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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, 2006

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)



---

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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

The number of common shares of beneficial interest, $.01 par value, outstanding on August 1, 2006, was 45,182,011.



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##### Table of Contents

TABLE OF CONTENTS



|              |  |                       |  |                                                                                                 |  |     
|------------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------- |  | ----
|              |  |                       |  |                                                                                                 |  | Page
|Part I        |  | Financial Information |  |                                                                                                
|              |  |                       | 
|              |  | Item 1.               |  | Financial Statements (unaudited)                                                                |  | 2   
|              |  |                       | 
|              |  |                       |  | Consolidated Balance Sheets at June 30, 2006 and December 31, 2005                              |  | 2   
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005 |  | 3   
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005           |  | 4   
|              |  |                       | 
|              |  |                       |  | Notes to Consolidated Financial Statements                                                      |  | 5   
|              |  |                       | 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 12  
|              |  |                       | 
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                      |  | 21  
|              |  |                       | 
|              |  | Item 4.               |  | Controls and Procedures                                                                         |  | 22  
|              |  |                      
|Part II.      |  | Other Information     |  |                                                                                                
|              |  |                       | 
|              |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                             |  | 22  
|              |  |                       | 
|              |  | Item 6.               |  | Exhibits                                                                                        |  | 22  
|              | 
|Signature     |  | 23                   
|              | 
|Exhibit Index |  | 24                   



i



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

Innkeepers USA Trust

Consolidated Balance Sheets (unaudited)

(in thousands, except share and per share data)



|                                                                                                                              |  |              |           |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                              |  | June 30,2006 |           |   | December 31,2005 |  
|ASSETS                                                                                                                        |  |              |           |   |                  |   |           |  
|Investment in hotels:                                                                                                         |  |              |           |   |                  |   |           |  
|Land and improvements                                                                                                         |  | $            | 150,134   |   |                  | $ | 150,375   |  
|Buildings and improvements                                                                                                    |  |              | 756,090   |   |                  |   | 754,131   |  
|Furniture and equipment                                                                                                       |  |              | 110,550   |   |                  |   | 106,944   |  
|Renovations in process                                                                                                        |  |              | 17,147    |   |                  |   | 4,534     |  
|Hotels under development                                                                                                      |  |              | 5,628     |   |                  |   | 4,413     |  
|                                                                                                                              |  |              |           |   |                  |   |           |  
|                                                                                                                              |  |              | 1,039,549 |   |                  |   | 1,020,397 |  
|Accumulated depreciation                                                                                                      |  |              | (248,656  | ) |                  |   | (230,139  | )
|                                                                                                                              |  |              |           |   |                  |   |           |  
|Net investment in hotels                                                                                                      |  |              | 790,893   |   |                  |   | 790,258   |  
|Cash and cash equivalents                                                                                                     |  |              | 13,704    |   |                  |   | 11,897    |  
|Restricted cash and cash equivalents                                                                                          |  |              | 7,898     |   |                  |   | 6,675     |  
|Accounts receivable, net                                                                                                      |  |              | 5,546     |   |                  |   | 6,124     |  
|Prepaid and other                                                                                                             |  |              | 4,415     |   |                  |   | 2,478     |  
|Deferred and other                                                                                                            |  |              | 19,769    |   |                  |   | 19,546    |  
|                                                                                                                              |  |              |           |   |                  |   |           |  
|Total assets                                                                                                                  |  | $            | 842,225   |   |                  | $ | 836,978   |  
|                                                                                                                              |  |              |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                          |  |              |           |   |                  |   |           |  
|Debt                                                                                                                          |  | $            | 269,071   |   |                  | $ | 269,426   |  
|Accounts payable and accrued expenses                                                                                         |  |              | 21,414    |   |                  |   | 15,956    |  
|Payable to manager                                                                                                            |  |              | 157       |   |                  |   | 236       |  
|Franchise conversion fee obligations                                                                                          |  |              | 10,450    |   |                  |   | 10,714    |  
|Distributions payable                                                                                                         |  |              | 9,416     |   |                  |   | 9,645     |  
|                                                                                                                              |  |              |           |   |                  |   |           |  
|Total liabilities                                                                                                             |  |              | 310,508   |   |                  |   | 305,977   |  
|                                                                                                                              |  |             
|Minority interest in Partnership                                                                                              |  |              | 5,689     |   |                  |   | 47,982    |  
|                                                                                                                              |  |             
|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, 45,182,011 and 42,874,412 issued and outstanding, respectively |  |              | 452       |   |                  |   | 429       |  
|Additional paid-in capital                                                                                                    |  |              | 503,478   |   |                  |   | 460,873   |  
|Unearned compensation                                                                                                         |  |              |          |   |                  |   | (1,939    | )
|Distributions in excess of earnings                                                                                           |  |              | (122,902  | ) |                  |   | (121,344  | )
|                                                                                                                              |  |              |           |   |                  |   |           |  
|Total shareholders equity                                                                                                    |  |              | 526,028   |   |                  |   | 483,019   |  
|                                                                                                                              |  |              |           |   |                  |   |           |  
|Total liabilities and shareholders equity                                                                                    |  | $            | 842,225   |   |                  | $ | 836,978   |  
|                                                                                                                              |  |              |           |   |                  |   |           |  

