 92.57  |   |  | 1.7  | %
|Occupancy                       |  |                            | 76.8   | % |                                |   | 72.5   | %                        |      | 5.9  |                                |      |   | 73.0   | % |  |   | 69.4   | % |  | 5.2  |  
|RevPAR                          |  | $                          | 72.60  |   |                                | $ | 66.42  |                          |      | 9.3  |                                |      | $ | 68.73  |   |  | $ | 64.23  |   |  | 7.0  |  
|By Segment                      |  |                            |        |   |                                |   |        |                          |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|Upscale Extended-Stay Hotels(2) |  |                            |        |   |                                |   |        |                          |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                             |  | $                          | 96.41  |   |                                | $ | 93.82  |                          |      | 2.8  | %                              |      | $ | 95.65  |   |  | $ | 94.48  |   |  | 1.2  | %
|Occupancy                       |  |                            | 80.7   | % |                                |   | 75.0   | %                        |      | 7.5  |                                |      |   | 77.1   | % |  |   | 72.3   | % |  | 6.7  |  
|RevPAR                          |  | $                          | 77.78  |   |                                | $ | 70.38  |                          |      | 10.5 |                                |      | $ | 73.76  |   |  | $ | 68.31  |   |  | 8.0  |  
|Upscale(3)                      |  |                            |        |   |                                |   |        |                          |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                             |  | $                          | 111.70 |   |                                | $ | 107.99 |                          |      | 3.4  | %                              |      | $ | 109.45 |   |  | $ | 106.84 |   |  | 2.4  | %
|Occupancy                       |  |                            | 78.8   | % |                                |   | 75.1   | %                        |      | 4.9  |                                |      |   | 79.8   | % |  |   | 74.6   | % |  | 6.9  |  
|RevPAR                          |  | $                          | 88.05  |   |                                | $ | 81.12  |                          |      | 8.5  |                                |      | $ | 87.28  |   |  | $ | 79.73  |   |  | 9.5  |  
|Mid-Priced Hotels(4)            |  |                            |        |   |                                |   |        |                          |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                             |  | $                          | 84.00  |   |                                | $ | 80.57  |                          |      | 4.3  | %                              |      | $ | 85.41  |   |  | $ | 82.99  |   |  | 2.9  | %
|Occupancy                       |  |                            | 63.5   | % |                                |   | 63.7   | %                        |      | (0.3 | )                              |      |   | 58.7   | % |  |   | 59.2   | % |  | (0.8 | )
|RevPAR                          |  | $                          | 53.34  |   |                                | $ | 51.31  |                          |      | 4.0  |                                |      | $ | 50.12  |   |  | $ | 49.11  |   |  | 2.1  |  



|(1) | 67 hotels, excludes one hotel acquired on June 1, 2003 and one hotel acquired on June 28,
2004
|--- | ----------------------------------------------------------------------------------------------



9



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##### Table of Contents

|(2) | 51 hotels
|--- | ---------



|(3) | 2 hotels
|--- | --------



|(4) | 14 hotels, excludes one hotel acquired on June 1, 2003 and one hotel acquired on June 28,
2004
|--- | ----------------------------------------------------------------------------------------------



Results of Operations



Comparison of the Three Months Ended June 30, 2004 (2004) to the Three Months
Ended June 30, 2003 (2003)



The Companys
revenues (as recognized in the accompanying financial statements) increased $39,379,000 to $56,376,000 in 2004 from $16,997,000 for 2003. The Companys 2004 revenue consists of $56,259,000 of hotel operating revenue, and $117,000 of other
revenue, compared with the 2003 revenue consisting of $16,532,000 of Percentage Lease revenue from the Lessees, $358,000 of hotel operating revenue and $107,000 of other revenue. The decrease in Percentage Lease revenue was due to the completion of
the TRS Transaction and the Wyndham Lease Termination Transaction. With the completion of these transactions as of April 1, 2004, the Company does not anticipate recognizing any Percentage Lease revenue in future periods.



The Companys hotel operating expenses (as recognized in the
accompanying financial statements) were $32,064,000 in 2004 compared to $236,000 in 2003. With the completion of the TRS transaction and the Wyndham Lease Termination Transaction, the Company recognizes hotel level operating expenses for hotels
leased to TRSs.



The TRS Transaction and the Wyndham Lease
Termination Transaction result in financial statement presentations that are substantially different between periods due to the Companys different operating structures before and after the transactions. Therefore, the Company presents the
following supplemental information, which it believes may be useful in evaluating the performance of the Company for the transitional period. The following table summarizes the hotel operating revenue and hotel operating expenses for the Company and
the IH Lessee for the three months ended June 30, 2004 and 2003 (dollar amounts in thousands):



