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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



(Mark One)

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



For the quarterly period ended September 30, 2003



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



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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 November 1, 2003, was 37,563,499.



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##### Table of Contents

TABLE OF CONTENTS





|              |  |                       |  |                                                                                                       |  | Page
|------------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----
|              |  |                      
|Part I        |  | Financial Information |  | 1                                                                                                    
|              |  |                       | 
|              |  | Item 1.               |  | Financial Statements                                                                                  |  | 1   
|              |  |                       | 
|              |  |                       |  | INNKEEPERS USA TRUST                                                                                  |  |     
|              |  |                       | 
|              |  |                       |  | Consolidated Balance Sheets at September 30, 2003 and December 31, 2002                               |  | 1   
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002 |  | 2   
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002           |  | 3   
|              |  |                       | 
|              |  |                       |  | Notes to Consolidated Financial Statements                                                            |  | 4   
|              |  |                       | 
|              |  |                       |  | INNKEEPERS HOSPITALITY                                                                                |  |     
|              |  |                       | 
|              |  |                       |  | Combined Balance Sheets at September 30, 2003 and December 31, 2002                                   |  | 9   
|              |  |                       | 
|              |  |                       |  | Combined Statements of Operations for the three and nine months ended September 30, 2003 and 2002     |  | 10  
|              |  |                       | 
|              |  |                       |  | Combined Statements of Cash Flows for the nine months ended September 30, 2003 and 2002               |  | 11  
|              |  |                       | 
|              |  |                       |  | Notes to Combined Financial Statements                                                                |  | 12  
|              |  |                       | 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 15  
|              |  |                       | 
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  | 24  
|              |  |                       | 
|              |  | Item 4.               |  | Controls and Procedures                                                                               |  | 25  
|              |  |                      
|Part II.      |  | Other Information     |  | 26                                                                                                   
|              |  |                       | 
|              |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                      |  | 26  
|              | 
|Signature     |  | 27                   
|              | 
|Exhibit Index |  | 28                   



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INNKEEPERS USA TRUST

PART I  FINANCIAL INFORMATION

ITEM 1 
FINANCIAL STATEMENTS



Innkeepers USA Trust

Consolidated Balance Sheets

(in thousands, except share and per share data)



|                                                                                                                              |  | September 30,2003 |          |   | December 31,2002 |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | -
|ASSETS                                                                                                                        |  |                   |          |   |                  |  
|Investment in hotel properties:                                                                                               |  |                   |          |   |                  |  
|Land and improvements                                                                                                         |  | $                 | 104,682  |   |                  | $
|Buildings and improvements                                                                                                    |  |                   | 657,613  |   |                  |  
|Furniture and equipment                                                                                                       |  |                   | 86,522   |   |                  |  
|Renovations in process                                                                                                        |  |                   | 16,023   |   |                  |  
|Hotels held for sale, net                                                                                                     |  |                   |         |   |                  |  
|                                                                                                                              |  |                   |          |   |                  |  
|                                                                                                                              |  |                   | 864,840  |   |                  |  
|Accumulated depreciation                                                                                                      |  |                   | (183,253 | ) |                  |  
|                                                                                                                              |  |                   |          |   |                  |  
|Net investment in hotel properties                                                                                            |  |                   | 681,587  |   |                  |  
|Cash and cash equivalents                                                                                                     |  |                   | 11,352   |   |                  |  
|Restricted cash and cash equivalents                                                                                          |  |                   | 10,672   |   |                  |  
|Due from Lessees                                                                                                              |  |                   | 9,811    |   |                  |  
|Deferred expenses, net                                                                                                        |  |                   | 3,083    |   |                  |  
|Other assets                                                                                                                  |  |                   | 1,875    |   |                  |  
|                                                                                                                              |  |                   |          |   |                  |  
|Total assets                                                                                                                  |  | $                 | 718,380  |   |                  | $
|                                                                                                                              |  |                   |          |   |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                          |  |                   |          |   |                  |  
|Debt                                                                                                                          |  | $                 | 233,347  |   |                  | $
|Accounts payable and accrued expenses                                                                                         |  |                   | 6,714    |   |                  |  
|Distributions payable                                                                                                         |  |                   | 3,981    |   |                  |  
|Deferred rent revenue                                                                                                         |  |                   | 10,249   |   |                  |  
|Minority interest in Partnership                                                                                              |  |                   | 51,953   |   |                  |  
|                                                                                                                              |  |                   |          |   |                  |  
|Total liabilities                                                                                                             |  |                   | 306,244  |   |                  |  
|                                                                                                                              |  |                   |          |   |                  |  
|Shareholders equity:                                                                                                         |  |                   |          |   |                  |  
|Preferred shares, $0.01 par value, 20,000,000 shares authorized, 4,630,000 shares issued and outstanding                      |  |                   | 115,750  |   |                  |  
|Common shares, $0.01 par value, 100,000,000 shares authorized, 37,563,499 and 37,483,913 issued and outstanding,
respectively |  |                   | 376      |   |                  |  
|Additional paid-in capital                                                                                                    |  |                   | 393,513  |   |                  |  
|Unearned compensation                                                                                                         |  |                   | (1,269   | ) |                  |  
|Distributions in excess of earnings                                                                                           |  |                   | (96,234  | ) |                  |  
|                                                                                                                              |  |                   |          |   |                  |  
|Total shareholders equity                                                                                                    |  |                   | 412,136  |   |                  |  
|                                                                                                                              |  |                   |          |   |                  |  
|Total liabilities and shareholders equity                                                                                    |  | $                 | 718,380  |   |                  | $
|                                                                                                                              |  |                   |          |   |                  |  



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



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Innkeepers USA Trust

Consolidated Statements of Operations

(in thousands, except per share data)



|                                                                             |  | Three Months Ended September 30, |        |   | Nine months Ended September 30, |  
|---------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                                             |  | 2003                             |        |   | 2002                            |  
|Revenue:                                                                     |  |                                  |        |   |                                 |  
|Percentage Lease revenue                                                     |  | $                                | 20,465 |   |                                 | $
|Hotel operating revenue                                                      |  |                                  | 1,381  |   |                                 |  
|Other revenue                                                                |  |                                  | 81     |   |                                 |  
|                                                                             |  |                                  |        |   |                                 |  
|Total revenue                                                                |  |                                  | 21,927 |   |                                 |  
|                                                                             |  |                                  |        |   |                                 |  
|Expenses:                                                                    |  |                                  |        |   |                                 |  
|Depreciation                                                                 |  |                                  | 8,523  |   |                                 |  
|Amortization of franchise costs                                              |  |                                  | 19     |   |                                 |  
|Ground rent                                                                  |  |                                  | 126    |   |                                 |  
|Interest expense                                                             |  |                                  | 4,378  |   |                                 |  
|Amortization of loan origination fees                                        |  |                                  | 270    |   |                                 |  
|Hotel operating expenses                                                     |  |                                  | 821    |   |                                 |  
|Property taxes and insurance                                                 |  |                                  | 3,275  |   |                                 |  
|General and administrative (excluding amortization of unearned compensation) |  |                                  | 1,256  |   |                                 |  
|Amortization of unearned compensation                                        |  |                                  | 356    |   |                                 |  
|Other charges                                                                |  |                                  | 557    |   |                                 |  
|                                                                             |  |                                  |        |   |                                 |  
|Total expenses                                                               |  |                                  | 19,581 |   |                                 |  
|                                                                             |  |                                  |        |   |                                 |  
|Income (loss) before minority interest                                       |  |                                  | 2,346  |   |                                 |  
|Minority interest, common                                                    |  |                                  | 35     |   |                                 |  
|Minority interest, preferred                                                 |  |                                  | (1,069 | ) |                                 |  
|                                                                             |  |                                  |        |   |                                 |  
|Income (loss) from continuing operations                                     |  |                                  | 1,312  |   |                                 |  
|Discontinued operations                                                      |  |                                  | 52     |   |                                 |  
|Gain on sale of hotel                                                        |  |                                  |       |   |                                 |  
|                                                                             |  |                                  |        |   |                                 |  
|Net income (loss)                                                            |  |                                  | 1,364  |   |                                 |  
|Preferred share dividends                                                    |  |                                  | (2,496 | ) |                                 |  
|                                                                             |  |                                  |        |   |                                 |  
|Net loss applicable to common shareholders                                   |  | $                                | (1,132 | ) |                                 | $
|                                                                             |  |                                  |        |   |                                 |  
|Earnings (loss) per share data:                                              |  |                                  |        |   |                                 |  
|Basic-continuing operations                                                  |  | $                                | (0.03  | ) |                                 | $
|                                                                             |  |                                  |        |   |                                 |  
|Basic                                                                        |  | $                                | (0.03  | ) |                                 | $
|                                                                             |  |                                  |        |   |                                 |  
|Diluted-continuing operations                                                |  | $                                | (0.03  | ) |                                 | $
|                                                                             |  |                                  |        |   |                                 |  
|Diluted                                                                      |  | $                                | (0.03  | ) |                                 | $
|                                                                             |  |                                  |        |   |                                 |  



