##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 30, 2005



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)



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



|                                                        |  |           
|------------------------------------------------------- |  | ----------
|340 Royal Poinciana Way, Suite 306, 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)



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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 August 3, 2005, was 42,914,086.



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##### Table of Contents

TABLE OF CONTENTS



|              |  |                       |  |                                                                                                 |  |     
|------------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------- |  | ----
|              |  |                       |  |                                                                                                 |  | Page
|Part I        |  | Financial Information |  |                                                                                                
|              |  |                       | 
|              |  | Item 1.               |  | Financial Statements (unaudited)                                                                |  | 1   
|              |  |                       | 
|              |  |                       |  | Consolidated Balance Sheets at June 30, 2005 and December 31, 2004                              |  | 2   
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004 |  | 3   
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004           |  | 4   
|              |  |                       | 
|              |  |                       |  | Notes to Consolidated Financial Statements                                                      |  | 5   
|              |  |                       | 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 11  
|              |  |                      
|              |  |                       | 
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                      |  | 19  
|              |  |                       | 
|              |  | Item 4.               |  | Controls and Procedures                                                                         |  | 20  
|              |  |                      
|Part II.      |  | Other Information     |  |                                                                                                
|              |  |                       | 
|              |  | Item 5.               |  | Other Information                                                                               |  | 21  
|              |  |                       | 
|              |  | Item 6.               |  | Exhibits                                                                                        |  | 21  
|              | 
|Signature     |  | 22                   
|              | 
|Exhibit Index |  | 23                   



i



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS (UNAUDITED)



Innkeepers USA Trust

Consolidated Balance Sheets

(in thousands, except share and per share data)



|                                                                                                                              |  |              |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                              |  | June 30,2005 |          |   | December 31,2004 |  
|ASSETS                                                                                                                        |  |              |          |   |                  |   |          |  
|Investment in hotels:                                                                                                         |  |              |          |   |                  |   |          |  
|Land and improvements                                                                                                         |  | $            | 146,604  |   |                  | $ | 127,392  |  
|Buildings and improvements                                                                                                    |  |              | 726,100  |   |                  |   | 687,754  |  
|Furniture and equipment                                                                                                       |  |              | 110,101  |   |                  |   | 101,909  |  
|Renovations in process                                                                                                        |  |              | 12,318   |   |                  |   | 2,794    |  
|Hotels under development                                                                                                      |  |              | 4,061    |   |                  |   | 3,864    |  
|Hotels held for sale                                                                                                          |  |              |         |   |                  |   | 19,299   |  
|                                                                                                                              |  |              |          |   |                  |   |          |  
|                                                                                                                              |  |              | 999,184  |   |                  |   | 943,012  |  
|Accumulated depreciation                                                                                                      |  |              | (225,121 | ) |                  |   | (207,853 | )
|                                                                                                                              |  |              |          |   |                  |   |          |  
|Net investment in hotels                                                                                                      |  |              | 774,063  |   |                  |   | 735,159  |  
|                                                                                                                              |  |             
|Cash and cash equivalents                                                                                                     |  |              | 27,167   |   |                  |   | 22,837   |  
|Restricted cash and cash equivalents                                                                                          |  |              | 8,606    |   |                  |   | 10,781   |  
|Accounts receivable, net                                                                                                      |  |              | 7,427    |   |                  |   | 4,577    |  
|Prepaid and other                                                                                                             |  |              | 2,145    |   |                  |   | 2,539    |  
|Deferred and other                                                                                                            |  |              | 17,633   |   |                  |   | 20,099   |  
|                                                                                                                              |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                  |  | $            | 837,041  |   |                  | $ | 795,992  |  
|                                                                                                                              |  |              |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                          |  |              |          |   |                  |   |          |  
|Debt                                                                                                                          |  | $            | 263,609  |   |                  | $ | 286,865  |  
|Accounts payable and accrued expenses                                                                                         |  |              | 17,274   |   |                  |   | 12,663   |  
|Payable to manager                                                                                                            |  |              | 395      |   |                  |   | 209      |  
|Franchise conversion fee obligations                                                                                          |  |              | 11,007   |   |                  |   | 10,825   |  
|Distributions payable                                                                                                         |  |              | 7,463    |   |                  |   | 5,450    |  
|Minority interest in Partnership                                                                                              |  |              | 48,427   |   |                  |   | 51,088   |  
|                                                                                                                              |  |              |          |   |                  |   |          |  
|Total liabilities                                                                                                             |  |              | 348,175  |   |                  |   | 367,100  |  
|                                                                                                                              |  |             
|Shareholders equity:                                                                                                         |  |              |          |   |                  |   |          |  
|Preferred shares, $0.01 par value, 20,000,000 shares authorized, 5,800,000 shares issued and outstanding                      |  |              | 145,000  |   |                  |   | 145,000  |  
|Common shares, $0.01 par value, 100,000,000 shares authorized, 42,874,412 and 37,966,756 issued and outstanding, respectively |  |              | 429      |   |                  |   | 380      |  
|Additional paid-in capital                                                                                                    |  |              | 460,171  |   |                  |   | 396,631  |  
|Unearned compensation                                                                                                         |  |              | (1,557   | ) |                  |   | (448     | )
|Distributions in excess of earnings                                                                                           |  |              | (115,177 | ) |                  |   | (112,671 | )
|                                                                                                                              |  |              |          |   |                  |   |          |  
|Total shareholders equity                                                                                                    |  |              | 488,866  |   |                  |   | 428,892  |  
|                                                                                                                              |  |              |          |   |                  |   |          |  
|Total liabilities and shareholders equity                                                                                    |  | $            | 837,041  |   |                  | $ | 795,992  |  
|                                                                                                                              |  |              |          |   |                  |   |          |  



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



2



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##### Table of Contents

Innkeepers USA Trust

Consolidated Statements of Operations

(in thousands, except share and per share data)