|                                                                    |  |         |        |   |               |   |    |       |  |   |               |   |  |   |        |  
|------------------------------------------------------------------- |  | ------- | ------ | - | ------------- | - | -- | ----- |  | - | ------------- | - |  | - | ------ | -
|                                                                    |  | 2004    |        |   | 2003          |  
|                                                                    |  | TRS (1) |        |   | IH Lessee (2) |   |    | Total |  |   | IH Lessee (3) |  
|Hotel operating revenue                                             |  | $       | 56,259 |   |               | $ | 0  |       |  | $ | 56,259        |   |  | $ | 43,467 |  
|Hotel operating expenses                                            |  |         | 32,064 |   |               |   | 36 |       |  |   | 32,100        |   |  |   | 23,842 |  
|Hotel operating expenses as a percentage of hotel operating revenue |  |         | 57.0   | % |               |   |   | %     |  |   | 57.1          | % |  |   | 54.9   | %



|(1) | Represents the hotel operations recognized in the Companys financial statements. It
excludes the operations of hotels that are held for sale.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents the hotel operations attributable to the IH Lessee. It excludes the operations of
hotels that are held for sale.
|--- | -----------------------------------------------------------------------------------------------------------------------------



|(3) | Represents the hotel operations for the IH Lessee. It excludes the operations of hotels that
are held for sale and the operations of the hotels leased to the Summerfield Lessee.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The increase in hotel operating revenue of $12,792,000 was due primarily to (a) the 9.3% RevPAR increase at the Hotels for 2004 over the 2003 comparable
period ($4,042,000), (b) the revenue from the operation of the Quality Inn hotel located in Atlantic City, NJ ($522,000) which was acquired in June 2003, (c) the revenue from the operation of the Sunrise Suites hotel located in Tinton Falls, NJ
($733,000) beginning March 1, 2004, (d) the revenue from the operation of five Summerfield Suites by Wyndham hotels ($5,027,000) beginning April 1, 2004, (e) the revenue from the Four Points by Sheraton hotel located in Fort Walton Beach, FL
($1,431,000), which was acquired on May 19, 2004 and (f) the revenue from the Homewood Suites hotel located in San Antonio, TX ($612,000), which was acquired on May 26, 2004.



Hotel operating expenses increased when expressed as a percentage of hotel operating revenue from 54.9% in 2003 to 57.1% in
2004. This was due primarily to (a) management fees due to the IH Manager as a result of the TRS Transaction, which increased management and accounting fees as a percentage of hotel operating revenue from 0.9% in 2003 to 3.2% in 2004, and (b) the
amortization in 2004 of deferred franchise conversion fees resulting from the Marriott Takeback Transaction and deferred lease acquisition costs arising from the TRS Transaction, in the amount of $405,000, or 0.7% of hotel operating revenue,
partially offset by a 170 basis point decrease in other hotel operating expenses.



Depreciation, amortization of franchise costs, amortization of loan origination fees, and amortization of unearned compensation (Depreciation and Amortization) was $8,805,000 in the aggregate for 2004
compared



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with $9,011,000 for 2003. The decrease in Depreciation and Amortization was primarily due to a decrease in the amortization of unearned compensation which
was attributable to fewer restricted shares being amortized.



Interest expense for 2004 was $4,599,000 compared with $4,400,000 for 2003. This increase was due primarily to interest expense on the franchise conversion fee obligations to Marriott ($161,000) and interest expense for the funds drawn on
the line of credit ($80,000).



Property taxes and insurance for
2004 was $2,889,000 compared with $3,185,000 for 2003. This decrease was due primarily to a 42% reduction on the cost of premiums on the Companys property insurance.



General and administrative remained relatively constant during the second quarter of 2004 at $1,199,000 compared with
$1,212,000 for the comparable period of 2003.



Other charges
decreased $227,000 to $117,000 in 2004 compared to $344,000 in 2003. This decrease was primarily due to a reduction in advisory fees related to the TRS transaction, which was completed during the first quarter of 2004.



Income from discontinued operations decreased from $334,000 in 2003 to
$119,000 in 2004. This decrease was due primarily to the sale of the Residence Inn by Marriott hotel located in Eden Prairie, MN on January 30, 2004.



Net income applicable to common shareholders for 2004 was $2,653,000, or $0.07 per diluted share, compared with net loss of $4,603,000, or $0.12 per
diluted share, for 2003. This change was due primarily to the factors discussed previously.



Comparison of the Six Months Ended June 30, 2004 (2004) to the Six Months Ended June 30, 2003 (2003)



The Companys revenues (as recognized in the accompanying financial statements) increased $65,268,000 to $98,729,000 in
2004 from $33,461,000 for 2003. The Companys 2004 revenue consists of $93,429,000 of hotel operating revenue, $5,073,000 of Percentage Lease revenue from the Lessees, and $227,000 of other revenue, compared with the 2003 revenue consisting of
$32,867,000 of Percentage Lease revenue from the Lessees, $358,000 of hotel operating revenue and $236,000 of other revenue. The decrease in Percentage Lease revenue was due to the completion of the TRS Transaction and the Wyndham Lease Termination
Transaction. With the completion of these transactions as of April 1, 2004, the Company does not anticipate recognizing any Percentage Lease revenue in future periods.



The Companys hotel operating expenses (as recognized in the accompanying financial statements) were $54,398,000 in
2004 compared to $236,000 in 2003. With the completion of the TRS transaction and the Wyndham Lease Termination Transaction, the Company recognizes hotel level operating expenses for hotels leased to TRSs.