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



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Innkeepers USA Trust

Consolidated Statements of Cash Flows

(in thousands)



|                                                                                |  | Nine months EndedSeptember 30, |        
|------------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                                |  | 2003                           |        
|Cash flows from operating activities:                                           |  |                                |        
|Net loss                                                                        |  | $                              | (3,297 
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                |        
|Depreciation and amortization                                                   |  |                                | 27,419 
|Minority interests                                                              |  |                                | 2,869  
|Deferred rent revenue                                                           |  |                                | 10,249 
|Loss (gain) on sale of hotel                                                    |  |                                | 57     
|Loss on hotel classified as held for sale                                       |  |                                |       
|Changes in operating assets and liabilities:                                    |  |                                |        
|Due from Lessees                                                                |  |                                | (1,027 
|Other assets                                                                    |  |                                | 1,157  
|Accounts payable and accrued expenses                                           |  |                                | (986   
|                                                                                |  |                                |        
|Net cash provided by operating activities                                       |  |                                | 36,441 
|                                                                                |  |                                |        
|Cash flows from investing activities:                                           |  |                                |        
|Investment in hotel properties                                                  |  |                                | (26,097
|Proceeds from sale of hotel                                                     |  |                                | 1,990  
|Payments for initial franchise fees                                             |  |                                | (10    
|Net withdrawals from restricted cash accounts                                   |  |                                | 3,479  
|                                                                                |  |                                |        
|Net cash used by investing activities                                           |  |                                | (20,638
|                                                                                |  |                                |        
|Cash flows from financing activities:                                           |  |                                |        
|Proceeds from debt issuance                                                     |  |                                |       
|Payments on debt                                                                |  |                                | (3,383 
|Distributions paid to unit holders                                              |  |                                | (3,520 
|Distributions paid to shareholders                                              |  |                                | (17,615
|Redemption of shares and units                                                  |  |                                | (1,055 
|Proceeds from issuance of common shares                                         |  |                                |       
|Loan origination fees and costs paid                                            |  |                                | (245   
|                                                                                |  |                                |        
|Net cash used by financing activities                                           |  |                                | (25,818
|                                                                                |  |                                |        
|Net increase (decrease) in cash and cash equivalents                            |  |                                | (10,015
|Cash and cash equivalents at beginning of period                                |  |                                | 21,367 
|                                                                                |  |                                |        
|Cash and cash equivalents at end of period                                      |  | $                              | 11,352 
|                                                                                |  |                                |        
|Supplemental cash flow information:                                             |  |                                |        
|Interest paid                                                                   |  | $                              | 13,128 
|                                                                                |  |                                |        



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
|-- | ------------



Innkeepers USA Trust (Innkeepers) is a self-administered real estate investment trust (REIT), which at September 30, 2003, owned
67 hotels with an aggregate of 8,311 rooms/suites (the Hotels) through its partnership interests in Innkeepers USA Limited Partnership (with its subsidiary partnerships, the Partnership and collectively with Innkeepers, the
Company).



At September 30, 2003, the Company
leased 60 of the Hotels to Innkeepers Hospitality, Inc. (or other entities under common control, collectively the IH Lessee) and six of the Hotels to affiliates of Wyndham International, Inc. (the Summerfield Lessee and,
together with the IH Lessee, the Lessees) pursuant to leases (Percentage Leases), each of which provides for rent (Percentage Rent) based on a fixed percentage of annual room revenue below, plus a higher fixed
percentage of annual room revenue in excess of, a specified dollar amount (Threshold), subject to a minimum annual base rent (Base Rent). Base Rent and the Threshold under each Percentage Lease increase each year based on the
increase in the Consumer Price Index for the previous year. Jeffrey H. Fisher, the Companys Chief Executive Officer, President and Chairman of the Board of Trustees, controls the IH Lessee. Rolf E. Ruhfus, a trustee of the Company, is also a
director of Wyndham International, Inc. (Wyndham).



At September 30, 2003, one of the Companys hotels was leased to a taxable REIT subsidiary of the Company and managed by an affiliate of the IH Lessee. The revenues and expenses related to this hotel are included in the accompanying
statements of operations under the captions hotel operating revenues and hotel operating expenses.



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, 2002 (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.



|2. | Recent Developments
|-- | -------------------



In June 2003, the Company purchased a Quality Inn hotel located in Atlantic City, NJ for $8,600,000. The Company anticipates closing the hotel in the
third quarter of 2004 and beginning renovations to enable the Company to convert the hotel to the Courtyard by Marriott brand. The Company currently believes that the renovation will cost approximately $9,000,000 and will be completed in the second
quarter of 2005. The Company anticipates funding the renovation costs from available cash or borrowings under the Line of Credit.



In June 2003, the Company granted 195,000 restricted shares to officers of the Company under the 1994 Plan. A certain number of the restricted shares vest
upon the attainment of certain annual performance targets and any unvested restricted shares will vest on January 1, 2007. The weighted average grant date fair value of the restricted shares granted was $6.50.



In August 2003, the Company agreed to acquire from the IH Lessee all of the
Percentage Leases for the 60 Hotels leased to the IH Lessee (the TRS Transaction). The Company has formed wholly owned taxable REIT subsidiaries (TRS) to acquire the hotel leases for an aggregate purchase price of $5.25
million in cash and the TRS will simultaneously enter into long-term management agreements with an affiliate of the IH Lessee to operate the hotels. The $5.25 million cash payment, when made, will be capitalized and amortized over the life of the
related management agreement (i.e., 10 years). The primary terms of the new management agreements are as follows:



| |  | Base management fee of 3% of gross revenues.
| | - | --------------------------------------------



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| |  | Accounting services fee of $750 per hotel per month.
| | - | ----------------------------------------------------



| |  | Incentive management fee of 50% of hotel available cash flow. Available cash flow is gross revenues less hotel operating expenses (including franchise fees), the base management
fees, the accounting services fee and Percentage Lease rent (paid by the TRS to the Company).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Initial term of 10 years (with 2 five year extension options).
| | - | --------------------------------------------------------------



In connection with the TRS Transaction, the Company will assume the franchise conversion fee obligations of the IH Lessee under the Marriott Takeback
Transaction, as described in Note 8. These franchise conversion fee obligations will be recorded as a liability (franchise conversion fee obligations) at their estimated fair value on the date of acquisition. The estimated fair value of
the franchise conversion fee obligations will be calculated as the present value of (1) the additional 11⁄2% franchise fee payable to Marriott for the first ten years of the new franchise agreements for the 17 affected hotels and (2) the annual
$850,000 Conversion Fee payable to Marriott for the first ten years of the new franchise agreements for the 17 affected hotels. The franchise conversion fee obligations liability is estimated to be approximately $10.73 million and will be reduced
using the effective interest method as payments are made to Marriott (interest will be imputed at the rate of 7% per annum). The Company will also recognize a deferred franchise conversion fees asset in the same amount as the liability
described above, which will be amortized over the initial term of the management agreements with the affiliate of the IH Lessee (i.e., 10 years) using the straight-line method.



The Company anticipates closing on the purchase of 23 Percentage Leases from the IH Lessee in the fourth quarter of 2003 or
the first quarter of 2004. The purchase of the remaining Percentage Leases is anticipated to close later in 2004.



|3. | 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 cost of less than $75,000 for the nine months ended September 30, 2003
and 2002. This would have reduced net income (loss) available to common shareholders per share by less than $0.01 in each of these periods.



|4. | Earnings per Share
|-- | ------------------



The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2003 and
2002 (in thousands, except share and per share data):



|                                                                                                      |  | Three Months Ended September 30, |            |   | Nine months Ended September 30, |  
|----------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | -
|                                                                                                      |  | 2003                             |            |   | 2002                            |  
|Numerator:                                                                                            |  |                                  |            |   |                                 |  
|Income (loss) from continuing operations                                                              |  | $                                | 1,312      |   |                                 | $
|Preferred share dividends                                                                             |  |                                  | (2,496     | ) |                                 |  
|                                                                                                      |  |                                  |            |   |                                 |  
|Income (loss) applicable to common shareholders from continuing operations                            |  |                                  | (1,184     | ) |                                 |  
|Gain on sale of hotel                                                                                 |  |                                  |           |   |                                 |  
|Discontinued operations                                                                               |  |                                  | 52         |   |                                 |  
|                                                                                                      |  |                                  |            |   |                                 |  
|Net loss applicable to common shareholders                                                            |  | $                                | (1,132     | ) |                                 | $
|                                                                                                      |  |                                  |            |   |                                 |  
|Denominator:                                                                                          |  |                                  |            |   |                                 |  
|Denominator for basic earnings (loss) per share  weighted average shares                             |  |                                  | 37,387,302 |   |                                 |  
|Effect of dilutive securities:                                                                        |  |                                  |            |   |                                 |  
|Share options                                                                                         |  |                                  | 1,501      |   |                                 |  
|Restricted shares                                                                                     |  |                                  | 141,639    |   |                                 |  
|                                                                                                      |  |                                  |            |   |                                 |  
|Denominator for diluted earnings per share  adjusted weighted average shares and assumed conversions |  |                                  | 37,530,442 |   |                                 |  
|                                                                                                      |  |                                  |            |   |                                 |  



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|                                |  | Three Months Ended September 30, |       |   | Nine months Ended September 30, |  
|------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | -
|                                |  | 2003                             |       |   | 2002                            |  
|Earnings (loss) per share data: |  |                                  |       |   |                                 |  
|Basic-continuing operations     |  | $                                | (0.03 | ) |                                 | $
|Basic-gain on sale of hotel     |  |                                  |      |   |                                 |  
|Basic-discontinued operations   |  |                                  |      |   |                                 |  
|                                |  |                                  |       |   |                                 |  
|Basic                           |  | $                                | (0.03 | ) |                                 | $
|                                |  |                                  |       |   |                                 |  
|Diluted-continuing operations   |  | $                                | (0.03 | ) |                                 | $
|Basic-gain on sale of hotel     |  |                                  |      |   |                                 |  
|Diluted-discontinued operations |  |                                  |      |   |                                 |  
|                                |  |                                  |       |   |                                 |  
|Diluted                         |  | $                                | (0.03 | ) |                                 | $
|                                |  |                                  |       |   |                                 |  