|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                    |  | 2005                        |            |   | 2004                      |   |            | 2005 |  |   | 2004       |  
|Revenue:                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Hotel operating                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Rooms                                               |  | $                           | 60,342     |   |                           | $ | 52,148     |      |  | $ | 113,373    |   |  | $ | 86,594     |  
|Food and beverage                                   |  |                             | 1,617      |   |                           |   | 295        |      |  |   | 1,916      |   |  |   | 372        |  
|Telephone                                           |  |                             | 467        |   |                           |   | 474        |      |  |   | 859        |   |  |   | 888        |  
|Other                                               |  |                             | 1,496      |   |                           |   | 1,242      |      |  |   | 2,767      |   |  |   | 1,896      |  
|Corporate                                           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Percentage lease                                    |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   | 5,073      |  
|Other                                               |  |                             | 148        |   |                           |   | 99         |      |  |   | 254        |   |  |   | 189        |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                       |  |                             | 64,070     |   |                           |   | 54,258     |      |  |   | 119,169    |   |  |   | 95,012     |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Expenses:                                           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Hotel operating                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Rooms                                               |  |                             | 12,578     |   |                           |   | 11,440     |      |  |   | 23,778     |   |  |   | 19,236     |  
|Food and beverage                                   |  |                             | 1,103      |   |                           |   | 284        |      |  |   | 1,339      |   |  |   | 361        |  
|Telephone                                           |  |                             | 722        |   |                           |   | 734        |      |  |   | 1,405      |   |  |   | 1,183      |  
|Other                                               |  |                             | 653        |   |                           |   | 494        |      |  |   | 1,248      |   |  |   | 791        |  
|General and administrative                          |  |                             | 6,002      |   |                           |   | 4,853      |      |  |   | 11,692     |   |  |   | 8,269      |  
|Franchise and marketing fees                        |  |                             | 4,177      |   |                           |   | 3,548      |      |  |   | 7,950      |   |  |   | 6,117      |  
|Amortization of deferred franchise conversion       |  |                             | 293        |   |                           |   | 274        |      |  |   | 656        |   |  |   | 500        |  
|Advertising and promotions                          |  |                             | 2,025      |   |                           |   | 1,680      |      |  |   | 3,713      |   |  |   | 2,840      |  
|Utilities                                           |  |                             | 2,610      |   |                           |   | 2,299      |      |  |   | 5,571      |   |  |   | 3,973      |  
|Repairs and maintenance                             |  |                             | 3,440      |   |                           |   | 2,768      |      |  |   | 5,864      |   |  |   | 4,709      |  
|Management fees                                     |  |                             | 1,770      |   |                           |   | 1,727      |      |  |   | 3,562      |   |  |   | 2,873      |  
|Amortization of deferred lease acquisition          |  |                             | 131        |   |                           |   | 131        |      |  |   | 262        |   |  |   | 250        |  
|Insurance                                           |  |                             | 393        |   |                           |   | 439        |      |  |   | 780        |   |  |   | 697        |  
|Corporate                                           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Depreciation                                        |  |                             | 8,767      |   |                           |   | 7,881      |      |  |   | 17,269     |   |  |   | 15,692     |  
|Amortization of franchise fees                      |  |                             | 18         |   |                           |   | 12         |      |  |   | 35         |   |  |   | 22         |  
|Ground rent                                         |  |                             | 130        |   |                           |   | 119        |      |  |   | 259        |   |  |   | 247        |  
|Interest                                            |  |                             | 4,241      |   |                           |   | 4,598      |      |  |   | 9,149      |   |  |   | 9,092      |  
|Amortization of loan origination fees               |  |                             | 225        |   |                           |   | 214        |      |  |   | 435        |   |  |   | 483        |  
|Property taxes and insurance                        |  |                             | 3,112      |   |                           |   | 2,791      |      |  |   | 6,005      |   |  |   | 5,569      |  
|General and administrative                          |  |                             | 1,853      |   |                           |   | 1,199      |      |  |   | 3,891      |   |  |   | 2,830      |  
|Amortization of unearned compensation               |  |                             | 158        |   |                           |   | 214        |      |  |   | 255        |   |  |   | 441        |  
|Other charges                                       |  |                             | 355        |   |                           |   | 107        |      |  |   | 3,053      |   |  |   | 478        |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total expenses                                      |  |                             | 54,756     |   |                           |   | 47,806     |      |  |   | 108,171    |   |  |   | 86,653     |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income before minority interest                     |  |                             | 9,314      |   |                           |   | 6,452      |      |  |   | 10,998     |   |  |   | 8,359      |  
|Minority interest, common                           |  |                             | (97        | ) |                           |   | (82        | )    |  |   | (77        | ) |  |   | 76         |  
|Minority interest, preferred                        |  |                             | (1,068     | ) |                           |   | (1,068     | )    |  |   | (2,136     | ) |  |   | (2,136     | )
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income from continuing operations                   |  |                             | 8,149      |   |                           |   | 5,302      |      |  |   | 8,785      |   |  |   | 6,299      |  
|(loss) income from discontinued operations          |  |                             | (73        | ) |                           |   | 251        |      |  |   | 1,363      |   |  |   | 1,087      |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income                                          |  |                             | 8,076      |   |                           |   | 5,553      |      |  |   | 10,148     |   |  |   | 7,386      |  
|Series A Preferred Share issuance costs             |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   | (4,249     | )
|Preferred share dividends                           |  |                             | (2,900     | ) |                           |   | (2,900     | )    |  |   | (5,800     | ) |  |   | (5,689     | )
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shareholders |  | $                           | 5,176      |   |                           | $ | 2,653      |      |  | $ | 4,348      |   |  | $ | (2,552     | )
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Earnings (loss) per share data:                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic  continuing operations                       |  | $                           | 0.12       |   |                           | $ | 0.06       |      |  | $ | 0.07       |   |  | $ | (0.10      | )
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic                                               |  | $                           | 0.12       |   |                           | $ | 0.07       |      |  | $ | 0.11       |   |  | $ | (0.07      | )
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic  weighted average shares                     |  |                             | 42,688,201 |   |                           |   | 37,470,106 |      |  |   | 41,258,447 |   |  |   | 37,450,343 |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted  continuing operations                     |  | $                           | 0.12       |   |                           | $ | 0.06       |      |  | $ | 0.07       |   |  | $ | (0.10      | )
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                             |  | $                           | 0.12       |   |                           | $ | 0.07       |      |  | $ | 0.10       |   |  | $ | (0.07      | )
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted  weighted average shares                   |  |                             | 42,867,121 |   |                           |   | 37,559,261 |      |  |   | 41,429,414 |   |  |   | 37,450,343 |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



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



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##### Table of Contents

Innkeepers USA Trust

Consolidated Statements of Cash Flows

(in thousands)



|                                                                                  |  |                           |         |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                  |  | Six Months Ended June 30, |        
|                                                                                  |  | 2005                      |         |   | 2004 |  
|Cash flows from operating activities:                                             |  | $                         | 10,148  |   |      | $ | 7,386    |  
|Net income                                                                        |  |                           |         |   |      |   |          |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         |   |      |   |          |  
|Depreciation and amortization                                                     |  |                           | 18,912  |   |      |   | 18,476   |  
|Write-off of deferred expenses included in extinguishment of debt                 |  |                           | 124     |   |      |   |         |  
|Minority interests                                                                |  |                           | 2,213   |   |      |   | 2,060    |  
|Gain on sale of hotel included in discontinued operations                         |  |                           | (1,490  | ) |      |   | (1,029   | )
|Changes in operating assets and liabilities:                                      |  |                           |         |   |      |   |          |  
|Accounts receivable (excluding allowance)                                         |  |                           | (3,341  | ) |      |   | 1,009    |  
|Allowance for doubtful accounts                                                   |  |                           | 491     |   |      |   |         |  
|Prepaid and other                                                                 |  |                           | 394     |   |      |   | 155      |  
|Accounts payable and accrued expenses                                             |  |                           | 4,611   |   |      |   | 9,531    |  
|Payable to manager                                                                |  |                           | 186     |   |      |   | (201     | )
|                                                                                  |  |                           |         |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                           | 32,248  |   |      |   | 37,387   |  
|                                                                                  |  |                           |         |   |      |   |          |  
|Cash flows from investing activities:                                             |  |                           |         |   |      |   |          |  
|Investment in hotels, net of insurance proceeds                                   |  |                           | (73,792 | ) |      |   | (71,408  | )
|Proceeds from sale of hotels                                                      |  |                           | 20,860  |   |      |   | 4,028    |  
|Net withdrawals (deposits) into restricted cash and cash equivalents              |  |                           | 2,175   |   |      |   | (935     | )
|Lease acquisitions                                                                |  |                           |        |   |      |   | (1,336   | )
|Payment of franchise fees                                                         |  |                           | (50     | ) |      |   | (192     | )
|Repayment of advances                                                             |  |                           | 322     |   |      |   | 25       |  
|                                                                                  |  |                           |         |   |      |   |          |  
|Net cash used in investing activities                                             |  |                           | (50,485 | ) |      |   | (69,818  | )
|                                                                                  |  |                           |         |   |      |   |          |  
|Cash flows from financing activities:                                             |  |                           |         |   |      |   |          |  
|Proceeds from debt issuance                                                       |  |                           | 71,000  |   |      |   | 26,000   |  
|Payments on debt                                                                  |  |                           | (94,257 | ) |      |   | (2,402   | )
|Payments on franchise conversion fee obligations                                  |  |                           | (560    | ) |      |   | (204     | )
|Distributions paid to unit holders                                                |  |                           | (2,246  | ) |      |   | (2,206   | )
|Distributions paid to shareholders                                                |  |                           | (10,644 | ) |      |   | (7,654   | )
|Redemption of shares or units                                                     |  |                           |        |   |      |   | (115,730 | )
|Proceeds from issuance of common and preferred shares                             |  |                           | 59,585  |   |      |   | 140,251  |  
|Loan origination fees and costs paid                                              |  |                           | (311    | ) |      |   | (68      | )
|                                                                                  |  |                           |         |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                           | 22,567  |   |      |   | 37,987   |  
|                                                                                  |  |                           |         |   |      |   |          |  
|Net increase in cash and cash equivalents                                         |  |                           | 4,330   |   |      |   | 5,556    |  
|Cash and cash equivalents at beginning of period                                  |  |                           | 22,837  |   |      |   | 9,586    |  
|                                                                                  |  |                           |         |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                         | 27,167  |   |      | $ | 15,142   |  
|                                                                                  |  |                           |         |   |      |   |          |  
|Supplemental cash flow information:                                               |  |                           |         |   |      |   |          |  
|Interest paid                                                                     |  | $                         | 9,149   |   |      | $ | 8,636    |  



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Supplemental disclosure of non-cash information   1.      During 2005, an adjustment of $742 for future obligations
under the Marriott Takeback Transaction was recorded in Deferred and other and Franchise conversion fee obligations. See Note 1 for a description of the Marriott Takeback Transaction.  2.      A common unit holder in the Companys operating
partnership redeemed 407,656 and 50,180 common units for common shares in the six months ended June 30, 2005 and 2004, respectively, and the increase in equity and decrease in minority interest associated with these redemptions was $6,111 and $463,
respectively.  3.      During 2005, the Company transferred $1,704 of costs associated with completed hotel acquisitions from deferred and other to investment in hotels, at cost.  4.      During 2005,
the Company capitalized interest of $373 related to the development and renovation of certain hotels.