The TRS Transaction and the Wyndham Lease Termination Transaction result in
financial statement presentations that are substantially different between periods due to the Companys different operating structures before and after the transactions. Therefore, the Company presents the following supplemental information,
which it believes may be useful in evaluating the performance of the Company for the transitional period. The following table summarizes the hotel operating revenue and hotel operating expenses for the Company and the IH Lessee for the six months
ended June 30, 2004 and 2003 (dollar amounts in thousands):



|                                                                    |  |         |        |   |               |   |       |       |  |   |               |   |  |   |        |  
|------------------------------------------------------------------- |  | ------- | ------ | - | ------------- | - | ----- | ----- |  | - | ------------- | - |  | - | ------ | -
|                                                                    |  | 2004    |        |   | 2003          |  
|                                                                    |  | TRS (1) |        |   | IH Lessee (2) |   |       | Total |  |   | IH Lessee (3) |  
|Hotel operating revenue                                             |  | $       | 93,429 |   |               | $ | 6,617 |       |  | $ | 100,046       |   |  | $ | 83,892 |  
|Hotel operating expenses                                            |  |         | 54,398 |   |               |   | 3,911 |       |  |   | 58,309        |   |  |   | 46,619 |  
|Hotel operating expenses as a percentage of hotel operating revenue |  |         | 58.2   | % |               |   | 59.1  | %     |  |   | 58.3          | % |  |   | 55.6   | %



|(1) | Represents the hotel operations recognized in the Companys financial statements. It
excludes the operations of hotels that are held for sale.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents the hotel operations attributable to the IH Lessee. It excludes the operations of
hotels that are held for sale.
|--- | -----------------------------------------------------------------------------------------------------------------------------



|(3) | Represents the hotel operations for the IH Lessee. It excludes the operations of hotels that
are held for sale and the operations of the hotels leased to the Summerfield Lessee.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The increase in hotel operating revenue of $16,154,00,000 was due primarily to (a) the 7.0% RevPAR increase at the Hotels for 2004 over the 2003
comparable period ($5,872,000), (b) the revenue from the operation of the Quality Inn hotel located in Atlantic City, NJ ($1,090,000) which was acquired in June 2003, (c) the



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revenue from the operation of the Sunrise Suites hotel located in Tinton Falls, NJ ($942,000) beginning March 1, 2004, (d) the revenue from the operation of
5 Summerfield Suites ($5,027,000) beginning April 1, 2004, (e) the revenue from the Four Points by Sheraton hotel located in Fort Walton Beach, FL ($1,431,000), which was acquired on May 19, 2004, (f) the revenue from the Homewood Suites located in
San Antonio, TX ($612,000), which was acquired on May 26, 2004, and (g) an extra day (February 29) of revenue in the 2004 period ($430,000).



Hotel operating expenses increased when expressed as a percentage of hotel operating revenue from 55.6% in 2003 to 58.3% in 2004. This was due primarily
to (a) management fees due to the IH Manager as a result of the TRS Transaction, which increased management and accounting fees as a percentage of hotel operating revenue from 0.6% in 2003 to 3.2% on 2004, and (b) the amortization of deferred
franchise conversion fees and deferred lease acquisition cost in 2004 of $751,000, or 0.8% of hotel operating revenue, partially offset by a 70 basis point decrease in other hotel operating expenses.



Depreciation and Amortization was $17,606,000 in the aggregate for 2004
compared with $17,942,000 for 2003. The decrease in Depreciation and Amortization was primarily due to a decrease in the amortization of unearned compensation which was attributable to fewer restricted shares being amortized.



Interest expense for 2004 was $9,093,000 compared with $8,715,000 for 2003.
This increase was due primarily to interest expense on the franchise conversion fees on the 17 Marriott Takeback properties ($324,000) and interest expense for the funds drawn on the line of credit ($80,000).



Property taxes and insurance for 2004 was $5,796,000 compared with $6,042,000
for 2003. This decrease was due primarily to a 40% reduction on the cost of premiums on the Companys property insurance.



General and administrative expenses increased $215,000, to $2,830,000 in 2004 from $2,615,000 in 2003. This increase was due primarily to an increase in
salaries and benefits of $401,000, offset by $201,000 of expense reductions in federal and state taxes.



Other charges decreased $511,000 to $488,000 in 2004 compared to $999,000 in 2003. This decrease was primarily due to a reduction in advisory fees related
to the TRS transaction, which was completed during the first quarter of 2004.



Income from discontinued operations increased from $512,000 in 2003 to $1,175,000 in 2004. This increase was due primarily to the $1,029,000 gain recognized on the sale of the Residence Inn by Marriott hotel located
in Eden Prairie, MN on January 30, 2004.



Net loss applicable
to common shareholders for 2004 was $2,552,000, or $0.07 per diluted share, compared with net loss of $9,653,000, or $0.26 per diluted share, for 2003. This change was due primarily to the factors discussed previously and the $4,249,000 loss
recognized on the redemption of the Series A Preferred Shares.