The conversion of
Common Units into common shares would have no effect on earnings (loss) per share. The conversion of the Series A Preferred Shares, the Class B Preferred Units and 1,345,500 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. For the periods where a loss was incurred, the denominator used for calculating diluted earnings
(loss) per share is the same as the denominator for basic earnings per share.



|5. | Other Charges
|-- | -------------



Other charges for the three and nine months ended September 30, 2003 and 2002 include the following (in thousands):



|                      |  | Three Months Ended September 30, |  |      |  | Nine months Ended September 30,
|--------------------- |  | -------------------------------- |  | ---- |  | -------------------------------
|                      |  | 2003                             |  | 2002 |  |                                
|Legal fees            |  |                                 |  | $90  |  |                                
|Litigation settlement |  | $18                              |  |     |  |                                
|Advisory services     |  | 267                              |  | 1    |  |                                
|TRS transaction costs |  | 272                              |  |     |  |                                
|                      |  |                                  |  |      |  |                                
|                      |  | $557                             |  | $91  |  |                                
|                      |  |                                  |  |      |  |                                



The legal fees and
litigation settlement are related to litigation with a former Company officer (see Note 7). The advisory services and TRS transaction costs are related to the TRS Transaction (see Note 2).



|6. | Discontinued Operations
|-- | -----------------------



In 2002, the Company adopted the provisions of FASB No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. During the third
quarter of 2002, the Company classified one of its hotel properties as held for sale. The results of operations from this hotel are classified as discontinued operations in the accompanying statements of operations. The previously
reported 2002 results of operations have been reclassified to reflect the classification of this hotel as held for sale. As a result of the held for sale classification, the Company reduced the carrying value of this hotel to its estimated fair
value (less costs to sell) and recognized a loss of $3,713,000 in 2003 ($1,599,000 was recognized in the third quarter of 2003 and $2,114,000 was recognized in the fourth quarter of 2003). The Company completed the sale of this hotel in September
2003 (gross proceeds were $2,050,000) and recognized an additional loss of $57,000.



The following table sets forth the components of discontinued operations for the three and nine months ended September 30, 2003 and 2002 (in thousands):



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|                                                                |  | Three Months Ended September 30, |   |  |          |   |  |  | Nine months Ended September 30, | 
|--------------------------------------------------------------- |  | -------------------------------- | - |  | -------- | - |  |  | ------------------------------- | 
|                                                                |  | 2003                             |   |  | 2002     |   |  |  |                                 | 
|Percentage Lease revenue                                        |  | $123                             |   |  | $    159 |   |  |  |                                 | 
|Depreciation                                                    |  |                                 |   |  | (52      | ) |  |  |                                 | 
|Property taxes and insurance                                    |  | (14                              | ) |  | (20      | ) |  |  |                                 | 
|Loss on sale of hotel                                           |  | (57                              | ) |  |         |   |  |  |                                 | 
|Loss recognized upon classification of hotel as held for sale |  |                                 |   |  | (1,599   | ) |  |  |                                 | 
|                                                                |  |                                  |   |  |          |   |  |  |                                 | 
|                                                                |  | $  52                            |   |  | $(1,512  | ) |  |  |                                 | 
|                                                                |  |                                  |   |  |          |   |  |  |                                 | 



|7. | Litigation Settlement
|-- | ---------------------



In May 2000, the Companys former Chief Operating Officer (who is a minority shareholder in certain of the IH Lessee entities) filed suit against the
Company, the IH Lessee and Mr. Fisher. The suit alleged that he was wrongfully terminated by the Company in breach of his employment contract with the Company, was wrongfully terminated by the IH Lessee under his employment contract with the IH
Lessee, was injured by various breaches of fiduciary duty by Mr. Fisher in his capacity as a director and majority shareholder of the IH Lessee, and various other related claims against the Company and the IH Lessee. In September 2003, the
defendants entered into a settlement agreement with the plaintiff. Under the settlement agreement, (a) the Company paid the plaintiff $3.0 million in cash (which included the purchase of 121,071 common shares from the plaintiff for $8.708 per share)
on September 30, 2003, (b) the IH Lessee agreed to pay the plaintiff $0.5 million in cash, and (c) Mr. Fisher agreed to pay the plaintiff $1.5 million in cash and to issue the plaintiff a promissory note in the amount of $3.0 million (for the
purchase of the plaintiffs equity interest in the IH Lessee). The litigation was dismissed against the Company when it made the payments described above, and will be dismissed against the IH Lessee when it makes the payment and delivers the
promissory note described above (see Note 4 to the IH Lessee financial statements). The Company recognized an expense of $2.9 million in the fourth quarter of 2002 and an additional expense of $60,000 in 2003 related to this settlement.



|8. | Related Party Transactions
|-- | --------------------------



In March 2003, the Company, the IH Lessee, Marriott International, Inc. (collectively with its affiliates, 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 our 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 IH Lessee (and the TRS after the TRS Transaction) will (1) pay a franchise fee of 61⁄2% of room revenues to Marriott for the first ten years of each franchise agreement and a
5% royalty thereafter (as compared to 5% of gross revenues under the previous 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 10 years, beginning in 2004 (the Conversion Fee). The Conversion Fee is subject to an aggregate credit of $750,000 from Marriott to be applied against the 2004 and 2005 Conversion Fee otherwise payable for those
years. 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. In connection with the TRS Transaction, the TRS will assume the obligations to Marriott under the new franchise agreements,
including payment of the Conversion Fee. This transaction is referred to as the Marriott Takeback Transaction.



Under the Marriott Takeback Transaction, the IH Lessee assumed the management of four hotels from Marriott on March 28, 2003, six hotels on April 25,
2003, six hotels on July 18, 2003 and one hotel on July 25, 2003. As of July 25, 2003, the IH Lessee managed all of the Hotels it leases from the Company.



In the first quarter of 2003, the Company commenced renovations at its Hampton Inn  Norcross, GA hotel that required a substantial number of rooms
be taken out of service. The Company compensated the IH lessee for the significant loss of room nights by reducing the Rent payable under the lease for this hotel by $110,000 in the first quarter of 2003.



The Company and the IH Lessee are replacing the majority of their corporate
information technology (IT) infrastructure. The total cost of the new IT infrastructure is currently estimated to be approximately $1.0 million, which will initially be funded by the Company. Upon completion, the Company and the IH
Lessee will



7



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enter into a cost sharing agreement related to their IT department that is intended to fairly allocate the costs of
forming, operating and maintaining the IT function between the Company and the IH Lessee.



The Company and the IH Lessee have also combined their purchasing departments. The Company added two IH Lessee employees to its payroll and now the Company is responsible for the purchasing duties for both companies.
The IH Lessee pays the Company a $200 per month per hotel purchasing fee for its services, which fee is intended to reimburse the Company for the costs assumed from the IH Lessee in connection with the combination of the departments.



See Note 2 for a description of the TRS Transaction.



|9. | Contingency
|-- | -----------



In the first quarter of 2003, the Company formed several taxable REIT subsidiaries in anticipation of the TRS Transaction with the IH Lessee. However, the
Company inadvertently failed to file certain taxable REIT subsidiary elections with the Internal Revenue Service on a timely basis. Applicable Treasury Department regulations provide a procedure under which a late filing of such elections will be
excused, provided that the taxpayer has acted in good faith. The Company has submitted a formal request to the Internal Revenue Service (the IRS) requesting such relief. Although the failure to receive such relief could result in a loss
of the Companys REIT status, the Company believes, based on (i) a review by its outside counsel of the applicable regulations and certain private letter rulings issued by the IRS granting relief to other taxpayers on generally comparable facts
and (ii) informal discussions with the IRS, that it is highly likely that such relief will be granted. Accordingly, the Company believes that the risk of any material tax liability arising from the late filing of the elections is remote.



|10. | Recently Issued Accounting Pronouncements
|--- | -----------------------------------------



The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 will have no impact on current financial instruments issued by the Company, but may impact financial instruments that may be issued the future.



The FASB has issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 will have no impact on current financial instruments issued by the Company, but may impact financial instruments that may be issued the future.



In January 2003, the FASB issued Interpretation No. 46 (FIN
46), Consolidation of Variable Interest Entities, FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and addresses consolidation by business enterprises of
variable interest entities (more commonly known as Special Purpose Entities or SPEs). FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively
disperse risk among the parties involved. FIN 46 also enhances the disclosure requirements related to variable interest entities. This statement is effective for variable interest entities created or in which an enterprise obtains an interest after
January 31, 2003. In October 2003, the FASB issued FIN 46-6, which deferred the implementation until after the fourth quarter of 2003 for entities created prior to January 31, 2003. The Company does not expect the adoption of FIN 46 to have a
material impact on its consolidated financial statements.