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



4



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##### Table of Contents

Innkeepers USA Trust

Notes to Consolidated Financial Statements(in thousands)



1. Organization and Recent Developments



Innkeepers USA Trust (Innkeepers) is a self-administered real
estate investment trust (REIT), which at June 30, 2005, owned 69 hotels with an aggregate of 8,745 rooms/suites (the Hotels) through its partnership interests in Innkeepers USA Limited Partnership (with its subsidiary
partnerships, the Partnership). The Company has a series of indirect, wholly-owned taxable REIT subsidiaries that lease the Hotels from the Partnership (the TRSs, and collectively with Innkeepers and the Partnership, the
Company). Innkeepers Hospitality Management Inc. (the IH Manager) manages 65 of the Hotels for Innkeepers and a third party manages one of the Hotels. Three of the Companys hotels, comprising a total of 575 rooms, are
closed for substantial renovation and branding, and upon re-opening, these hotels will be managed by the IH Manager.



TRS Transaction.From January 1, 2003 through November 30, 2003, 60 of the Companys hotels were leased to Innkeepers Hospitality, Inc. or its
affiliates (collectively, the IH Lessee) under separate percentage leases (collectively, the Percentage Leases) providing for rent equal to (a) a fixed base amount or, (b) if greater, percentage lease rent based on the room
revenues of the hotel. The IH Lessee operated 44 of the Companys hotels for that entire 11-month period. Affiliates of Marriott International, Inc. (Marriott) operated 17 of the hotels for part of 2003, under management agreements
with the IH Lessee. At various times between April 2003 and July 2003, the IH Lessee terminated the Marriott management agreements for those 17 hotels and began managing those hotels directly (see  Management Conversion of
Marriott-Managed Hotels below). As of December 1, 2003, TRSs of the Company acquired from the IH Lessee the Percentage Leases for 23 hotels, and simultaneously entered into management agreements with the IH Manager to manage those 23 hotels.
The IH Lessee continued to lease and manage 37 Company hotels under Percentage Leases for the remainder of 2003. Between December 31, 2003 and March 1, 2004, TRSs acquired the Percentage Leases on the remaining 37 hotels leased by the IH Lessee, and
the TRSs entered into management agreements with the IH Manager to manage those 37 hotels as those Percentage Leases were acquired. All of the IH Lessees Percentage Leases were acquired by the TRSs without any modification to existing rent
formulas or other economic terms. This transaction is referred to as the TRS Transaction.



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



At June 30, 2005, all but one of the Companys Hotels was (or upon reopening will be) managed by the IH Manager under management agreements with the
TRSs. The TRSs are responsible for paying all Hotel operating expenses, including all personnel costs, franchise royalties and related fees, the Conversion Fee payable in connection with the Marriott Takeback Transaction (see Management
Conversion of Marriott-Managed Hotels below), utility costs, and general repairs and maintenance. The TRSs are also responsible for all management fees payable to the IH Manager, including base and incentive fees. The Company remains
responsible for ownership costs such as ground rent, capital expenditures, and property taxes and insurance (except that the TRSs pay for property insurance for the six hotels formerly leased to the Summerfield Lessee). After the TRS Transaction and
Wyndham Lease Termination Transaction, all Hotel-level revenue is reflected in the Companys financial statements as Hotel operating revenue and all Hotel-level expense is reflected in the Companys financial statements as
Hotel operating expense. However, since the Company had Hotels operating under the previous structure during the six months ended June 30, 2004, the accompanying statements of operations for the six months ended June 30, 2004 reflect
some Percentage Lease revenue and do not reflect all hotel-level operating revenues and expenses.



5



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##### Table of Contents

Management Conversion of Marriott-Managed Hotels. Between April 2003 and July 2003, the agreements
under which 17 of the Companys hotels were franchised and managed by Marriott were converted into long-term franchise agreements with Marriott. Under those franchise agreements, the TRSs will pay Marriott (1) a franchise royalty fee of 6.5% of
room revenues for the first ten years of each franchise agreement and a 5% royalty thereafter (as compared to 5% of gross revenues under the previous management agreements with Marriott) and (2) $850 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). 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 Conversion Fee was subject to an aggregate credit of $750 from Marriott; the Company applied $375 of the credit to the $850 Conversion Fee due for 2004 and plans to
apply the balance of the credit to the Conversion Fee expected to be payable in 2005. Other than the fees discussed above, the 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. This transaction is referred to as the Marriott Takeback Transaction, and the IH Manager now manages these 17 hotels.



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



Acquisitions and Sales of Hotels



In January 2005, the Company acquired an existing 83-room Hampton Inn hotel in Columbia, Maryland for a gross amount of $10 million, including closing
costs and anticipated capital expenditures. In January 2005, the Company acquired an existing 190-room hotel in Montvale, NJ, for a gross amount of $23 million, including closing costs and anticipated capital expenditures. The Company closed the
hotel to begin a $5 million renovation to convert the hotel to a Courtyard by Marriott which is expected to open in 2006. In May 2005, the Company acquired the newly renovated 224-room Westin Governor Morris hotel in Morristown, N.J. for a gross
amount of $35.1 million. The acquisitions were funded by borrowings under the Companys unsecured line of credit (Line of Credit).



In February 2005, the Company sold a 112-suite Residence Inn hotel in Portland, OR for a gross amount of $8.5 million and a 120-suite Residence Inn hotel
in Vancouver, WA for a gross amount of $6.4 million. In March 2005, the Company sold a 204-room Holiday Inn Express hotel in Lexington, MA for a gross amount of $6.4 million.



Issuance of Common Shares



In February 2005, the Company completed a public offering of 4.4 million common shares at $13.71 per share. The net proceeds from the offering of $59.6
million were used to pay down a portion of the Companys outstanding indebtedness under its unsecured the Line of Credit. In March 2005, the Company issued 407,656 shares in exchange for 407,656 common units outstanding. Additionally, the
company granted performance awards to two executives, which are discussed in Note 3 below. On June 1, 2005, the Company granted two executives a total of 100,000 restricted shares.



2. Basis of Presentation



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 included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2004 (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.



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).



6



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##### Table of Contents

The Company awarded to two executive officers as of June 1, 2005 performance awards that may result in
the issuance of 237,500 common shares and 225,000 common share equivalents (the equivalents may settle in cash). The common shares and equivalents will only be issued if the Companys compounded annual total shareholder return (share price
appreciation plus dividends) exceeds a targeted threshold over a measuring period. The measuring period ends May 30, 2008 or upon the termination without cause, death or disability of the executive, or a change of control of the Company. Any shares
or equivalents issued at the end of the measuring period will vest 50% at issuance and 25% on the first two anniversaries of issuance, or earlier if the executive is terminated without cause, dies or is disabled, or if a change of control occurs.
The Company accounts for these performance awards under variable accounting in accordance with APB Opinion No. 25, and no compensation expense is recognized for the performance awards as of June 30, 2005, as a minimum target threshold has not yet
been achieved.



4. Recently Issued Accounting Pronouncements



On March 29, 2005, the SEC published Staff Accounting Bulletin No. 107.
The interpretations in this staff accounting bulletin (SAB) express views of the staff regarding the interaction between Statement of Financial Accounting Standards Statement No. 123 (revised 2004), Share-Based Payment (Statement
123R or the Statement) and SEC rules and regulations and provide the staffs views regarding the valuation of share-based payment arrangements for public companies. In particular, this SAB provides guidance related to
share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of Statement 123R in an interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of Statement 123R, the modification of employee share options prior to adoption of Statement 123R and disclosures in
Managements Discussion and Analysis (MD&A) subsequent to adoption of Statement 123R.



On April 15, 2005, the SEC issued a rule entitled Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Financial Accounting
Standards No. 123 (Revised 2004), Share-Based Payment. The rule amends the dates by which registrants are required to comply with Statement 123R, giving many public companies additional time to prepare for adoption. For a public company that
does not file as a small business issuer, Statement 123R must be adopted as of the beginning of the companys first fiscal year that begins after June 15, 2005. For a public company that files as a small business issuer, Statement 123R must be
adopted as of the beginning of the companys fiscal year that begins after December 15, 2005. The Company plans to adopt Statement 123R in January 2006 and will continue reviewing the statement and evaluating the impact of this statement.



FAS 154 Accounting Changes and Error replace APB Opinion No.
20, and FASB Statement No. 3. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle.
This Statement requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When
it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as
of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the
statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement
requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable.



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##### Table of Contents

5. Allowance for Doubtful Accounts



The Company provides an allowance for doubtful accounts to the estimated uncollectible amounts of recorded accounts
receivable. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of accounts receivable. The Company increased the allowance for doubtful accounts from $58 at December
31, 2004 to $549 at June 30, 2005. See Note 10.