Liquidity
and Capital Resources



During 2003, the Companys
principal source of liquidity was rent payments from the Lessees under the Percentage Leases, and the Company was dependent on the Lessees to make such payments to provide cash for debt service, distributions, capital expenditures at its Hotels, and
working capital. With the completion of the TRS Transaction, the Companys principal source of liquidity is now derived from hotel operations. The Company expects that its cash from hotel operations during 2004 will be adequate to meet its
liquidity and capital expenditure needs during the year, excluding acquisitions and development projects. The Company currently expects to fund its acquisitions and development projects primarily with the Companys current cash on hand, by
borrowing on its Line of Credit or accessing the capital markets, if feasible.



Cash Flow Analysis



Cash and cash equivalents
(including restricted cash and restricted cash equivalents) at June 30, 2004 and 2003 were $23,663,000 and $20,114,000, including $0 and $2,036,000, respectively, which the Company was required, under the Percentage Leases, to make available to the
Lessee for the replacement and refurbishment of furniture and equipment and certain other capital expenditures. Additionally, cash and cash equivalents included $8,521,000 and $7,675,000 at June 30, 2004 and 2003, respectively, that was held in
escrow by lenders to pay for insurance, taxes, and capital expenditures for certain Hotels.



Net cash provided by operating activities for the six months ended June 30, 2004 and 2003 was $37,387,000 and $24,473,000, respectively. The increase in net cash provided by operating activities was



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primarily the result of a change from a net loss to net income between periods, a decrease in accounts receivable, and an increase in accounts payable and
accrued expenses.



Net cash used in investing activities was
$69,818,000 for the six months ended June 30, 2004. This was comprised primarily of (a) renovations at certain hotels for $13,332,000, (b) the purchase of the San Antonio, TX hotel for $21,000,000, the Fort Walton Beach, FL hotel for $30,000,000 and
the Louisville, KY hotel for $6,400,000 (the purchase prices do not include $676,000 in costs incurred in connection with these acquisitions), (c) the acquisition of leases from the IH Lessee for $1,336,000, (c) net deposits of $935,000 into certain
restricted cash accounts, and (d) payment of franchise fees for $192,000, which were partially offset by the net proceeds from the sale of the Residence Inn by Marriott located in Eden Prairie, MN of $4,028,000.



Net cash used in investing activities was $16,593,000 for the six months
ended June 30, 2003. This was comprised primarily of (a) renovations at certain hotels of $12,360,000, (b) net withdrawals of $4,440,000 from certain restricted cash accounts, and (c) the purchase of the Atlantic City, NJ hotel for $8,663,000.



Net cash provided by financing activities was $37,987,000 for
the six months ended June 30, 2004, consisting primarily of the proceeds from the issuance of the Series C Preferred Shares of $140,251,000 and draws under the Line of Credit of $26,000,000, partially offset by (a) the redemption of the Series A
Preferred Shares of $115,730,000, (b) distributions paid of $9,860,000, (c) loan costs paid of $68,000, (d) principal payments on amortizing debt of $2,402,000, and (e) franchise conversion fee obligation principal payments of $204,000.



Net cash used by financing activities was $18,844,000 for the six months
ended June 30, 2003, consisting primarily of (a) principal payments on amortizing debt of $2,258,000, (b) distributions paid of $16,405,000 and (c) loan costs paid of $181,000.



Distributions/Dividends



The Company has paid regular quarterly distributions on its common shares and Common Units since its inception. The 2004 first and second quarter
distribution was $0.03 per common share or unit. Quarterly preferred distributions of between $0.275 and $0.28875 are payable on each Class B Preferred Unit (depending on the level of common share dividend paid), and the 2004 first and second
quarter distributions were $0.275 per Class B Preferred Unit. A dividend of $0.49114 was paid on each Series A Preferred Share when the Series A Preferred Shares were redeemed on January 20, 2004. In addition, dividends of $0.539 and $0.50 were paid
on each Series C Preferred Share for the first and second quarter of 2004, respectively. The timing and amount of any future dividends will be determined by the Companys Board of Trustees in its sole discretion based on factors it deems
relevant and no assurance can be given that the current dividend levels will be sustained. Under federal income tax law provisions applicable to REITs, the Company is required to distribute at least 90% of its taxable income to maintain its REIT
status.



On January 20, 2004, the Company completed an offering
of 5,800,000 8.0% Series C cumulative preferred shares (the Series C Preferred Shares). The Series C Preferred Shares may be redeemed at the $25 liquidation preference at the election of the Company on or after January 20, 2009. The
Series C Preferred Shares have no stated maturity, sinking fund or mandatory redemption and are not convertible into any other securities of the Company. Each Series C Preferred Share is entitled to a quarterly dividend of $0.50. The net proceeds
from the offering were approximately $140.3 million and the Company used approximately $115.7 million to redeem all of the Companys outstanding Series A Preferred Shares and the balance for general corporate purposes.