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Innkeepers Hospitality

Combined Balance Sheets

(in thousands, except share data)



|                                                                             |  | September 30,2003 |        |   | December 31,2002 |  
|---------------------------------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | -
|ASSETS                                                                       |  |                   |        |   |                  |  
|Current assets:                                                              |  |                   |        |   |                  |  
|Cash and cash equivalents                                                    |  | $                 | 12,297 |   |                  | $
|Marketable securities                                                        |  |                   | 2,844  |   |                  |  
|Accounts receivable, net                                                     |  |                   | 5,825  |   |                  |  
|Prepaid expenses                                                             |  |                   | 430    |   |                  |  
|                                                                             |  |                   |        |   |                  |  
|Total current assets                                                         |  |                   | 21,396 |   |                  |  
|Other assets                                                                 |  |                   | 267    |   |                  |  
|                                                                             |  |                   |        |   |                  |  
|Total assets                                                                 |  | $                 | 21,663 |   |                  | $
|                                                                             |  |                   |        |   |                  |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                        |  |                   |        |   |                  |  
|Current liabilities:                                                         |  |                   |        |   |                  |  
|Accounts payable                                                             |  | $                 | 2,396  |   |                  | $
|Accrued expenses                                                             |  |                   | 8,225  |   |                  |  
|Accrued litigation settlement                                                |  |                   | 456    |   |                  |  
|Payable to Manager                                                           |  |                   | 1,751  |   |                  |  
|Due to Partnership                                                           |  |                   | 9,111  |   |                  |  
|                                                                             |  |                   |        |   |                  |  
|Total current liabilities                                                    |  |                   | 21,939 |   |                  |  
|Line of credit                                                               |  |                   | 1,000  |   |                  |  
|Other long-term liabilities                                                  |  |                   | 860    |   |                  |  
|                                                                             |  |                   |        |   |                  |  
|Total liabilities                                                            |  |                   | 23,799 |   |                  |  
|                                                                             |  |                   |        |   |                  |  
|Shareholders deficit:                                                       |  |                   |        |   |                  |  
|Common shares, $1 par value, 9,000 shares authorized, issued and outstanding |  |                   | 9      |   |                  |  
|Additional paid-in capital                                                   |  |                   | 4,805  |   |                  |  
|Unrealized loss on marketable securities                                     |  |                   | (599   | ) |                  |  
|Retained deficit                                                             |  |                   | (6,351 | ) |                  |  
|                                                                             |  |                   |        |   |                  |  
|Total shareholders deficit                                                  |  |                   | (2,136 | ) |                  |  
|                                                                             |  |                   |        |   |                  |  
|Total liabilities and shareholders deficit                                  |  | $                 | 21,663 |   |                  | $
|                                                                             |  |                   |        |   |                  |  



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



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Innkeepers Hospitality

Combined Statements of Operations

(in thousands)



|                                                                           |  | Three Months Ended September 30, |         |   | Nine months Ended September 30, |  
|-------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | -
|                                                                           |  | 2003                             |         |   | 2002                            |  
|Gross operating revenue:                                                   |  |                                  |         |   |                                 |  
|Rooms                                                                      |  | $                                | 45,973  |   |                                 | $
|Food and beverage                                                          |  |                                  | 72      |   |                                 |  
|Telephone                                                                  |  |                                  | 621     |   |                                 |  
|Other                                                                      |  |                                  | 1,039   |   |                                 |  
|                                                                           |  |                                  |         |   |                                 |  
|Gross operating revenue                                                    |  |                                  | 47,705  |   |                                 |  
|Departmental expenses:                                                     |  |                                  |         |   |                                 |  
|Rooms                                                                      |  |                                  | 9,723   |   |                                 |  
|Food and beverage                                                          |  |                                  | 73      |   |                                 |  
|Telephone                                                                  |  |                                  | 361     |   |                                 |  
|Other                                                                      |  |                                  | 457     |   |                                 |  
|                                                                           |  |                                  |         |   |                                 |  
|Total departmental profit                                                  |  |                                  | 37,091  |   |                                 |  
|                                                                           |  |                                  |         |   |                                 |  
|Unallocated operating expenses:                                            |  |                                  |         |   |                                 |  
|General and administrative                                                 |  |                                  | 4,034   |   |                                 |  
|Franchise and marketing fees                                               |  |                                  | 3,687   |   |                                 |  
|Advertising and promotions                                                 |  |                                  | 2,383   |   |                                 |  
|Utilities                                                                  |  |                                  | 2,358   |   |                                 |  
|Repairs and maintenance                                                    |  |                                  | 2,681   |   |                                 |  
|Management fees                                                            |  |                                  | 72      |   |                                 |  
|                                                                           |  |                                  |         |   |                                 |  
|Total unallocated operating expenses                                       |  |                                  | 15,215  |   |                                 |  
|                                                                           |  |                                  |         |   |                                 |  
|Gross profit                                                               |  |                                  | 21,876  |   |                                 |  
|Insurance                                                                  |  |                                  | (323    | ) |                                 |  
|Lessee overhead                                                            |  |                                  | (884    | ) |                                 |  
|Litigation settlement                                                      |  |                                  | 1,569   |   |                                 |  
|Percentage lease expense                                                   |  |                                  | (20,536 | ) |                                 |  
|                                                                           |  |                                  |         |   |                                 |  
|Net income                                                                 |  |                                  | 1,702   |   |                                 |  
|Other comprehensive incomeunrealized gain (loss) on marketable securities |  |                                  | 504     |   |                                 |  
|                                                                           |  |                                  |         |   |                                 |  
|Comprehensive income (loss)                                                |  | $                                | 2,206   |   |                                 | $
|                                                                           |  |                                  |         |   |                                 |  



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



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Innkeepers Hospitality

Combined Statements of Cash Flows

(in thousands)



|                                                                              |  | Nine months Ended September 30, |       
|----------------------------------------------------------------------------- |  | ------------------------------- | ------
|                                                                              |  | 2003                            |       
|Cash flows from operating activities:                                         |  |                                 |       
|Net income                                                                    |  | $                               | 180   
|Adjustments to reconcile net income to net cash used by operating activities: |  |                                 |       
|Depreciation                                                                  |  |                                 | 30    
|Litigation settlement                                                         |  |                                 | (1,569
|Changes in operating assets and liabilities:                                  |  |                                 |       
|Accounts receivable                                                           |  |                                 | (2,562
|Prepaid expenses                                                              |  |                                 | 249   
|Accounts payable                                                              |  |                                 | (970  
|Accrued expenses                                                              |  |                                 | 3,390 
|Payable to Manager                                                            |  |                                 | (700  
|Due to Partnership                                                            |  |                                 | 901   
|                                                                              |  |                                 |       
|Net cash provided (used) by operating activities                              |  |                                 | (1,051
|                                                                              |  |                                 |       
|Cash flows from investing activities:                                         |  |                                 |       
|Repayment of advances from Partnership                                        |  |                                 |      
|Purchase of equipment                                                         |  |                                 | (42   
|                                                                              |  |                                 |       
|Net cash used by investing activities                                         |  |                                 | (42   
|                                                                              |  |                                 |       
|Cash flows from financing activities:                                         |  |                                 |       
|Advance under line of credit                                                  |  |                                 | 1,000 
|Paid-in capital                                                               |  |                                 | 195   
|Advances or distributions to shareholder                                      |  |                                 | (295  
|                                                                              |  |                                 |       
|Net cash provided (used) by financing activities                              |  |                                 | 900   
|                                                                              |  |                                 |       
|Net decrease in cash and cash equivalents                                     |  |                                 | (193  
|Cash and cash equivalents at beginning of period                              |  |                                 | 12,490
|                                                                              |  |                                 |       
|Cash and cash equivalents at end of period                                    |  | $                               | 12,297
|                                                                              |  |                                 |       
|Supplemental cash flow information:                                           |  |                                 |       
|Interest paid                                                                 |  |                                 |      
|                                                                              |  |                                 |       



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



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Innkeepers Hospitality

Notes to Combined Financial Statements



|1. | Organization
|-- | ------------



Innkeepers Hospitality, Inc. and other entities under common control (collectively IH or the IH Lessee) are controlled by Jeffrey
H. Fisher and were formed primarily to lease and operate hotels owned by the Company. Mr. Fisher is the Chief Executive Officer, President and Chairman of the Board of Trustees of the Company. The IH Lessee leased and operated 60 hotels (the
IH Leased Hotels) from the Company at September 30, 2003. An affiliate of the IH Lessee also operates one hotel owned by the Company under a management agreement with a taxable REIT subsidiary of the Company.



An affiliate of the IH Lessee operates two hotels under management agreements
with two unrelated third parties.



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, 2002 (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.



|2. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



Each IH Leased Hotel is leased by the Company to the IH Lessee under a percentage lease agreement (Percentage Lease). The Percentage Lease for
each IH Leased Hotel provides for rent (Percentage Rent) based on a fixed percentage of annual room revenue below, plus a higher fixed percentage of annual room revenue in excess of, a specified dollar amount (Threshold),
subject to a minimum annual base rent (Base Rent). Base Rent and the Threshold under each Percentage Lease increase each year based on the increase in the Consumer Price Index for the previous year. Base Rent is paid monthly and
Percentage Rent is paid no later than 25 days after the end of each calendar quarter.



The IH Lessee currently estimates that 19 of the IH Leased Hotels will pay only the minimum Base Rent in 2003. The remaining IH Leased Hotels are expected to pay Percentage Rent that is in excess of the minimum Base
Rent.



The IH Lessee recognizes Percentage Rent as Percentage
Lease expense for a hotel prior to the achievement of the annual Threshold (using in the calculation a prorated portion of the Threshold based on how much of the year has elapsed) when it is probable that the Threshold will be exceeded for the full
year. Additionally, the IH Lessee recognizes Base Rent as Percentage Lease expense for a hotel to the extent that Base Rent exceeds the calculated Percentage Lease payments (using in the calculation a prorated portion of the Threshold based on how
much of the year has elapsed). This generally results in the recognition of Percentage Lease expense in an amount equal to the payments required under the terms of the Percentage Leases.



|3. | Lessee Overhead
|-- | ---------------



Lessee overhead for the three and nine months ended September 30, 2003 and 2002 include the following (in thousands):



|                      |  | Three Months Ended September 30, |       |   | Nine monthsEnded September 30, |  
|--------------------- |  | -------------------------------- | ----- | - | ------------------------------ | -
|                      |  | 2003                             |       |   | 2002                           |  
|Gross Lessee overhead |  | $                                | 1,442 |   |                                | $
|Interest income       |  |                                  | (35   | ) |                                |  
|Other income          |  |                                  | (310  | ) |                                |  
|Management fee income |  |                                  | (219  | ) |                                |  
|Interest expense      |  |                                  | 6     |   |                                |  
|                      |  |                                  |       |   |                                |  
|                      |  | $                                | 884   |   |                                | $
|                      |  |                                  |       |   |                                |  



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|4. | Litigation Settlement
|-- | ---------------------



In May 2000, the IH Lessees former president (who is a minority shareholder in certain of the IH Lessee entities and a former officer in the
Company) filed suit against the IH Lessee, the Company and Mr. Fisher. The suit alleged that he was wrongfully terminated by the IH Lessee in breach of his employment contract with the IH Lessee, was wrongfully terminated by the Company under his
employment contract with the Company, was injured by various breaches of fiduciary duty by Mr. Fisher in his capacity as a director and majority shareholder of the IH Lessee, and various other related claims against the IH Lessee and the Company.