6. Earnings per Share



The following table sets forth the computation of basic
and diluted earnings (loss) per share for the three and six months ended June 30, 2005 and 2004 (in thousands, except share and per share data):



|                                                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                             |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                                             |  | 2005                        |            |   | 2004                      |   |            | 2005 |  |   | 2004       |  
|Numerator:                                                                                                   |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income from continuing operations                                                                            |  | $                           | 8,149      |   |                           | $ | 5,302      |      |  | $ | 8,785      |   |  | $ | 6,299      |  
|                                                                                                             |  |                             |            |  
|Series A Preferred Share issuance costs                                                                      |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   | (4,249     | )
|                                                                                                             |  |                             |            |  
|Preferred share dividends                                                                                    |  |                             | (2,900     | ) |                           |   | (2,900     | )    |  |   | (5,800     | ) |  |   | (5,689     | )
|                                                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shareholders from continuing operations                               |  |                             | 5,249      |   |                           |   | 2,402      |      |  |   | 2,985      |   |  |   | (3,639     | )
|                                                                                                             |  |                             |            |  
|Discontinued operations                                                                                      |  |                             | (73        | ) |                           |   | 251        |      |  |   | 1,363      |   |  |   | 1,087      |  
|                                                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shareholders                                                          |  | $                           | 5,176      |   |                           | $ | 2,653      |      |  | $ | 4,348      |   |  | $ | (2,552     | )
|                                                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Denominator:                                                                                                 |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Denominator for basic earnings (loss) per share  weighted average shares                                    |  |                             | 42,688,201 |   |                           |   | 37,470,106 |      |  |   | 41,258,447 |   |  |   | 37,450,343 |  
|Effect of dilutive securities:                                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                             |  |                             |            |  
|Share options                                                                                                |  |                             | 141,003    |   |                           |   | 3,510      |      |  |   | 134,084    |   |  |   |           |  
|                                                                                                             |  |                             |            |  
|Restricted shares                                                                                            |  |                             | 37,917     |   |                           |   | 85,645     |      |  |   | 36,883     |   |  |   |           |  
|                                                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Denominator for diluted earnings (loss) per share  adjusted weighted average shares and assumed conversions |  |                             | 42,867,121 |   |                           |   | 37,559,261 |      |  |   | 41,429,414 |   |  |   | 37,450,343 |  
|                                                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Earnings (loss) per share data:                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic-continuing operations                                                                                  |  | $                           | 0.12       |   |                           | $ | 0.06       |      |  | $ | 0.07       |   |  | $ | (0.10      | )
|                                                                                                             |  |                             |            |  
|Basic-discontinued operations                                                                                |  | $                           | 0.00       |   |                           | $ | 0.01       |      |  | $ | 0.03       |   |  | $ | 0.03       |  
|                                                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                                                                        |  | $                           | 0.12       |   |                           | $ | 0.07       |      |  | $ | 0.11       |   |  | $ | (0.07      | )
|                                                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted-continuing operations                                                                                |  | $                           | 0.12       |   |                           | $ | 0.06       |      |  | $ | 0.07       |   |  | $ | (0.10      | )
|Diluted-discontinued operations                                                                              |  | $                           | 0.00       |   |                           | $ | 0.01       |      |  | $ | 0.03       |   |  | $ | 0.03       |  
|                                                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                                                                                      |  | $                           | 0.12       |   |                           | $ | 0.07       |      |  | $ | 0.10       |   |  | $ | (0.07      | )
|                                                                                                             |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



The conversion of
Common Units into common shares has no effect on earnings (loss) per share. The conversion of Class B Preferred Units and 1,088,000 outstanding options are anti-dilutive (i.e. conversion into common shares would increase earnings per share or
decrease loss per share) and, therefore, are not included in the calculation of diluted earnings (loss) per share.



7. Other Charges



Other charges for the three and six months ended June 30, 2005 and 2004 include the following (in thousands):



|                       |  |                             |     |                          |   |      |  |      |       |  |   |    
|---------------------- |  | --------------------------- | --- | ------------------------ | - | ---- |  | ---- | ----- |  | - | ---
|                       |  | Three Months Ended June 30, |     | Six Months EndedJune 30,
|                       |  | 2005                        |     | 2004                     |   | 2005 |  | 2004
|Advisory services      |  | $                           |    |                          | $ |     |  | $    |      |  | $ | 32 
|TRS Transaction costs  |  |                             |    |                          |   | 107  |  |      |      |  |   | 446
|Personnel cost         |  |                             | 355 |                          |   |     |  |      | 355   |  |   |   
|Extinguishment of Debt |  |                             |    |                          |   |     |  |      | 2,698 |  |   |   
|                       |  |                             |     |                          |   |      |  |      |       |  |   |    
|                       |  | $                           | 355 |                          | $ | 107  |  | $    | 3,053 |  | $ | 478
|                       |  |                             |     |                          |   |      |  |      |       |  |   |    



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##### Table of Contents

The advisory services (which included legal fees to the special committee of the Board of Trustees) and
TRS Transaction costs are related to the TRS Transaction. The Company reimbursed the IH Manager for expenses incurred for the transition of 17 hotels managed by Marriott to the IH Manager as part of the Marriott Takeback Transaction. Extinguishment
of debt includes prepaid interest, loan origination fees and other costs associated with the partial defeasance of outstanding debt of $16,500 encumbering three hotels that were sold during the first quarter of 2005. The personnel cost was incurred
in connection with the retirement of the Companys former chief financial officer.



8. Discontinued Operations



The Company
classified three hotels as held for sale at December 31, 2004. The Company recognized an impairment loss of $11,400 in 2003 relating to two of these three hotels and an additional impairment loss of $380 was recognized in 2004 relating to one of
those two hotels. The Company recognized a loss of $246 relating to the third hotel in 2004. The Company sold the three hotels in the first quarter of 2005, and the Company recognized a net gain of $1490 on the sale.



The Company sold a hotel in January 2004 and recognized a gain on the sale of
$1,029. The Company recognized an impairment loss of $6,500 relating to this hotel in 2002. The Company sold a hotel in July 2004 and recognized a loss on the sale of $247. The Company recognized an impairment loss of $3,800 relating to this hotel
in 2002.



The results of operations from the three hotels
classified as held for sale at December 31, 2004 are recognized as discontinued operations for the three and six months ended June 30, 2005. The results of operations for all five hotels sold during 2005 and 2004 are classified as discontinued
operation for the three and six months ended June 30, 2004. Previously reported results of operations for these hotels have been reclassified to reflect that these hotels were sold.



The following table sets forth the components of income (loss) from discontinued operations for the three and six months
ended June 30, 2005 and 2004 (in thousands):



|                                           |  |                             |     |   |                           |   |        |      |  |   |       |   |  |   |        |  
|------------------------------------------ |  | --------------------------- | --- | - | ------------------------- | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                           |  | Three Months Ended June 30, |     |   | Six Months Ended June 30, |  
|                                           |  | 2005                        |     |   | 2004                      |   |        | 2005 |  |   | 2004  |  
|Hotel operating revenue                    |  | $                           |    |   |                           | $ | 2,578  |      |  | $ | 918   |   |  | $ | 4,580  |  
|Percentage Lease revenue                   |  |                             |    |   |                           |   |       |      |  |   |      |   |  |   | 74     |  
|Other revenue                              |  |                             |    |   |                           |   | 18     |      |  |   | 28    |   |  |   | 39     |  
|Hotel operating expenses                   |  |                             | (73 | ) |                           |   | (1,735 | )    |  |   | (996  | ) |  |   | (3,251 | )
|Depreciation                               |  |                             |    |   |                           |   | (482   | )    |  |   |      |   |  |   | (1,082 | )
|Amortization of franchise fees             |  |                             |    |   |                           |   | (4     | )    |  |   | (2    | ) |  |   | (7     | )
|Property taxes and insurance               |  |                             |    |   |                           |   | (114   | )    |  |   | (75   | ) |  |   | (281   | )
|General and administrative                 |  |                             |    |   |                           |   | (10    | )    |  |   |      |   |  |   | (14    | )
|Gain on sale of hotels                     |  |                             |    |   |                           |   |       |      |  |   | 1,490 |   |  |   | 1,029  |  
|                                           |  |                             |     |   |                           |   |        |      |  |   |       |   |  |   |        |  
|(Loss) income from discontinued operations |  | $                           | (73 | ) |                           | $ | 251    |      |  | $ | 1,363 |   |  | $ | 1,087  |  
|                                           |  |                             |     |   |                           |   |        |      |  |   |       |   |  |   |        |  



9. Income Taxes



The Companys TRSs are subject to federal and state income taxes. The
TRSs have cumulative future income tax deductions of approximately $5,195 (related primarily to accumulated net operating losses) at June 30, 2005 and the gross deferred tax asset associated with these future tax deductions was approximately $2,098.
The TRSs have recorded a valuation allowance equal to 100% of the gross deferred tax asset due to the uncertainty of realizing the benefit of this asset due to the TRSs limited operating history and the taxable losses incurred by the TRSs since
their inception.