Financing



In making future investments in hotel properties, the Company may incur additional indebtedness. The Company may also incur
indebtedness to meet distribution requirements imposed on a REIT under the Internal Revenue Code, to fund its renovation and upgrade program or to fund any other liquidity needs to the extent that working capital and cash flow from the
Companys operations are insufficient to fund such needs. The Companys Declaration of Trust limits aggregate indebtedness to 50% of the Companys investment in hotel properties, at cost, after giving effect to the Companys use
of proceeds from any indebtedness. On July 23, 2004, the Company entered into a new $135,000,000 Line of Credit with a majority of its existing line of credit lenders on substantially the same terms as the maturing credit facility. The interest rate
on the Line of Credit is LIBOR plus 122.5 to 225 basis points, depending on certain financial ratios. The Line of Credit matures on July 23, 2007. The actual amount that can be borrowed under the Line of Credit is subject to borrowing base
availability and certain other conditions described in the loan agreement. At June 30, 2004, the Company (i) had $26 million of borrowings outstanding under the Line of Credit and (ii) had available to it approximately $99 million under the



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Line of Credit (assuming the proceeds were used for the acquisition of hotel properties). At June 30, 2004, the Company was in compliance with the financial
covenants contained all of in its various loan agreements.



The
following table summarizes certain information concerning the Companys debt at June 30, 2004 and 2003:



|                                                    |  |      |             |   |      |   |             |  
|--------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                    |  | 2004 |             |   | 2003 |  
|Investment in hotels, at cost                       |  | $    | 922,279,000 |   |      | $ | 884,841,000 |  
|Debt                                                |  |      | 255,772,000 |   |      |   | 234,472,000 |  
|Percentage of debt to investment in hotels, at cost |  |      | 27.7        | % |      |   | 26.5        | %
|Percentage of fixed rate debt to total debt         |  |      | 85.9        | % |      |   | 95.7        | %
|Weighted average implied interest rates on:         |  |      |             |   |      |   |             |  
|Fixed rate debt                                     |  |      | 7.54        | % |      |   | 7.54        | %
|Variable rate debt                                  |  |      | 2.38        | % |      |   | 1.25        | %
|Total debt                                          |  |      | 6.81        | % |      |   | 7.27        | %
|Number of hotels properties:                        |  |      |             |   |      |   |             |  
|Encumbered                                          |  |      | 39          |   |      |   | 39          |  
|Unencumbered                                        |  |      | 30          |   |      |   | 28          |  



In the future, the
Company may seek to increase or decrease the amount of its credit facilities, negotiate additional credit facilities, or issue corporate debt instruments, all in compliance with the Companys debt limitation. Any debt incurred or issued by the
Company may be secured or unsecured, short-term or long-term, bear a fixed or variable interest rate and may be subject to such other terms as management or the Board of Trustees of the Company deems prudent. The Company has no interest rate hedging
instrument exposure, financial derivatives or forward equity commitments.



Capital Expenditures



Each of the
Companys term loans require that the Company make available for the periodic replacement or refurbishment of furniture, fixtures and equipment and certain other capital expenditures at the Hotels collateralizing those loans, amounts up to 5%
of gross revenues from such Hotels. The Company intends to cause the expenditure of amounts in excess of such obligated amounts, if necessary, to comply with the reasonable requirements of any franchise agreement and otherwise to the extent that the
Company deems such expenditures to be in the best interests of the Company. Management believes that the amounts required to be made available by the Company under the Term Loans will be sufficient to meet most of the routine expenditures for
furniture, fixtures and equipment at the Hotels. However, in the past, the Company has spent substantially more on capital expenditures than the Term Loans require. Management believed these additional expenditures were necessary to meet competitive
pressures from other hotels, many of which are newly constructed. In many cases, the expenditures were also required by franchisors of the Hotels. Management believes that for the foreseeable future the Company will continue to spend substantially
more on capital expenditures than it is required to make available under the loan agreements. The extent to which the actual expenditures exceed the amounts required to be made available will vary from year to year, based on a number of factors.
Those factors include, for any given year, market and franchisor requirements, the point in the normal recurring upgrade cycle the hotels are at in that year, and the revenue of the hotels for that year. In 2004, management expects to spend
approximately $20 million on capital expenditures. To the extent that the Company spends more on capital expenditures than is available from the Companys operations, the Company intends to borrow under the Line of Credit or other facilities.



Related Party Transactions



The Company has entered into a number of transactions and arrangements that
involve conflicts of interest. For a description of these transactions and arrangements, please see Risk Factors  Conflicts of Interest and Related Party Transactions beginning on page R-2 in the 10-K. See also Notes 9, 10 and 11
to the Companys financial statements beginning on page F-1 in the 10-K.



Contractual Obligations and Commercial Commitments



There were no significant changes, outside the normal course of business, in the contractual obligations and commercial commitments disclosed in the 10-K except for the acquisition commitments described in Note 1 to
the accompanying financial statements.



Seasonality of Hotel Business



The hotel industry is seasonal in nature. Historically,
the Hotels operations have generally reflected higher occupancy rates and ADR during the second and third quarters. To the extent that cash flow for a quarter is



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insufficient to fund all of the operating expenses and distributions for such quarter due to seasonal and other factors, the Company may fund quarterly
operating expenses and distributions with available cash and/or borrowings under the Line of Credit.