Under the terms of a preliminary settlement agreement reached
in December 2002, Mr. Fisher agreed to pay the plaintiff $1.0 million for his equity interests in the IH Lessee and the IH Lessee agreed to pay the plaintiff a total of $5.9 million, which was accrued and recognized as a litigation settlement
expense. In conjunction with the preliminary settlement agreement, Mr. Fisher advanced the plaintiff $0.1 million and the IH Lessee advanced the plaintiff $0.4 million.



The preliminary settlement agreement discussed above expired earlier in 2003. In September 2003, the defendants entered into
a final settlement agreement with the plaintiff. In addition to the cash advances described above, under the settlement agreement, (a) the Company paid the plaintiff $3.0 million in cash (which included the purchase of 121,071 common shares from the
plaintiff for $8.708 per share) on September 30, 2003, (b) the IH Lessee agreed to pay the plaintiff $0.5 million in cash, and (c) Mr. Fisher agreed to pay the plaintiff $1.5 million in cash and to issue the plaintiff a promissory note in the amount
of $3.0 million (for the purchase of the plaintiffs equity interest in the IH Lessee). Under the settlement agreement, the IH Lessee and Mr. Fisher are required to pay the plaintiff the cash portion of the settlement and issue the promissory
note to the plaintiff by the earlier to occur of (i) the first closing under the TRS Transaction (described in Note 6) or (ii) December 31, 2004. The promissory note will (1) bear interest at the prime rate, (2) be guaranteed by Mr. Fisher and any
hotel management or leasing entities in which he has more than a 50% ownership interest, (3) fully amortize over its term with monthly payments beginning on February 1, 2005, (4) mature on December 31, 2015 and (5) be collateralized by the
management fees to be paid to an affiliate of the IH Lessee by the Company after the completion of the TRS Transaction. The litigation was dismissed against the Company when it made the payments described above, and will be dismissed against the IH
Lessee when it makes the payment and delivers the promissory note described above.



As a result of the revisions to the preliminary settlement agreement reached in December 2002, the accrued litigation settlement liability has been reduced to the final settlement amount of $0.5 million resulting in a
$1.6 million reversal of amounts previously accrued that will not be paid under the final settlement agreement and a $3.5 million reclassification to paid-in capital for amounts previously accrued that have been assumed by Mr. Fisher.



|5. | Line of Credit
|-- | --------------



The IH Lessee established a $1,000,000 line of credit that is collateralized by 247,450 common shares and 20,500 preferred shares of the Company owned by
the IH Lessee and guaranteed by Mr. Fisher. The line of credit matures on December 24, 2004 and bears interest at LIBOR plus 190 basis points. The IH Lessee may borrow up to 50% of the then-current market value of the pledged common and preferred
shares. However, if the borrowing to market value ratio at any time exceeds 60%, the IH Lessee is required to repay borrowings to bring the borrowing to market value ratio below 50%. In March 2003, the IH Lessee borrowed $1,000,000 under the line of
credit.



|6. | Related Party Transactions
|-- | --------------------------



In March 2003, the Company, the IH Lessee, Marriott International, Inc. (collectively with its affiliates, 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 our 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 IH Lessee (and the TRS after the TRS Transaction) will (1) pay a franchise fee of 61⁄2% of room revenues to Marriott for the first ten years of each franchise agreement and a
5% royalty thereafter (as compared to 5% of gross revenues under the previous agreements with Marriott) and (2) pay Marriott



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$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 10 years, beginning in 2004 (the Conversion Fee). The Conversion Fee is subject to an aggregate credit of $750,000 from Marriott to be applied against the 2004 and 2005 Conversion Fee otherwise payable for those
years. 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. In connection with the TRS Transaction, the TRS will assume the obligations to Marriott under the new franchise agreements,
including payment of the Conversion Fee. This transaction is referred to as the Marriott Takeback Transaction.



Under the Marriott Takeback Transaction, the IH Lessee assumed the management of four hotels from Marriott on March 28, 2003, six hotels on April 25,
2003, six hotels on July 18, 2003 and one hotel on July 25, 2003. As of July 25, 2003, IH Lessee manages all of the Hotels it leases from the Company.



In the first quarter of 2003, the Company commenced renovations at its Hampton Inn  Norcross, GA hotel that required a substantial number of rooms
be taken out of service. The Company compensated the IH lessee for the significant loss of room nights by reducing the Rent payable under the lease for this hotel by $110,000 in the first quarter of 2003.



In August 2003, the IH Lessee agreed to sell to the Company all of the
Percentage Leases for the 60 Hotels leased from the Company (the TRS Transaction). The aggregate selling price is $5.25 million in cash and TRS of the Company will simultaneously enter into long-term management agreements with an
affiliate of the IH Lessee to operate the hotels. The primary terms of the new management agreements are as follows:



| |  | Base management fee of 3% of gross revenues.
| | - | --------------------------------------------



| |  | Accounting services fee of $750 per hotel per month.
| | - | ----------------------------------------------------



| |  | Incentive management fee of 50% of hotel available cash flow. Available cash flow is gross revenues less hotel operating expenses (including franchise fees), the base management
fees, the accounting services fee and Percentage Lease rent (paid by the TRS to the Company).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Initial term of 10 years (with two five-year extension options).
| | - | ----------------------------------------------------------------



The IH Lessee anticipates closing on the sale of 23 Percentage Leases to the Company in the fourth quarter of 2003 or the first quarter of 2004. The sale
of the remaining Percentage Leases is anticipated to close later in 2004.



The Company and the IH Lessee are replacing the majority of their corporate information technology (IT) infrastructure. The total cost of the new IT infrastructure is currently estimated to be
approximately $1.0 million, which will initially be funded by the Company. Upon completion, the Company and the IH Lessee will enter into a cost sharing agreement related to their IT department that is intended to fairly allocate the costs of
forming, operating and maintaining the IT function between the Company and the IH Lessee.



The Company and the IH Lessee have also combined their purchasing departments. The Company added two IH Lessee employees to its payroll and now the Company is responsible for the purchasing duties for both companies.
The IH Lessee pays the Company a $200 per month per hotel purchasing fee for its services, which fee is intended to reimburse the Company for the costs assumed from the IH Lessee in connection with the combination of the departments.



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INNKEEPERS USA TRUST

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, 2002 (the 10-K). 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 2002 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 September 30, 2003:



|Franchise Affiliation         |  | Number ofHotels |  | Number ofRooms/Suites
|----------------------------- |  | --------------- |  | ---------------------
|Upscale Extended-Stay         |  |                 |  |                      
|Residence Inn by Marriott     |  | 45              |  | 5,401                
|Summerfield Suites by Wyndham |  | 5               |  | 650                  
|Sunrise Suites                |  | 1               |  | 96                   
|                              |  |                 |  |                      
|                              |  | 51              |  | 6,147                
|                              |  |                 |  |                      
|Mid-Priced                    |  |                 |  |                      
|Hampton Inn                   |  | 12              |  | 1,526                
|Courtyard by Marriott         |  | 1               |  | 136                  
|TownePlace Suites by Marriott |  | 1               |  | 95                   
|Holiday Inn Express           |  | 1               |  | 204                  
|Quality Inn (Note 1)          |  | 1               |  | 203                  
|                              |  |                 |  |                      
|                              |  | 16              |  | 2,164                
|                              |  |                 |  |                      
|                              |  | 67              |  | 8,311                
|                              |  |                 |  |                      

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



Occupancy, average daily rate (ADR) and revenue per available room (RevPAR) for 66 of the Hotels are
presented in the following table.



|                                 |  | Three Months Ended September 30, |       |   | Percentage increase |   |       | Nine monthsEnded September 30, |  |      | Percentage increase(decrease) | 
|-------------------------------- |  | -------------------------------- | ----- | - | ------------------- | - | ----- | ------------------------------ |  | ---- | ----------------------------- | 
|                                 |  | 2003                             |       |   | 2002                |   |       | (decrease)                     |  |      | 2003                          | 
|Portfolio (1)                    |  |                                  |       |   |                     |   |       |                                |  |      |                               | 
|ADR                              |  | $                                | 91.43 |   |                     | $ | 95.78 |                                |  | (4.5 | )%                            | 
|Occupancy                        |  |                                  | 74.8  | % |                     |   | 74.7  | %                              |  | 0.3  |                               | 
|RevPAR                           |  | $                                | 68.42 |   |                     | $ | 71.50 |                                |  | (4.3 | )                             | 
|By Segment                       |  |                                  |       |   |                     |   |       |                                |  |      |                               | 
|Upscale Extended-Stay Hotels (2) |  |                                  |       |   |                     |   |       |                                |  |      |                               | 
|ADR                              |  | $                                | 93.98 |   |                     | $ | 98.35 |                                |  | (4.4 | )                             | 
|Occupancy                        |  |                                  | 79.2  | % |                     |   | 79.2  | %                              |  | 0.0  |                               | 
|RevPAR                           |  | $                                | 74.40 |   |                     | $ | 77.87 |                                |  | (4.5 | )                             | 
|Mid-Priced Hotels (3)            |  |                                  |       |   |                     |   |       |                                |  |      |                               | 
|ADR                              |  | $                                | 81.43 |   |                     | $ | 85.54 |                                |  | (4.8 | )                             | 
|Occupancy                        |  |                                  | 61.6  | % |                     |   | 60.8  | %                              |  | 1.3  |                               | 
|RevPAR                           |  | $                                | 50.19 |   |                     | $ | 52.03 |                                |  | (3.5 | )                             | 



|(1) | 66 hotels, excludes one hotel acquired on June 1, 2003 and one hotel sold on September 9, 2003
|--- | ----------------------------------------------------------------------------------------------

|(2) | 51 hotels, excludes one hotel sold on September 9, 2003
|--- | -------------------------------------------------------

|(3) | 15 hotels, excludes one hotel acquired on June 1, 2003
|--- | ------------------------------------------------------