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##### Table of Contents

10. Uncertainty



The Company recorded a $431 charge during the three months ended March 31, 2005 to reflect the estimated loss from misappropriation of receipts on hotel
accounts receivable by an employee at one of the 69 Hotels. The Company believes that most of the misappropriation occurred prior to December 31, 2004 based on the results of the Companys investigation to date. The investigation is continuing
to determine whether, how and to what extent misappropriation from the company occurred. The Company has an insurance policy under which it believes that it will recover substantially all of the loss, and the insurance company is conducting an
investigation of the Companys claim. At this time however, there can be no assurance that recovery under such insurance policy will be obtained.



11. Subsequent Events



In July 2005, Bruce Riggins joined the Company as chief financial officer following the retirement of the Companys previous chief financial
officer in the second quarter of 2005.



In August 2005, the
Company opened the Louisville, KY Hampton Inn after the completion of the hotels renovation, which began in October 2004. The Company acquired this hotel in June 2004.



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##### Table of Contents

ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(in thousands)



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, 2004 (the 10-K). Capitalized terms used but
not defined in this section have the meanings ascribed in the notes to the consolidated financial statements included in this Report on Form 10-Q. An investment in the Company is subject to significant risks, which the Company discloses in reports
filed from time to time with the SEC, including a discussion of Risk Factors included in the Form 10-K. The Companys 2004 annual report (including the 10-K) is posted on the Companys website at www.innkeepersusa.com, and the
Form 10-K may be found at the SECs EDGAR website at www.sec.gov.



The following chart sets forth certain information with respect to the Hotels at June 30, 2005:



|                              |  |                 |  |                      
|----------------------------- |  | --------------- |  | ---------------------
|Franchise Affiliation         |  | Number ofHotels |  | Number ofRooms/Suites
|Upscale Extended Stay         |  |                 |  |                      
|Residence Inn by Marriott     |  | 42              |  | 5,044                
|Summerfield Suites by Wyndham |  | 5               |  | 650                  
|Homewood Suites by Hilton     |  | 1               |  | 146                  
|Sunrise Suites (1)            |  | 1               |  | 96                   
|                              |  |                 |  |                      
|                              |  | 49              |  | 5,936                
|                              |  |                 |  |                      
|Upscale                       |  |                 |  |                      
|Doubletree Guest Suites       |  | 1               |  | 105                  
|Four Points by Sheraton       |  | 1               |  | 216                  
|Courtyard by Marriott (2)     |  | 3               |  | 529                  
|Westin (3)                    |  | 1               |  | 224                  
|                              |  |                 |  |                      
|                              |  | 6               |  | 1,074                
|                              |  |                 |  |                      
|Mid Price                     |  |                 |  |                      
|Hampton Inn (4)               |  | 13              |  | 1,640                
|TownePlace Suites             |  | 1               |  | 95                   
|                              |  |                 |  |                      
|                              |  | 14              |  | 1,735                
|                              |  |                 |  |                      
|Total:                        |  | 69              |  | 8,745                
|                              |  |                 |  |                      

---

|(1) | This hotel is operated independently of any franchise.
|--- | ------------------------------------------------------

|(2) | Two of these hotels (with a total of 393 rooms) are closed for renovation and conversion to the Courtyard by Marriott brand.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(3) | This is a full-service upper-upscale hotel.
|--- | -------------------------------------------

|(4) | One of these hotels (with 182 rooms) was closed for renovation and conversion to the Hampton Inn brand at June 30, 2005. This hotel opened as a Hampton Inn in August 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Hotel occupancy, average daily rate (ADR) and revenue per available room (RevPAR)
results are presented in the following table.



|                          |  |                             |        |   |                               |   |        |                           |      |       |                               |      |   |        |   |  |   |        |   |  |       |  
|------------------------- |  | --------------------------- | ------ | - | ----------------------------- | - | ------ | ------------------------- | ---- | ----- | ----------------------------- | ---- | - | ------ | - |  | - | ------ | - |  | ----- | -
|                          |  | Three Months Ended June 30, |        |   | Percentage increase(decrease) |   |        | Six Months Ended June 30, |      |       | Percentage increase(decrease) |     
|                          |  | 2005                        |        |   | 2004                          |   |        |                           | 2005 |       |                               | 2004 |   |       
|Portfolio (1)             |  |                             |        |   |                               |   |        |                           |      |       |                               |      |   |        |   |  |   |        |   |  |       |  
|ADR                       |  | $                           | 104.01 |   |                               | $ | 97.67  |                           |      | 6.5   | %                             |      | $ | 103.33 |   |  | $ | 96.73  |   |  | 6.8   | %
|Occupancy                 |  |                             | 78.82  | % |                               |   | 78.40  | %                         |      | 0.5   |                               |      |   | 75.60  | % |  |   | 74.82  | % |  | 1.0   |  
|RevPAR                    |  | $                           | 81.99  |   |                               | $ | 76.57  |                           |      | 7.1   |                               |      | $ | 78.11  |   |  | $ | 72.37  |   |  | 7.9   |  
|                          |  |                             |        |   |                               |  
|By Price Segment          |  |                             |        |   |                               |   |        |                           |      |       |                               |      |   |        |   |  |   |        |   |  |       |  
|Upscale Extended Stay (2) |  |                             |        |   |                               |   |        |                           |      |       |                               |      |   |        |   |  |   |        |   |  |       |  
|ADR                       |  | $                           | 103.55 |   |                               | $ | 97.50  |                           |      | 6.2   | %                             |      | $ | 102.72 |   |  | $ | 96.87  |   |  | 6.0   | %
|Occupancy                 |  |                             | 81.41  | % |                               |   | 80.85  | %                         |      | 0.7   |                               |      |   | 78.29  | % |  |   | 77.43  | % |  | 1.1   |  
|RevPAR                    |  | $                           | 84.30  |   |                               | $ | 78.83  |                           |      | 6.9   |                               |      | $ | 80.42  |   |  | $ | 75.01  |   |  | 7.2   |  
|Upscale (3)               |  |                             |        |   |                               |   |        |                           |      |       |                               |      |   |        |   |  |   |        |   |  |       |  
|ADR                       |  | $                           | 136.90 |   |                               | $ | 127.74 |                           |      | 7.2   | %                             |      | $ | 128.29 |   |  | $ | 115.82 |   |  | 10.8  | %
|Occupancy                 |  |                             | 70.76  | % |                               |   | 83.93  | %                         |      | (15.7 | )                             |      |   | 69.87  | % |  |   | 80.82  | % |  | (13.6 | )
|RevPAR                    |  | $                           | 96.87  |   |                               | $ | 107.21 |                           |      | (9.6  | )                             |      | $ | 89.63  |   |  | $ | 93.60  |   |  | (4.2  | )
|Mid Price (4)             |  |                             |        |   |                               |   |        |                           |      |       |                               |      |   |        |   |  |   |        |   |  |       |  
|ADR                       |  | $                           | 96.40  |   |                               | $ | 87.41  |                           |      | 10.3  | %                             |      | $ | 98.39  |   |  | $ | 88.89  |   |  | 10.7  | %
|Occupancy                 |  |                             | 71.33  | % |                               |   | 67.41  | %                         |      | 5.8   |                               |      |   | 66.96  | % |  |   | 63.04  | % |  | 6.2   | %
|RevPAR                    |  | $                           | 68.76  |   |                               | $ | 58.92  |                           |      | 16.7  |                               |      | $ | 65.89  |   |  | $ | 56.04  |   |  | 17.6  |  
|                          |  |                             |        |   |                               |  
|Comparable hotels (5)     |  |                             |        |   |                               |   |        |                           |      |       |                               |      |   |        |   |  |   |        |   |  |       |  
|ADR                       |  | $                           | 101.19 |   |                               | $ | 94.76  |                           |      | 6.8   | %                             |      | $ | 101.20 |   |  | $ | 94.73  |   |  | 6.8   | %
|Occupancy                 |  |                             | 78.91  | % |                               |   | 77.60  | %                         |      | 1.6   |                               |      |   | 75.83  | % |  |   | 74.30  | % |  | 2.1   |  
|RevPAR                    |  | $                           | 79.81  |   |                               | $ | 73.54  |                           |      | 8.5   |                               |      | $ | 76.70  |   |  | $ | 70.34  |   |  | 9.0   |  

---

|(1) | Includes 65 hotels, and excludes four hotels closed for renovation and/or conversion during part or all of the periods presented. Includes the Ft. Walton Beach, FL Hotel, which had
a substantial number of rooms out of service for extended periods following hurricanes in September 2004
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 49 hotels
|--- | ------------------

|(3) | Includes three hotels, and excludes four hotels closed for renovation and conversion during part or all of the periods presented
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 13 hotels, and excludes one hotel closed for renovation and conversion during part or all of the periods presented
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(5) | Includes the 61 hotels owned by the Company as of January 1, 2004 and operating throughout all of the periods presented
|--- | -----------------------------------------------------------------------------------------------------------------------



Results of Operations



Comparison of the Three Months Ended June 30, 2005 (2005) to the Three Months
Ended June 30, 2004 (2004)



The Company had
total revenue for 2005 of $64,070 consisting of $63,922 of Hotel operating revenue and $148 of other revenue compared to total revenue of $54,258 for 2004, consisting of $54,159 of Hotel operating revenue and $99 of other revenue.