Inflation



Operators of
hotels, including the IH Manager, generally possess the ability to adjust room rates quickly. However, competitive pressures and other factors have limited and may in the future limit the ability of the IH Manager and any third-party managers
retained by the TRSs to raise room rates in response to inflation. However, there can be no assurance that these modest inflation levels will not increase in future years or that the Company will not continue to be constrained from raising room
rates. We are also subject to the risk that inflation will cause increases in hotel operating expenses disproportionately to revenues.



Funds From Operations



The National Association of Real Estate Investment Trusts (NAREIT) adopted the definition of funds from operations (FFO) in order
to promote an industry standard measure of REIT financial and operating performance. The Company believes that the presentation of FFO (defined below) provides useful information to investors regarding the Companys financial condition and
results of operations, particularly in reference to the Companys ability to service debt, fund capital expenditures and pay cash dividends. FFO adds back historical cost depreciation, which assumes the value of real estate assets diminishes
predictably in the future. In fact, real estate asset values increase or decrease with market conditions. Consequently, the Company believes FFO is a useful measure in evaluating its operating performance by disregarding (or adding back) historical
cost depreciation. Additionally, FFO per share targets are used to determine a significant portion of the incentive compensation of the Companys senior management.



NAREIT defines FFO as net income (loss) (computed in accordance with generally accepted accounting principles (GAAP)),
excluding gains (losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company calculates FFO in compliance with the NAREIT definition. Therefore, FFO and FFO
per share are presented to assist investors in analyzing the performance of the Company. While we believe our calculation of FFO and FFO per share conforms to the NAREIT definition, our method of calculating FFO and FFO per share may be different
from methods used by other REITs. Accordingly, the Companys method of calculating FFO and FFO per share may not be comparable to other REITs. Moreover, FFO (i) does not represent cash flows from operating activities as defined by generally
accepted accounting principles, (ii) does not include the cost of capital or capitalized interest, (iii) is not indicative of cash available to fund all cash flow and liquidity needs, including its ability to make distributions, and (iv) should not
be considered as an alternative to net income (as determined in accordance with generally accepted accounting principles) for purposes of evaluating the Companys operating performance.



The following presents the Companys calculations of FFO and the
denominator for FFO per share for the three and six months ended June 30, 2004 and 2003 (in thousands, except share and per share data):



|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | -------------------------- | ---------- | ---- | ------------------------ | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | Three Months EndedJune 30, |            |      | Six Months EndedJune 30, |           
|                                                    |  | 2004                       |            | 2003 |                          |            | 2004 |  |   | 2003       |  
|Net income (loss) applicable to common shareholders |  | $                          | 2,653      |      | $                        | (4,603     | )    |  | $ | (2,552     | ) |  | $ | (9,653     | )
|Depreciation                                        |  |                            | 8,363      |      |                          | 8,358      |      |  |   | 16,655     |   |  |   | 16,661     |  
|Depreciation included in discontinued operations    |  |                            |           |      |                          | 154        |      |  |   | 119        |   |  |   | 308        |  
|Minority interest, common                           |  |                            | 81         |      |                          | (144       | )    |  |   | (76        | ) |  |   | (301       | )
|Gain on sale of hotel                               |  |                            |           |      |                          |           |      |  |   | (1,029     | ) |  |   |            |  
|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Basic FFO                                           |  | $                          | 11,097     |      | $                        | 3,765      |      |  |   | 13,117     |   |  | $ | 7,015      |  
|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Minority interest, preferred(1)                     |  |                            | 1,068      |      |                          |           |      |  |   |           |   |  |   |           |  
|Preferred share dividends(1)                        |  |                            |           |      |                          |           |      |  |   |           |   |  |   |           |  
|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Diluted FFO                                         |  | $                          | 12,165     |      | $                        | 3,765      |      |  | $ | 13,117     |   |  | $ | 7,015      |  
|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Denominator for basic earnings per share            |  |                            | 37,470,106 |      |                          | 37,387,194 |      |  |   | 37,450,343 |   |  |   | 37,386,755 |  
|Weighted average:                                   |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Common Units                                        |  |                            | 1,128,294  |      |                          | 1,167,344  |      |  |   | 1,147,765  |   |  |   | 1,167,617  |  
|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Denominator for basic FFO per share                 |  |                            | 38,598,400 |      |                          | 38,554,538 |      |  |   | 38,598,108 |   |  |   | 38,554,372 |  
|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Denominator for diluted earnings per share          |  |                            | 37,559,261 |      |                          | 37,387,194 |      |  |   | 37,450,343 |   |  |   | 37,386,755 |  
|Effect of dilutive securities:                      |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Stock options                                       |  |                            |           |      |                          | 267        |      |  |   | 3,849      |   |  |   | 140        |  
|Restricted shares                                   |  |                            |           |      |                          | 79,510     |      |  |   | 67,696     |   |  |   | 41,265     |  
|Weighted average:                                   |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Common Units                                        |  |                            | 1,128,294  |      |                          | 1,167,344  |      |  |   | 1,147,765  |   |  |   | 1,167,617  |  
|Class B Preferred Units(1)                          |  |                            | 3,884,469  |      |                          |           |      |  |   |           |   |  |   |           |  
|Series A Preferred Shares(1)(2)                     |  |                            |           |      |                          |           |      |  |   |           |   |  |   |           |  
|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Denominator for diluted FFO per share               |  |                            | 42,572,024 |      |                          | 38,634,315 |      |  |   | 38,669,653 |   |  |   | 38,595,777 |  
|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Basic FFO per share                                 |  | $                          | 0.29       |      | $                        | 0.10       |      |  | $ | 0.34       |   |  | $ | 0.18       |  
|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  
|Diluted FFO per share                               |  | $                          | 0.29       |      | $                        | 0.10       |      |  | $ | 0.34       |   |  | $ | 0.18       |  
|                                                    |  |                            |            |      |                          |            |      |  |   |            |   |  |   |            |  