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Results of Operations



Deferred Recognition of Percentage Lease Revenue under SAB 101



On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. SAB 101 provides that a lessor shall defer recognition of contingent rental income in interim periods until specified annual targets that trigger the contingent income are met. The Company reviewed the terms of its
Percentage Leases and determined that the provisions of SAB 101 apply to the Companys revenue recognition on an interim basis, but have no impact on the Companys annual Percentage Lease revenue recognition or its receipt of interim
payments under the Percentage Leases from its Lessees. The Companys quarterly distributions are based on rent collected or due from the Lessees under the Percentage Leases.



The effect of the application of SAB 101 on the financial statements for the nine months ended September 30, 2003 and 2002
was to defer the recognition of Percentage Lease revenue of $10,249,000 and $14,955,000. At September 30, 2003 and 2002, Deferred rent revenue of $10,249,000 and $14,955,000, respectively, represents Percentage Rent collected or due from
the Lessees under the terms of the Percentage Leases that the Company expects to recognize (or, for 2002, recognized) as Percentage Lease revenue in the fourth quarter.



Comparison of the Three Months Ended September 30, 2003 (2003) to the Three Months Ended September 30, 2002
(2002)



Percentage Lease revenue decreased by
$1,173,000, or 5%, from $21,638,000 in 2002 to $20,465,000 in 2003. This was due primarily to the reduction in rent from a hotel sold in the third quarter of 2002 ($185,000) and the reduction in Percentage Lease revenue recognized due to the lower
level of room revenues at the hotels ($2,100,000), partially offset by the increase in base rent as of January 1, 2003 as a result of the increase in the consumer price index during 2002 ($377,000) and the receipt of rent on the Companys newly
developed Residence Inn by Marriott hotel located in Saddle River, NJ ($735,000).



In June 2003, the Company acquired a Quality Inn hotel located in Atlantic City, NJ and leased it to a taxable REIT subsidiary (TRS). The TRS has entered into a management agreement with an affiliate of
the IH Lessee to manage the hotel. The Company recognizes the hotel level operating revenues and expenses related to the hotel. SAB 101 does not affect the revenue recognized for this hotel.



Depreciation, amortization of franchise costs, amortization of loan
origination fees, and amortization of unearned compensation (Depreciation and Amortization) were $9,168,000 in the aggregate for 2003 compared with $9,611,000 for 2002. The decrease in Depreciation and Amortization was primarily due to
certain assets becoming fully-depreciated in 2002, partially offset by the depreciation of renovations completed during 2002 and depreciation on the Saddle River, NJ and Atlantic City, NJ hotels.



Interest expense for 2003 was $4,378,000 compared with $4,212,000 for 2002.
This increase was due primarily to interest expense related to the Companys development of the Residence Inn by Marriott hotel located in Saddle River, NJ being capitalized in 2002 and expensed in 2003 partially offset by reduced interest
expense related to principal reductions on the Companys amortizing debt and a slight decrease in the interest rates on the Companys variable rate debt.



Property taxes and insurance increased by $231,000, or 8%, in 2003 compared with 2002. This increase was due primarily to
property taxes incurred on the Saddle River, NJ hotel ($61,000), property taxes incurred on the Atlantic City, NJ hotel ($58,000), and the receipt of refunds of prior year taxes paid (or a reduction in the accrual for certain prior year taxes)
related to two hotels located in Cook County, IL recorded in 2002 ($141,000).



General and administrative expenses increased by $460,000 in 2003 compared with 2002. This increase was due primarily to an increase in trustee and officer insurance premiums ($90,000), increases in salaries and
benefits related primarily to additional personnel ($124,000), an increase in trustee fees and expenses related to meetings held in conjunction with the TRS Transaction ($44,000), a reduction in certain



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prior year franchise tax accruals in 2002 ($105,000) and costs incurred in complying with certain Sarbanes-Oxley (and
similar) rules ($22,000).



Other charges increased by $466,000
to $557,000 in 2003 from $91,000 in 2002. This increase was primarily due to an increase in fees and costs incurred in connection with the TRS Transaction ($538,000), partially offset by a decrease in costs related to litigation with a former
officer of the Company ($72,000).



Income from discontinued
operations increased by $1,564,000 from a loss of $1,512,000 in 2002 to income of $52,000 in 2003. This increase was primarily due to the impairment charge recorded in 2002 related to the Companys classification of a hotel as held for
sale. This hotel was sold during the third quarter of 2003.



Net loss applicable to common shareholders for 2003 was $(1,132,000), or $(0.03) per diluted share, compared with $(612,000), or $(0.02) per diluted share, for 2002. This change is due primarily to the factors discussed previously.



Comparison of the Nine months Ended September 30, 2003 (2003)
to the Nine months Ended September 30, 2002 (2002)



Percentage Lease revenue decreased by $481,000, or 1%, from $54,519,000 in 2002 to $54,038,000 in 2003. This decrease was due primarily to the reduction in rent from a hotel sold in the third quarter of 2002 ($841,000) and the reduction in
Percentage Lease revenue recognized due to the lower level of room revenues at the hotels ($2,395,000), partially offset by the increase in base rent as of January 1, 2003 as a result of the increase in the consumer price index during 2002
($1,131,000) and the receipt of rent on the Companys newly developed Residence Inn by Marriott hotel located in Saddle River, NJ ($1,624,000). On January 1, 2003 the base rent for each hotel increased by 2.37% (such increase was based on the
change in the consumer price index for the previous year) as provided for in the Percentage Leases.



In June 2003, the Company acquired a Quality Inn hotel located in Atlantic City, NJ and leased it to a TRS. The TRS has entered into a management
agreement with an affiliate of the IH Lessee to manage the hotel. The Company recognizes the hotel level operating revenues and expenses related to the hotel. SAB 101 does not affect the revenue recognized for this hotel.



Depreciation and Amortization were $27,419,000 in the aggregate for 2003
compared with $29,826,000 for 2002. The decrease in Depreciation and Amortization was primarily due to certain assets becoming fully-depreciated in 2002 and the elimination of depreciation on a hotel which was sold in the third quarter of 2002,
partially offset by the depreciation of renovations completed during 2002 and depreciation on the Saddle River, NJ and Atlantic City, NJ hotels.



Interest expense for 2003 was $13,093,000 compared with $13,025,000 for 2002. This increase was due primarily to interest expense related to the
Companys development of the Saddle River, NJ hotel being capitalized in 2002 and expensed in 2003, partially offset by principal reductions on the Companys amortizing debt, repayment of the entire balance outstanding under the
Companys Line of Credit in the second quarter of 2002 and a slight decrease in the interest rates on the Companys variable rate debt.



Property taxes and insurance increased by $71,000, or 1%, in 2003 compared with 2002. This increase was due primarily to property taxes incurred on the
Saddle River, NJ hotel ($181,000), property taxes incurred on the Atlantic City, NJ hotel ($77,000) and an increase in insurance premiums ($263,000), partially offset by the receipt of refunds of prior year taxes paid (or a reduction in the accrual
for certain prior year taxes) related to two hotels located in Cook County, IL recorded in 2002 ($224,000), property taxes expensed in 2002 for a hotel which was sold in the third quarter of 2002 ($125,000) and a reduction in the 2003 property taxes
on a hotel located in Cook County, IL ($75,000).



General and
administrative expenses increased by $1,032,000 in 2003 compared with 2002. This increase was due primarily to an increase in franchise taxes paid to certain states ($209,000), an increase in trustee and officer insurance premiums ($236,000),
increases in salaries and benefits related primarily to additional personnel ($256,000), increases in trustee fees and expenses related to meetings held in conjunction



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with the TRS Transaction ($77,000), costs incurred in complying with certain Sarbanes-Oxley (and similar) rules ($80,000)
and increases in legal expenses ($44,000).



Other charges
increased by $1,069,000 to $1,556,000 in 2003 from $487,000 in 2002. This increase was primarily due to an increase in fees and costs incurred in connection with the TRS Transaction ($1,381,000), partially offset by a decrease in costs related to
litigation with a former officer of the Company ($312,000).



Income from discontinued operations increased by $1,718,000 from a loss of $1,385,000 in 2002 to income of $333,000 in 2003. This increase was primarily due to the impairment charge recorded in 2002 related to the Companys
classification of a hotel as held for sale and due to depreciation recorded in 2002, which was not present in 2003. When this hotel was classified as held for sale in the third quarter of 2002, the Company ceased depreciation
of the hotel assets.



Net loss applicable to common
shareholders for 2003 was $(10,785,000), or $(0.29) per diluted share, compared with $(12,124,000), or $(0.34) per diluted share, for 2002. This change is due primarily to the factors discussed previously.