Of the companys 69 owned hotels at June 30, 2005, 61 Hotels with a
total of 7,396 rooms are deemed Comparable Hotels whose operations are reflected in the Statements of Operations for the full three months ended June 30, 2005 and 2004. The eight Hotels excluded consist of (a) four Hotels with a total of
799 rooms closed for renovation and conversion during part or all of the periods presented and (b) four other Hotels acquired in 2004 or 2005 whose operations are not reflected in the Statement of Operations for the full three months ended June 30,
2004.



Room revenue increased $8,194 to $60,342 in 2005 from
$52,148 for 2004. The increase was a result of a 7.1% RevPAR increase at 65 of our Hotels (excludes four Hotels closed for renovation and conversion during part or all of 2005 and 2004) and additional revenue associated with hotels acquired in 2005
and 2004. Room revenue



12



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##### Table of Contents

for the Comparable Hotels increased $4,222, or 8.5%, to $53,746 in 2005 from $49,523 in 2004. This increase was due to an
8.5% RevPAR increase which was driven mainly by a 6.8% increase in ADR. The remaining increase of $3,972 to $6,596 in 2005 from $2,625 in 2004 was primarily due to the hotels acquired in 2005 and 2004.



Food and beverage revenue increased $1,322 to $1,617 in 2005 from $295 in
2004. Food and beverage revenue for the Comparable Hotels increased $58 to $162 in 2005 from $104 in 2004. The remaining increase of $1,264 was primarily due to the acquisitions of the full service Westin Governor Morris hotel in Morristown, N.J.
and the Four Points Sheraton hotel in Ft. Walton Beach, FL.



The Company had Hotel operating expenses for 2005 of $35,897 compared to Hotel operating expenses in 2004 of $30,671. Hotel operating expenses for the Comparable Hotels increased $1,280, or 4.4%, to $30,117 in 2005 from $28,837 in 2004.
This increase was due primarily to higher occupancies and increases in payroll related expenses. Hotel operating expenses as a percentage of revenue for the Comparable Hotels decreased in 2005 to 54.3% in 2005 from 56.3% in 2004. The remaining
increase of $3,946 to $5,780 in 2005 from $1,834 in 2004 was primarily due to the Hotels acquired in 2005 and 2004.



Depreciation, amortization of franchise fees, amortization of loan origination fees, amortization of deferred franchise conversion fees, amortization of
deferred lease acquisition cost, and amortization of unearned compensation increased $866 in 2005 to $9,592 in the aggregate from $8,726 for 2004. This increase is primarily due to depreciation increase on the three Hotels acquired in 2005 and 2004.



Interest expense for 2005 was $4,241 compared to $4,598 for
2004. This decrease was due primarily to a lower interest rate on borrowings under the Line of Credit in 2005 due to the Companys results. The Line of Credit had an outstanding balance of $55,574 at June 30, 2005 and $59,574 at December 31,
2004.



Property taxes and insurance increased in 2005 to $3,112
compared to $2,791 for 2004. Property taxes and insurance for the Companys comparable hotels increased slightly in 2005 to $2,715 from $2,684 in 2004. The remaining increase of $290 to $397 in 2005 from $107 in 2004 was primarily due to the
hotels acquired in 2005 and 2004.



Corporate general and
administrative expenses increased $654 to $1,853 in 2005 from $1,199 in 2004. This increase was due primarily to an increase in salaries and benefits and fees associated with complying with certain of Sarbanes-Oxley rules.



Other charges in 2005 increased to $355 compared to $107 in 2004. This
increase was due to personnel cost related to the retirement of the Companys former Chief Financial Officer in the second quarter 2005.



Preferred share dividends remained constant at $2,900 in 2004 and 2005.



Net income applicable to common shareholders for 2005 was $5,176 or $0.12 per diluted share, compared with a net income of
$2,653 or $0.07 per diluted share for 2004. This increase was due primarily to the factors discussed previously.



Comparison of the six Months Ended June 30, 2005 (2005) to the six Months Ended June 30, 2004 (2004)



The Company had total revenue for 2005 of $119,169 consisting of $118,915 of
Hotel operating revenue and $254 of other revenue compared to total revenue of $95,012 for 2004, consisting of consisting of $5,073 of Percentage Lease revenue from the Lessees, $89,750 of Hotel operating revenue and $189 of other revenue. The
increase in Hotel operating revenue and decline in Percentage Lease revenue from 2004 to 2005 was due to the completion of the TRS Transaction and the Wyndham Lease Termination Transaction.



The TRS Transaction was completed with respect to 22 of the Comparable Hotels
with a total of 2,734 rooms on February 1, 2004 and one Hotel with 174 rooms on March 1, 2004. The Wyndham Lease Transaction was completed with respect to six of the Comparable Hotels with a total of 746 rooms on March 1, 2004. The accompanying
Statements of Operations reflect Percentage Lease revenue for those Hotels for periods prior to February 1, 2004 and March 1, 2004, respectively, and do not reflect all revenues or any operating expenses for those Hotels prior to such dates. The
results discussed below for 2004 assume that the TRS Transaction and Wyndham Lease Termination Transaction were completed for these Hotels on January 1, 2004.



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##### Table of Contents

Room revenue increased $26,779 to $113,373 in 2005 from $86,594 for 2004. This increase was a result of a
7.9% RevPAR increase at 65 of our Hotels (excludes four Hotels closed for renovation and conversion during part or all of the periods presented). Room revenue for the Comparable Hotels increased $7,844, or 8.2%, to $102,728 in 2005 from $94,884 in
2004. This increase was due to a 9.0% RevPAR increase which was driven mainly by a 6.8% increase in ADR.



Food and beverage revenue increased $1,544 to $1,916 in 2005 from $372 in 2004. This increase was primarily due to the acquisitions of the full service
Westin Governor Morris hotel in Morristown, N.J. and the Four Points by Sheraton hotel in Ft. Walton Beach, FL. Food and beverage revenue for the Comparable Hotels decreased $46 to $305 in 2005 from $351 in 2004.



The Company had Hotel operating expenses for 2005 of $67,820 compared to
Hotel operating expenses in 2004 of $51,799. Hotel operating expenses for the Comparable Hotels increased $2,694, or 4.8%, to $59,191 in 2005 from $56,497 in 2004. This increase was due primarily to higher occupancies and increases in payroll
related expenses. Hotel operating expenses as a percentage of revenue decreased in 2005 to 55.9% in 2005 from 57.5% in 2004.



Depreciation, amortization of franchise fees, amortization of loan origination fees, amortization of deferred franchise conversion fees, amortization of
deferred lease acquisition cost, and amortization of unearned compensation increased $1,524 in 2005 to $18,912 in the aggregate from $17,388 for 2004. This increase was primarily due to depreciation increase on the three Hotels acquired in 2005.



Interest expense remained relatively constant in 2005 at
$9,149 compared with $9,092 for 2004. The Line of Credit had an outstanding balance of $55,574 and $26,000 at June 30, 2005 and 2004, respectively.



Property taxes and insurance in 2005 was $6,005 compared to $5,569 for 2004. Property taxes and insurance for the Companys comparable hotels
decreased in 2005 to $4,753 compared to $4,825 for 2004.



Corporate general and administrative expenses increased $1,061, to $3,891 in 2005 from $2,830 in 2004. This increase was due primarily to an increase in salaries and benefits and fees associated with complying with certain of Sarbanes-Oxley
rules.



Other charges in 2005 increased to $3,053 compared to
$478 in 2004. This increase is due to an extinguishment of debt which incurred $2,704 in interest, fees and costs in 2005, and personnel cost related to the retirement of the Companys Chief Financial Officer.