|(1) | Except for the three months ended June 30, 2004, the conversion of the Series A Preferred
Shares and the Class B Preferred Units into common shares is anti-dilutive and, therefore, is not included in the calculation of FFO per share for the other periods presented.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | The Series A Preferred Shares were redeemed on January 20, 2004.
|--- | ----------------------------------------------------------------



The 2004 six-month results include a loss on the redemption of the Series A
Preferred Shares of $4,249,000, or $0.11 per diluted share. The 2003 six-month results exclude the recognition of $7,892,000, or $0.20 per diluted share, of Percentage Lease revenue that was deferred in accordance with SAB 101.



Forward-Looking Statements



This report contains forward-looking statements within the
meaning of the federal securities laws including, without limitation, statements containing the words estimates, projects, anticipates, should, expects and words of similar import. Such
forward-looking statements relate to future events and the future financial performance of the Company and 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 the results or achievements expressed or implied by such forward-looking statements. The Company is not obligated to update any such factors or to reflect the impact of actual future events or developments or
such forward-looking statements.



Cautionary statements set
forth in reports filed by the Company from time to time with the SEC discuss important factors with respect to such forward-looking statements. These factors include, without limitation, (i) more direct exposure to the operational risks of the hotel
business (including falling hotel revenues and increasing hotel expenses) under the Companys new taxable REIT subsidiary structure, (ii) risks that disruptions in oil imports or higher oil prices, widespread health alerts, changes
in domestic or international political environments, war, terrorism or similar activity would have results that could negatively affect the travel industry and/or Company in ways and to an extent that cannot be anticipated, (iii) the relative
strength and performance of businesses and industries that are important demand generators in the Companys key markets (e.g., technology, automotive, aerospace, etc.), (iv) international, national, regional and local economic conditions that
will, among other things, affect demand for the Companys hotel rooms and the availability and terms of financing, (v) the Companys ability to maintain its properties in competitive condition, (vi) the Companys ability to acquire or
develop additional properties and risks that potential acquisitions or developments may not perform in accordance with expectations, (vii) the Companys ability to meet covenants in its debt agreements, (viii) changes in travel patterns,
pricing methods and mechanisms (i.e. the increased use of internet reservation channels), or the prevailing means of commerce (i.e., e-commerce), (ix) the complex tax rules that the Company must satisfy to qualify as a REIT and (x) governmental
regulation may increase the Companys cost of doing business or otherwise negatively affect its attractiveness as an investment or its business (e.g., changes in laws affecting taxes on dividends or other taxes, compliance with the Americans
with Disabilities Act, workers compensation law changes, the Sarbanes-Oxley law, etc.). Although we believe that the expectations reflected in the forward-looking statements are based on reasonable assumptions, we can give no assurances that our
expectations will be attained or that any deviations will not be material.



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INNKEEPERS USA TRUST

ITEM 3 - QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK



The Companys primary market risk exposure is to changes in interest
rates on its Line of Credit and other debt. The Companys interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower its overall borrowing costs. To achieve these objectives, the
Company manages its exposure to fluctuations in market interest rates for a portion of its borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. The Company may
enter into derivative financial instruments such as interest rate swaps or caps and treasury options or locks to mitigate its interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of its variable
rate debt. Currently, the Company has no derivative financial instruments. The Company does not enter into derivative or interest rate transactions for speculative purposes. The Company regularly reviews interest rate exposure on its outstanding
borrowings in an effort to minimize the risk of interest rate fluctuations.