Liquidity and Capital Resources



The Companys principal source of liquidity is rent payments from the
Lessees under the Percentage Leases, and the Company is dependent on the Lessees to make such payments to provide cash for debt service, distributions, capital expenditures at its Hotels, and working capital. The Company does not expect that its
cash provided by operating activities will be adequate to meet all of its liquidity and capital expenditure needs. The Company currently expects to fund any liquidity or capital expenditure shortfall and its external growth objectives primarily by
borrowing on its Line of Credit or other facilities, exchanging equity for hotel properties or possibly accessing the capital markets if market conditions permit.



The IH Lessee, which leases 60 of the Companys hotels, reported a net loss of $1,389,000 for the nine months ended
September 30, 2003. The IH Lessees obligations under its Percentage Leases are uncollateralized and we believe that IH Lessee relies on the cash flow of the IH Leased Hotels to generate sufficient cash flow to pay rent to the Company. There
can be no assurance that the IH Leased Hotels will generate sufficient cash flow to allow the IH Lessee to meet its obligations under the Percentage Leases.



The Summerfield Lessee leases six of the Hotels under Percentage Leases. The obligations of the Summerfield Lessee under its Percentage Leases and related
agreements are collateralized by $4,759,220 in irrevocable letters of credit, one of which is pledged to a lender to the Company, and are guaranteed by Wyndham. Wyndham has had significant net losses in recent reporting periods. We believe that
Wyndham may be unwilling or unable to meet its guarantee obligations and relies exclusively on the cash flow of the Summerfield Hotels to generate sufficient cash flow to pay rent and satisfy its capital expenditure and other obligations under its
Percentage Leases. There can be no assurance that the Summerfield Hotels will generate sufficient cash flow to allow the Summerfield Lessee to meet its obligations under the Percentage Leases. The Company believes that the Summerfield Lessee failed
certain performance tests at one or more of the Summerfield Hotels in 2002, which may give rise to certain rights under the Percentage Leases for the effected Summerfield Hotels, possibly including the right to terminate those Percentage Leases. The
Company is in discussions with the Summerfield Lessee regarding the Companys rights under the Percentage Leases and a possible resolution of these matters.



As of November 3, 2003, the Lessees were current in their financial obligations under the Percentage Leases.



Cash Flow Analysis



Cash and cash equivalents (including restricted cash and cash equivalents)
at September 30, 2003 and 2002 were $22,024,000 and $38,261,000, including $2,082,000 and $6,435,000, respectively, which the Company is required, under the Percentage Leases, to make available to the Lessees for the replacement and refurbishment of
furniture and equipment and certain other capital expenditures. Additionally, cash and cash



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equivalents included $8,590,000 and $9,098,000 at September 30, 2003 and 2002, 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 nine months ended September 30, 2003 and 2002 was $36,441,000 and $45,806,000, respectively. The $9,365,000 decrease was primarily due to the reduction in amounts paid
or payable under the Percentage leases for 2003 versus 2002 ($5,227,000) and the payment of $2.0 million under the litigation settlement discussed in Note 7 to the Companys financial statements.



Net cash used in investing activities was $20,638,000 for the nine months
ended September 30, 2003. This was comprised primarily of (a) renovations at certain hotels of $17,434,000 and (b) the purchase of the Atlantic City, NJ hotel for $8,663,000, partially offset by (i) the net proceeds from the sale of the Residence
Inn by Marriott hotel located in Winston Salem, NC of $1,990,000 and (ii) net withdrawals of $3,479,000 from certain restricted cash accounts.



Net cash used in investing activities was $12,159,000 for the nine months ended September 30, 2002. This was comprised primarily of (a) renovations at
certain hotels of $14,220,000 and (b) costs on the Companys hotel development in Saddle River, NJ of $13,824,000 (including franchise fees of $69,000), which were partially offset by (i) the net proceeds from the sale of the Summerfield Suites
by Wyndham hotel located in West Hollywood, CA of $12,280,000 and (ii) withdrawals of $3,605,000 in cash from certain restricted cash accounts for renovations completed during the period.



Net cash used by financing activities was $25,818,000 for the nine months ended September 30, 2003, consisting primarily of
(a) principal payments on amortizing debt of $3,383,000, (b) distributions paid of $21,135,000, (c) the purchase of 121, 071 common shares (at $8.708 per share) for $1,055,000 in connection with the litigation settlement discussed in Note 7 to the
Companys financial statements and (d) loan costs paid of $245,000.



Net cash used by financing activities was $15,996,000 for the nine months ended September 30, 2002, consisting primarily of (a) distributions paid of $17,030,000; (b) the redemption of 22,909 Common Units in the
Partnership for $236,000; (c) loan costs paid of $266,000; (d) net repayments on the Line of Credit of $21,000,000; and (e) principal payments on amortizing debt of $2,390,000, which were partially offset by net proceeds of $24,926,000 from the
issuance of 2,600,000 common shares.



Distributions/Dividends



The Company has paid regular distributions on its common
shares and Common Units. The 2003 first quarter distribution was $0.08 per common share or unit and the second and third quarter distributions were each $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 dividends paid) and the 2003 first, second and third quarter distributions were each $0.275 per Class B Preferred Unit. Each Class B Preferred Unit may be converted
into one Common Unit at the election of the holder. Each Series A Preferred Share is entitled to annual dividends equal to the greater of (i) $2.15624 ($0.53906 payable quarterly) or (ii) the cash dividend paid or payable on the number of common
shares into which a Series A Preferred Share is then convertible (1.4811). The 2003 first, second and third quarter distributions were each $0.53906 per Series A Preferred Share. 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. The holders of the Common Units and Class B Preferred Units may redeem
each of their units for cash equal to the then-trading value of a common share or, at the election of Innkeepers, one common share. 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.



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



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properties, at cost, after giving effect to the Companys use of proceeds from any indebtedness. The Company had
bank-funding commitments available under the Line of Credit of approximately $125,000,000 at September 30, 2003. However, the actual amount that can be borrowed is subject to borrowing base availability as described in the loan agreement. During the
first quarter of 2002, the Company negotiated an amendment to the Line of Credit. This amendment reset certain financial covenant thresholds for 2002 and increased the allowable percentage of total debt to implied value of the Hotels from 40% to
50%. The interest rate on the Line of Credit, as amended, is LIBOR plus 122.5 to 225 basis points, depending on certain financial ratios. In January 2003, the Company obtained an extension of the Line of Credit amendment obtained in the first
quarter of 2002, which is effective until December 31, 2003. The Line of Credit matures in July 2004. At September 30, 2003, the Company was in compliance with the financial covenants contained in its various loan agreements, as amended, and there
were no borrowings outstanding under the Line of Credit. If the operating environment in 2003 worsens substantially from the Companys current expectations and the Company violates the amended covenants, the Company may have to locate
replacement financing for borrowings that may then be outstanding under the Line of Credit, reduce distributions to its shareholders and/or significantly reduce its planned capital expenditures.



The following table summarizes certain information concerning the
Companys debt at September 30, 2003 and 2002:



|                                                    |  | 2003 |             |   | 2002 |  
|--------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Investment in hotels, at cost                       |  | $    | 864,840,000 |   |      | $
|Debt                                                |  |      | 233,347,000 |   |      |  
|Percentage of debt to investment in hotels, at cost |  |      | 27.0        | % |      |  
|Percentage of fixed rate debt to total debt         |  |      | 95.7        | % |      |  
|Weighted average implied interest rates on:         |  |      |             |   |      |  
|Fixed rate debt                                     |  |      | 7.54        | % |      |  
|Variable rate debt                                  |  |      | 0.93        | % |      |  
|Total debt                                          |  |      | 7.26        | % |      |  



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 or forward equity commitments.



Capital Expenditures



The Percentage Leases generally require the Company to
make available to the Lessees an amount equal to 4% of room revenues from the Hotels, on a monthly basis, for the periodic replacement or refurbishment of furniture, fixtures and equipment and certain other capital expenditures at the Hotels. Each
of the Companys term loans require that the Company make available for such purposes, 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 Percentage Leases 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
Percentage Leases 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, such as Marriotts requirements to substantially upgrade and refresh the Companys Generation 1 Residence Inn by Marriott hotels. Management believes that for the foreseeable future the Company will continue to
spend more on capital expenditures than it is required to make available to the Lessees under the Percentage Leases or 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
2003,



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management expects to spend approximately $25 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.



Related Party Transactions



The Company has entered into a number of ongoing transactions and arrangements that may 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 Note 2 to the Companys financial statements included herein for a
description of the TRS Transaction.



The Company and the IH
Lessee are replacing the majority of their corporate information technology (IT) infrastructure. The total cost of the new IT infrastructure is currently estimated to be approximately $1.0 million, which will initially be funded by the
Company. Upon completion, the Company and the IH Lessee will enter into a cost sharing agreement related to their IT department that is intended to fairly allocate the costs of forming, operating and maintaining the IT function between the Company
and the IH Lessee.



The Company and the IH Lessee have also
combined their purchasing departments. The Company added two IH Lessee employees to its payroll and now the Company is responsible for the purchasing duties for both companies. The IH Lessee pays the Company a $200 per month per hotel purchasing fee
for its services, which fee is intended to reimburse the Company for the costs assumed from the IH Lessee in connection with the combination of the departments.



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 as discussed below.



In connection with the TRS
Transaction, the Company has agreed to pay the IH Lessee $5.25 million in cash for the acquisition of the 60 Percentage Leases held by them. In addition, The Company will assume the franchise conversion obligations with an estimated net present
value of $10.73 million under the Marriott Takeback Transaction. Please see Notes 2 and 8 to the Companys financial statements included herein.