Discontinued operations increased from income of $1,087 in 2004 to income of
$1,363 in 2005. The increase is due primarily to a gain on the sale of Hotels recognized in 2005 of $1,490 compared to a gain on the sale of Hotels recognized in 2004 of $1,029.



Issuance costs in 2004 of $4,249 were recognized when the Series A preferred shares were redeemed in January 2004.



Net loss applicable to common shareholders for 2005 was
$4,348, or $0.11 per diluted share, compared with a net income applicable to common shareholders of $2,552 or $(0.07) per diluted share for 2004. This change was due primarily to the factors discussed previously.



Liquidity and Capital Resources



The Companys principal source of liquidity is derived from hotel
operations. The Company expects that its cash from hotel operations during 2005 will be adequate to meet its liquidity and capital expenditure needs during the year, excluding acquisitions, development, and re-branding projects. The Company
currently expects to fund its acquisitions, development, and re-branding projects primarily with the Companys current cash on hand and by borrowing on its Line of Credit or accessing the capital markets, if feasible.



Cash Flow Analysis



Cash and cash equivalents at June 30, 2005 and 2004 were $27,167 and $15,142, respectively, including $5,777 and $8,521 at
June 30, 2005 and 2004, respectively, that was held in escrow by lenders to pay for insurance, taxes, debt service, and capital expenditures for certain Hotels.



14



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##### Table of Contents

Net cash provided by operating activities for the six months ended June 30, 2005 and 2004 was $32,248 and
$37,387, respectively. The decrease in net cash provided by operating activities was primarily the result of an increase in accounts receivable, and a decrease in accounts payables accrued expenses, which was partially offset by an increase in net
income from the six months ended June 30, 2004 to June 30, 2005.



Net cash used in investing activities was $50,485 for the six months ended June 30, 2005. This was comprised primarily of the acquisition of three hotels for $73,792, offset by proceeds from the sales of hotels of $20,860



Net cash used in investing activities was $69,818 for the six months ended
June 30, 2004. This was comprised primarily of (a) renovations at certain hotels for $13,332, (b) the purchase of three hotels for $57,400, (c) the acquisition of Percentage Leases from the IH Lessee for $1,336, partially offset by the net proceeds
from the sale of a hotel of $4,028.



Net cash provided by
financing activities was $22,567 for the six months ended June 30, 2005, consisting primarily of the proceeds from issuance of common shares of $59,585 and borrowing on the line of credit of $71,000 reduced by proceeds from debt principal payments
of $94,257 and distributions paid of $12,890.



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



Distributions/Dividends



The Company has paid regular quarterly distributions on its common shares and Common Units since its inception. The 2005 distributions for the first and
second quarters were $0.06 and $0.10, respectively, per common share or unit. Quarterly preferred distributions of between $0.275 and $0.289 are payable on each Class B Preferred Unit (depending on the level of common share dividend paid), and the
2005 first and second quarter distribution was $0.275 per Class B Preferred Unit. Dividends of $0.50 were paid on each Series C Preferred Share for the first and second quarter of 2005. The second quarter dividends were paid on July 26, 2005 to
shareholders of record on June 24, 2005. The timing and amount of any future dividends will be determined by the Companys Board of Trustees in its sole discretion based on factors it deems relevant and no assurance can be given that the
current dividend levels will be sustained. Under federal income tax law provisions applicable to REITs, the Company is required to distribute at least 90% of its taxable income to maintain its REIT status.



Financing



In making future investments in hotels, 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 hotels, at cost, after giving effect to the Companys use of
proceeds from any indebtedness. The interest rate on the Companys $135.0 million unsecured Line of Credit is LIBOR plus 122.5 to 225 basis points, depending on certain financial ratios. The interest rate was approximately 4.88% at June 30,
2005. The Line of Credit matures on July 23, 2007. The actual amount that can be borrowed under the Line of Credit is subject to borrowing base availability and certain other conditions described in the loan agreement. At June 30, 2005, the Company
(i) had $55.6 million of borrowings outstanding under the Line of Credit and (ii) had available approximately $68.4 million under the Line of Credit (assuming the proceeds were used for the acquisition of hotel properties). At June 30, 2005, the
Company was in compliance with all financial covenants contained in all of its various loan agreements.



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



15



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##### Table of Contents

Capital Expenditures



The Percentage Leases with the TRSs generally require the Company to make available an amount equal to 4% or 5% of room revenues from the Hotels, per
month on a cumulative 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. Management believes that for the foreseeable future the Company
will continue to spend substantially more on capital expenditures than it is required to make available to the TRSs 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 2005, management expects to spend approximately $17 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 fund capital expenditures with available cash and borrowings under the Line of Credit.



Related Party Transactions



The Company has entered into a number of transactions and arrangements that involve conflicts of interest. For a description of these transactions and arrangements, please see Risk Factors  Conflicts of Interest and Related
Party Transactions beginning on page R-2 in the Form 10-K. See also Notes 10, 11 and 12 to the Companys financial statements beginning on page F-1 in the Form 10-K.



Contractual Obligations and Commercial Commitments



During the normal course of business, the Company enters into acquisition agreements for the purchase and sale of hotels.
These agreements are subject to customary conditions and due diligence.



There were no significant changes, outside the normal course of business, in the contractual obligations and commercial commitments disclosed in the Form 10-K.



Seasonality of Hotel Business



The hotel industry is seasonal in nature. Historically, the Hotels operations have generally reflected higher occupancy rates and ADR during the
second and third quarters. To the extent that cash flow for a quarter is insufficient to fund all of the hotel operating expenses and distributions for such quarter due to seasonal and other factors, the Company may fund quarterly hotel operating
expenses and distributions with available cash and borrowings under the Line of Credit.



Inflation



Operators of hotels, including the
IH Manager, generally possess the ability to adjust room rates quickly. However, competitive pressures and other factors have limited and may in the future limit the ability of the IH Manager to raise room rates in response to inflation. There can
be no assurance that recent modest inflation levels will not increase in future years or that the effects of inflation can be offset by raising hotel room rates.



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##### Table of Contents

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. Management believes that the presentation of FFO (defined below) provides useful supplemental 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. Many other real estate companies use FFO as a measure of their financial and operating
performance, which provides another basis for comparison for management. FFO, as defined, adds back historical cost depreciation. Historical cost depreciation assumes the value of real estate assets diminishes predictably over a certain period of
time. In fact, real estate asset values historically have increased or decreased with market conditions. Consequently, FFO may be a useful supplemental measure in evaluating financial and operating performance by disregarding, or adding back,
historical cost depreciation in the calculation of FFO. Additionally, FFO per share targets have historically been 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 real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company calculates FFO in
compliance with the NAREIT definition.



None of these measures
should be considered as an alternative to net income, net cash provided by operating activities, or any other financial and operating performance measure prescribed by GAAP. These measures should only be used in conjunction with GAAP measures.



The following presents the Companys calculations of FFO
and the denominator for FFO per share for the three and six months ended June 30, 2005 and 2004 (in thousands, except share and per share data):



|                                                           |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|---------------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | - | ---------- |  | - | ---------- | - |  | - | ---------- | -
|                                                           |  | Three Months Ended June 30, |            | Six Months Ended June 30, |  
|                                                           |  | 2005                        |            | 2004                      |   | 2005       |  |   | 2004       |  
|Net income (loss) applicable to common shareholders        |  | $                           | 5,176      |                           | $ | 2,653      |  | $ | 4,348      |   |  | $ | (2,552     | )
|                                                           |  |                             |            |                          
|Depreciation                                               |  |                             | 8,767      |                           |   | 7,881      |  |   | 17,269     |   |  |   | 15,692     |  
|                                                           |  |                             |            |                          
|Depreciation included in discontinued operations           |  |                             |           |                           |   | 482        |  |   |           |   |  |   | 1,082      |  
|                                                           |  |                             |            |                          
|Minority interest, common                                  |  |                             | 97         |                           |   | 81         |  |   | 77         |   |  |   | (76        | )
|Gain on sale of hotels included in discontinued operations |  |                             |           |                           |   |           |  |   | (1,490     | ) |  |   | (1,029     | )
|                                                           |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Basic FFO                                                  |  | $                           | 14,040     |                           | $ | 11,097     |  | $ | 20,204     |   |  | $ | 13,117     |  
|                                                           |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Minority interest, preferred                               |  |                             | 1,068      |                           |   | 1,068      |  |   | 2,136      |   |  |   |           |  
|                                                           |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Diluted FFO                                                |  | $                           | 15,108     |                           | $ | 12,165     |  | $ | 22,340     |   |  | $ | 13,117     |  
|                                                           |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Denominator for basic earnings per share                   |  |                             | 42,688,201 |                           |   | 37,470,106 |  |   | 41,258,447 |   |  |   | 37,450,343 |  
|Effect of dilutive securities:                             |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Stock options                                              |  |                             | 141,003    |                           |   | 3,510      |  |   | 134,084    |   |  |   |           |  
|Restricted shares                                          |  |                             | 37,917     |                           |   | 85,045     |  |   | 36,883     |   |  |   |           |  
|Weighted average:                                          |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Common Units                                               |  |                             | 709,400    |                           |   | 1,128,294  |  |   | 842,283    |   |  |   | 1,147,765  |  
|Preferred Units                                            |  |                             | 3,884,469  |                           |   | 3,884,469  |  |   | 3,884,469  |   |  |   |           |  
|                                                           |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Denominator for diluted FFO per share                      |  |                             | 47,460,990 |                           |   | 42,572,024 |  |   | 46,156,166 |   |  |   | 38,669,653 |  
|                                                           |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Diluted FFO per share                                      |  | $                           | 0.32       |                           | $ | 0.29       |  | $ | 0.48       |   |  | $ | 0.34       |  
|                                                           |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  