For debt obligations outstanding at June 30, 2004, the following table presents principal repayments and related weighted average implied interest rates by expected maturity dates (in thousands):



|                      |  |      |       |   |      |   |       |      |  |   |       |   |  |      |        |   |            |   |       |       |  |   |           |   |  |   |         |   |  |   |        
|--------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ------ | - | ---------- | - | ----- | ----- |  | - | --------- | - |  | - | ------- | - |  | - | -------
|                      |  | 2004 |       |   | 2005 |   |       | 2006 |  |   | 2007  |   |  | 2008 |        |   | Thereafter |   |       | Total |  |   | FairValue
|Debt:                 |  |      |       |   |      |   |       |      |  |   |       |   |  |      |        |   |            |   |       |       |  |   |           |   |  |   |         |   |  |   |        
|Fixed Rate            |  | $    | 2,481 |   |      | $ | 5,884 |      |  | $ | 6,399 |   |  | $    | 27,566 |   |            | $ | 6,006 |       |  | $ | 171,436   |   |  | $ | 219,772 |   |  | $ | 219,772
|Average Interest Rate |  |      | 7.57  | % |      |   | 7.59  | %    |  |   | 7.59  | % |  |      | 8.03   | % |            |   | 7.46  | %     |  |   | 7.46      | % |  |   | 7.54    | % |  |   |       
|Variable Rate         |  |      |      |   |      |   |      |      |  |   |      |   |  |      | 26,000 |   |            |   |      |       |  | $ | 10,000    |   |  | $ | 36,000  |   |  | $ | 36,000 
|Average Interest Rate |  |      |      |   |      |   |      |      |  |   |      |   |  |      | 2.89   | % |            |   |      |       |  |   | 1.03      | % |  |   | 2.38    | % |  |   |       



The table incorporates
only those exposures that existed as of June 30, 2004 and does not consider exposures or positions that could arise after that date. As a result, the Companys ultimate realized gain or loss with respect to interest rate fluctuations will
depend on the exposures that arise during the future period, prevailing interest rates, and the Companys hedging strategies at that time. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates.
The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Companys financing requirements.



At June 30, 2004, the Company had $26,000,000 in outstanding borrowings under its existing line of credit. On July 23, 2004, the Company entered into a
new Line of Credit with a majority of its existing line of credit lenders. The table above reflects the new July 2007 maturity date of the Line of Credit. All of our other debt matures in 2007 or thereafter.



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##### Table of Contents

INNKEEPERS USA TRUST

ITEM 4  CONTROLS AND PROCEDURES



The Company evaluated, under the supervision and with the participation of the Companys management (including its chief executive officer and chief financial officer), the effectiveness of the design and operation of its disclosure
controls and procedures as defined in Exchange Act Rule 13a  15(e).



Based on their evaluation of such disclosure controls and procedures, the Companys chief executive officer and chief financial officer have concluded that such controls were effective as of June 30, 2004, are
operating as designed and will alert them on a timely basis to any material information relating to the Company required to be included in the Companys periodic SEC filings.



There has been no change in the Companys internal control over financial reporting during the quarter ended June 30,
2004 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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INNKEEPERS USA TRUST

PART II - OTHER INFORMATION



ITEM 4 - Submissions of Matters to a Vote of Security Holders



The 2004 Annual Meeting of Shareholders was held on May 5, 2004 for the following purpose:



| |  | To elect three Class I trustees to serve of the Companys Board of Trustees until the Companys annual meeting of shareholders in 2007 or until their successors have been
duly elected and qualified.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Shareholders voted
to elect: (a) Mr. Jack P. DeBoer as a Class I trustee with 34,431,195 shares voted for Mr. DeBoer (1,710,139 votes withheld authority), (b) Mr. Joel F. Zemans as a Class I trustee, with 34,646,531 shares voted for Mr. Zemans (1,494,803 votes
withheld authority), and (c) Mr. Randall L. Churchey as a Class I trustee, with 34,892,377 shares voted for Mr. Churchey (1,248,957 withheld authority).



ITEM 6  Exhibits and Reports on Form 8-K



| | (a) | Exhibits
| | --- | --------



|        |  |                                                                             
|------- |  | ----------------------------------------------------------------------------
|Exhibit |  | Description                                                                 
|        | 
|31.1    |  | CEO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        | 
|31.2    |  | CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        | 
|32.1    |  | CEO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|        | 
|32.2    |  | CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



| | (b) | Reports on Form 8-K:
| | --- | --------------------



An Item 7 and 12 current report on Form 8-K, dated May 4, 2004, was filed with the Securities and Exchange Commission on May 5, 2004.



An Item 5 current report on Form 8-K, dated May 19, 2004, was filed with the
Securities and Exchange Commission on May 20, 2004.



An Item 5
current report on Form 8-K, dated June 29, 2004, was filed with the Securities and Exchange Commission on June 30, 2004.



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SIGNATURE



Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



|               |  |  |  |                                                                            
|-------------- |  |  |  | ---------------------------------------------------------------------------
|               |  |  |  | INNKEEPERS USA TRUST                                                       
|               |  | 
|August 3, 2004 |  |  |  | /s/    GREGORY M. FAY                                                      
|               |  |  |  | Gregory M. Fay                                                             
|               |  |  |  | Chief Accounting and Administrative Officer andPrincipal Accounting Officer



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EXHIBIT INDEX



|        |  |                                                                             
|------- |  | ----------------------------------------------------------------------------
|Exhibit |  | Description                                                                 
|31.1    |  | CEO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        | 
|31.2    |  | CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        | 
|32.1    |  | CEO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|        | 
|32.2    |  | CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002