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 from the Percentage Leases for a quarter is 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 Lessees and any third-party managers retained by the Lessees, 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 Lessees and any third-party managers retained by the Lessees to raise room rates in response to inflation. In fact, room rates have decreased over the last two years while inflation has been modest. 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.



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. Real estate



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asset values increase or decrease with market conditions. Consequently, we believe FFO is a useful measure in evaluating
the Companys 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 these other REITs. Moreover, FFO (i)
does not represent cash flows from operating activities as defined by generally accepted accounting principles, (ii) is not indicative of cash available to fund all cash flow and liquidity needs, including its ability to make distributions, and
(iii) 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 FFO per
share for the three and nine months ended September 30, 2003 and 2002 (in thousands, except share data):



|                                           |  | Three Months Ended September 30, |            |   | Three Months Ended September 30, |  
|------------------------------------------ |  | -------------------------------- | ---------- | - | -------------------------------- | -
|                                           |  | 2003                             |            |   | 2002                             |  
|Net loss applicable to common shareholders |  | $                                | (1,132     | ) |                                  | $
|Depreciation                               |  |                                  | 8,523      |   |                                  |  
|Minority interest, common                  |  |                                  | (35        | ) |                                  |  
|Loss (gain) on sale of hotels              |  |                                  | 57         |   |                                  |  
|                                           |  |                                  |            |   |                                  |  
|Basic FFO                                  |  | $                                | 7,413      |   |                                  | $
|                                           |  |                                  |            |   |                                  |  
|Minority interest, preferred (1)           |  |                                  |           |   |                                  |  
|Preferred share dividends (1)              |  |                                  |           |   |                                  |  
|                                           |  |                                  |            |   |                                  |  
|Diluted FFO                                |  | $                                | 7,413      |   |                                  | $
|                                           |  |                                  |            |   |                                  |  
|Denominator for basic earnings per share   |  |                                  | 37,387,302 |   |                                  |  
|Weighted average:                          |  |                                  |            |   |                                  |  
|Common Units                               |  |                                  | 1,167,236  |   |                                  |  
|                                           |  |                                  |            |   |                                  |  
|Denominator for basic FFO per share        |  |                                  | 38,554,538 |   |                                  |  
|                                           |  |                                  |            |   |                                  |  
|Denominator for diluted earnings per share |  |                                  | 37,530,442 |   |                                  |  
|Weighted average:                          |  |                                  |            |   |                                  |  
|Common Units                               |  |                                  | 1,167,236  |   |                                  |  
|Class B Preferred Units (1)                |  |                                  |           |   |                                  |  
|Series A Preferred Shares (1)              |  |                                  |           |   |                                  |  
|                                           |  |                                  |            |   |                                  |  
|Denominator for diluted FFO per share      |  |                                  | 38,697,678 |   |                                  |  
|                                           |  |                                  |            |   |                                  |  
|Basic FFO per share                        |  | $                                | 0.19       |   |                                  | $
|                                           |  |                                  |            |   |                                  |  
|Diluted FFO per share                      |  | $                                | 0.19       |   |                                  | $
|                                           |  |                                  |            |   |                                  |  



|(1) | The conversion of the Series A Preferred Shares and the Class B Preferred Units are anti-dilutive (i.e., assuming that they were converted into common shares would increase FFO per
share) and, therefore, are not included in the calculation of FFO per share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Previously, the Company excluded any impairment loss recognized upon classification of a hotel as held for sale from its calculation of FFO and FFO per share. In accordance with recent guidance from NAREIT
and the SEC, the Company no longer excludes these impairment losses from its calculation of FFO and FFO per share.



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



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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)
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, (ii) 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.), (iii) 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, (iv) the Companys ability to
maintain its properties in competitive condition, (v) the Companys ability to acquire or develop additional properties and risks that potential acquisitions or developments may not perform in accordance with expectations, (vi) 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), (vii) the complex tax rules that the company must satisfy to qualify as a REIT and
(viii) governmental regulation affecting our business (e.g. changes in laws affecting taxes on dividends or other taxes            , compliance with the Americans with Disabilities Act,
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 fix 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 September 30, 2003, the following table presents principal repayments and related weighted average interest rates by expected maturity dates (in thousands):



|                      |  | 2003 |       |   | 2004 |   |       | 2005 |  |   | 2006  |   |  | 2007 |       |   | Thereafter |   |        | Total |  |   | Fair Value |  
|--------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - | ---------- | - | ------ | ----- |  | - | ---------- | -
|Debt:                 |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |        |       |  |   |            |  
|Fixed Rate            |  | $    | 1,173 |   |      | $ | 4,883 |      |  | $ | 5,884 |   |  | $    | 6,399 |   |            | $ | 27,566 |       |  | $ | 177,442    |  
|Average Interest Rate |  |      | 7.57  | % |      |   | 7.57  | %    |  |   | 7.59  | % |  |      | 7.59  | % |            |   | 8.03   | %     |  |   | 7.46       | %
|Variable Rate         |  |      |      |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |       |       |  | $ | 10,000     |  
|Average Interest Rate |  |      |      |   |      |   |      |      |  |   |      |   |  |      |      |   |            |   |       |       |  |   | 0.93       | %



The table incorporates
only those exposures that existed as of September 30, 2003 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.



The Companys Line of Credit, which currently has no outstanding borrowings under it, matures in July 2004. All of our other debt matures in 2007 or
thereafter.



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INNKEEPERS USA TRUST

ITEM 4
CONTROLS AND PROCEDURES



Innkeepers USA Trust



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 pursuant to Exchange Act Rule 13a-15(e) and
15d-15(e) as of September 30, 2003.



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 September 30, 2003, 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 our controls over financial reporting during our most recent quarter that has materially affected, or is likely to materially
affect, our internal control over financial reporting.



Innkeepers
Hospitality



Innkeepers Hospitality has advised the
Company that Innkeepers Hospitality evaluated, under the supervision and with the participation of Innkeepers Hospitalitys management (including its vice president of accounting), the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of September 30, 2003.



Innkeepers Hospitality has advised the Company that based on this evaluation of such disclosure controls and procedures, Innkeepers Hospitalitys
vice president of accounting has concluded that such controls were effective as of September 30, 2003, are operating as designed and will alert him on a timely basis to any material information relating to Innkeepers Hospitality required to be
included in the Companys periodic SEC filings.



Innkeepers Hospitality has advised the Company that there has been no change in their controls over financial reporting during our most recent quarter that has materially affected, or is likely to materially affect, their internal control
over financial reporting.



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INNKEEPERS USA TRUST

PART IIOTHER INFORMATION



ITEM 6

Exhibits and Reports on Form 8-K



(a) Exhibits



|Exhibit |  | Description                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|31.1    |  | Certification of Jeffrey H. Fisher, Chief Executive Officer of Innkeepers USA Trust, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and dated November 3, 2003
|        | 
|31.2    |  | Certification of David Bulger, Chief Financial Officer of Innkeepers USA Trust, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 and dated November 3, 2003     
|        | 
|31.3    |  | Certification of Roger Pollak, Vice President of Accounting of Innkeepers Hospitality, dated November 3, 2003                                                                                                          
|        | 
|32.1    |  | Certification of Jeffrey H. Fisher, Chief Executive Officer of Innkeepers USA Trust, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and dated November 3, 2003
|        | 
|32.2    |  | Certification of David Bulger, Chief Financial Officer of Innkeepers USA Trust, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and dated November 3, 2003     
|        | 
|32.3    |  | Certification of Roger Pollak, Vice President of Accounting of Innkeepers Hospitality, dated November 3, 2003                                                                                                          



(b) Reports on Form
8-K  The Company filed with the SEC a Current Report on Form 8-K on August 12, 2003 that contained the Companys press release announcing the operating results for the quarter ended June 30, 2003.



The Company filed with the SEC a Current Report on Form 8-K
on August 11, 2003 describing the TRS Transaction (as defined in Note 2 to the Companys financial statements contained herein) and the Marriott Takeback Transaction (as defined in Note 8 to the Companys financial statements contained
herein). This Current Report also contained the pro forma financial information for the year ended December 31, 2002 and the three months ended March 31, 2003 and 2002.



The Company filed with the SEC a Current Report on Form 8-K on September 10, 2003 updating the pro forma
financial information for the TRS Transaction and the Marriott Takeback Transaction. This Current Report contained pro forma financial information for the six months ended June 30, 2003 and 2002



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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                                                                       
|---------------- |  |  |  | -------------------------------------------------------------------------------------------
|                 |  | 
|                 |  |  |  | /s/    Gregory M. Fay                                                                      
|November 4, 2003 |  |  |  | Gregory M. Fay Chief Accounting and Administrative Officer and Principal Accounting Officer









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EXHIBIT INDEX





|Exhibit |  | Description                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|31.1    |  | Certification of Jeffrey H. Fisher, Chief Executive Officer of Innkeepers USA Trust, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and dated November 3, 2003
|        | 
|31.2    |  | Certification of David Bulger, Chief Financial Officer of Innkeepers USA Trust, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 and dated November 3, 2003     
|        | 
|31.3    |  | Certification of Roger Pollak, Vice President of Accounting of Innkeepers Hospitality, dated November 3, 2003                                                                                                          
|        | 
|32.1    |  | Certification of Jeffrey H. Fisher, Chief Executive Officer of Innkeepers USA Trust, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and dated November 3, 2003
|        | 
|32.2    |  | Certification of David Bulger, Chief Financial Officer of Innkeepers USA Trust, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and dated November 3, 2003     
|        | 
|32.3    |  | Certification of Roger Pollak, Vice President of Accounting of Innkeepers Hospitality, dated November 3, 2003                                                                                                          



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