---

|(1) | The conversion of Preferred Units into common shares for the six months ended June 30, 2004 are anti-dilutive and therefore, is not included in the calculation of diluted FFO.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Forward-Looking Statements



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



Cautionary statements set forth in reports filed by the company from time
to time with the SEC discuss important factors impacting, or that could impact, the company and its results or forecasted results. These factors include, without limitation, (i) the operational risks of the hotel business (including decreasing hotel
revenues and increasing hotel expenses) under the companys taxable REIT subsidiary structure, (ii) risks that war, terrorism or similar activities, widespread health alerts, disruption in oil imports or higher oil prices or changes in domestic
or international political environments negatively affect the travel industry and the company, (iii) risk of declines in the performance and prospects of businesses and industries (e.g., technology, automotive, aerospace, pharmaceuticals) that are
important hotel demand generators in the companys key markets (e.g. the Silicon Valley, CA, Washington, DC, etc.), (iv) risk that poor, declining and/or uncertain international, national, regional and/or local economic conditions will, among
other things, negatively affect demand for the companys hotel rooms and the availability and terms of financing, (v) risk that the companys ability to maintain its properties in competitive condition becomes prohibitively expensive, (vi)
risk that pricing in the hotel acquisition market becomes prohibitively expensive or non-financeable and that potential acquisitions or developments do not perform in accordance with expectations, (vii) risk that the Company may invest in hotels of
a size or nature (e.g., upscale full service or resort) different than those it has focused on historically (e.g., upscale extended-stay, and mid-scale limited service); (viii) risks related to an increasing focus on development, including
permitting risks, increasing the proportion of Company assets not producing revenue at a given time and risks that projects cost more, take longer to complete or do not perform as anticipated; (ix) changes in travel patterns or the prevailing means
of commerce (i.e., e-commerce) may reduce demand for hotels in general or the Companys hotels in particular, (x) the complex tax rules that the company must satisfy to qualify as a REIT and the potentially severe consequences of failing to
satisfy such requirements, and (xi) governmental regulation that may increase the companys cost of doing business or otherwise negatively effect its business or its attractiveness as an investment and create risk of liability for
non-compliance (e.g., changes in laws affecting taxes or dividends, compliance with the Americans with Disabilities Act, workers compensation law changes, the Sarbanes-Oxley law, etc.).



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INNKEEPERS USA TRUST

ITEM 3 - QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK



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



For debt obligations outstanding at June 30, 2005, the following table presents principal repayments and related weighted average interest rates by
expected maturity dates (in thousands):



|                      |  |      |       |   |      |   |       |      |  |   |        |   |  |            |       |   |       |   |         |   |  |   |         |  
|--------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | - |  | ---------- | ----- | - | ----- | - | ------- | - |  | - | ------- | -
|                      |  | 2005 |       |   | 2006 |   |       | 2007 |  |   | 2008   |   |  | Thereafter |       |   | Total |  
|Debt:                 |  |      |       |   |      |   |       |      |  |   |        |   |  |            |       |   |       |   |         |   |  |   |         |  
|Fixed Rate            |  | $    | 3,175 |   |      | $ | 6,399 |      |  | $ | 27,566 |   |  | $          | 6,006 |   |       | $ | 154,889 |   |  | $ | 198,035 |  
|Average Interest Rate |  |      | 7.56  | % |      |   | 7.59  | %    |  |   | 8.03   | % |  |            | 7.46  | % |       |   | 7.50    | % |  |   | 7.58    | %
|Variable Rate         |  |      |      |   |      |   |      |      |  | $ | 55,574 |   |  |            |      |   |       | $ | 10,000  |   |  | $ | 65,574  |  
|Average Interest Rate |  |      |      |   |      |   |      |      |  |   | 4.98   | % |  |            |      |   |       |   | 2.70    | % |  |   | 3.84    | %



The table incorporates
only those exposures that existed as of June 30, 2005 and does not consider exposures or positions that could arise after that date. As a result, the Companys ultimate realized gain or loss with respect to interest rate fluctuations will
depend on the exposures that arise during the future period, prevailing interest rates, and the Companys hedging strategies at that time. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates.
The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Companys financing requirements.



At June 30, 2005, the Company had $55,574 in outstanding borrowings under its $135,000 Line of Credit, which matures in July 2007.



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INNKEEPERS USA TRUST

ITEM 4  CONTROLS AND PROCEDURES



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



Based on their evaluation of such disclosure controls and procedures, the
Companys chief executive officer and chief financial officer have concluded that such controls were effective as of June 30, 2005, are operating as designed and will alert them on a timely basis to any material information relating to the
Company required to be included in the Companys periodic SEC filings.



There has been no change in the Companys internal control over financial reporting during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.



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INNKEEPERS USA TRUST

PART II - OTHER INFORMATION



ITEM 4  Submission of Matters to a Vote of Security Holders



The 2005 annual meeting shareholders was held on May 4, 2005 to (a) elect
two Class II trustees to serve on the Companys Board of Trustees until the Companys annual meeting of shareholders in 2008 or until their successors are duly elected and qualified; (b) amend and restate the Companys 1994 Share
Incentive Plan (1994 Plan) primarily to increase the authorized shares thereunder by 1 million; and (c) ratify PricewaterhouseCoopers LLC (PWC) as the Companys independent auditor for 2005. Shareholders voted to (1)
elect (A) Mr. Miles Berger as a Class II trustee with 39,061,305 shares were for Mr. Berger (484,692 shares withheld authority) and (B) Mr. C. Gerald Goldsmith as a Class II Trustee with 38,827,860 shares voted for Mr. Goldsmith (718,347 shares
withheld authority); (II) amend and restate the 1994 Plan, with 32,622,157 shares voted in favor of amending and restating the 1994 Plan (2,942,425 shares voted against, 64,306 shares abstained and there were 3,917,104 broker non-votes); and (II)
ratify PWC as the Companys independent auditor for 2005, with 39,333,508 shares voted in favor of ratifying PWC (187,960 shares voted against and 24,528 shares abstained.



ITEM 5  Other Information



The Companys Board of Trustees approved the payment of annual retainers of $13, $13, and $8, respectively, to the lead independent trustee, chairman of the Audit Committee and chairman of the Compensation Committee beginning in the
second quarter of 2005. Other fees payable to non-employee trustees remain unchanged.



ITEM 6  Exhibits



|        |  |                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                   
|10.1    |  | Indemnification Agreement between Innkeepers USA Trust and Bruce Riggins, dated July 20, 2005.
|        | 
|10.2    |  | Severance Agreement between Innkeepers USA Trust and Bruce Riggins, dated July 20, 2005.      
|        | 
|31.1    |  | CEO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  
|        | 
|31.2    |  | CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  
|        | 
|32.1    |  | CEO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  
|        | 
|32.2    |  | CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  



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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/ Bruce Riggins      
|August 8, 2005 |  | Bruce Riggins          
|               |  | Chief Financial Officer



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EXHIBIT INDEX



|         |  |                                                                                               
|-------- |  | ----------------------------------------------------------------------------------------------
|ExhibiRt |  | Description                                                                                   
|10.1     |  | Indemnification Agreement between Innkeepers USA Trust and Bruce Riggins, dated July 20, 2005.
|         | 
|10.2     |  | Severance Agreement between Innkeepers USA Trust and Bruce Riggins, dated July 20, 2005.      
|         | 
|31.1     |  | CEO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  
|         | 
|31.2     |  | CFO Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                  
|         | 
|32.1     |  | CEO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  
|         | 
|32.2     |  | CFO Certification, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  



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