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 Operations(unaudited)

(in thousands, except share and per share data)



|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                    |  | 2006                        |            |   | 2005                      |   |            | 2006 |  |   | 2005       |  
|Revenue:                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Hotel operating                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Rooms                                               |  | $                           | 68,361     |   |                           | $ | 60,342     |      |  | $ | 128,907    |   |  | $ | 113,373    |  
|Food and beverage                                   |  |                             | 2,596      |   |                           |   | 1,617      |      |  |   | 4,674      |   |  |   | 1,916      |  
|Telephone                                           |  |                             | 359        |   |                           |   | 467        |      |  |   | 720        |   |  |   | 859        |  
|Other                                               |  |                             | 1,714      |   |                           |   | 1,496      |      |  |   | 3,222      |   |  |   | 2,767      |  
|Corporate                                           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Other                                               |  |                             | 160        |   |                           |   | 148        |      |  |   | 269        |   |  |   | 254        |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                       |  |                             | 73,190     |   |                           |   | 64,070     |      |  |   | 137,792    |   |  |   | 119,169    |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Expenses:                                           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Hotel operating                                     |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Rooms                                               |  |                             | 13,455     |   |                           |   | 12,578     |      |  |   | 26,103     |   |  |   | 23,778     |  
|Food and beverage                                   |  |                             | 1,925      |   |                           |   | 1,103      |      |  |   | 3,508      |   |  |   | 1,339      |  
|Telephone                                           |  |                             | 792        |   |                           |   | 722        |      |  |   | 1,539      |   |  |   | 1,405      |  
|Other                                               |  |                             | 738        |   |                           |   | 653        |      |  |   | 1,468      |   |  |   | 1,248      |  
|General and administrative                          |  |                             | 7,025      |   |                           |   | 6,002      |      |  |   | 13,426     |   |  |   | 11,692     |  
|Franchise and marketing fees                        |  |                             | 4,638      |   |                           |   | 4,177      |      |  |   | 8,762      |   |  |   | 7,950      |  
|Amortization of deferred franchise conversion       |  |                             | 292        |   |                           |   | 293        |      |  |   | 584        |   |  |   | 656        |  
|Advertising and promotions                          |  |                             | 2,401      |   |                           |   | 2,025      |      |  |   | 4,651      |   |  |   | 3,713      |  
|Utilities                                           |  |                             | 2,924      |   |                           |   | 2,610      |      |  |   | 6,374      |   |  |   | 5,571      |  
|Repairs and maintenance                             |  |                             | 3,348      |   |                           |   | 3,440      |      |  |   | 6,118      |   |  |   | 5,864      |  
|Management fees                                     |  |                             | 2,189      |   |                           |   | 1,770      |      |  |   | 4,144      |   |  |   | 3,562      |  
|Amortization of deferred lease acquisition          |  |                             | 131        |   |                           |   | 131        |      |  |   | 261        |   |  |   | 262        |  
|Insurance                                           |  |                             | 424        |   |                           |   | 393        |      |  |   | 838        |   |  |   | 780        |  
|Corporate                                           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Depreciation                                        |  |                             | 9,360      |   |                           |   | 8,767      |      |  |   | 18,577     |   |  |   | 17,269     |  
|Amortization of franchise fees                      |  |                             | 29         |   |                           |   | 18         |      |  |   | 47         |   |  |   | 35         |  
|Ground rent                                         |  |                             | 139        |   |                           |   | 130        |      |  |   | 278        |   |  |   | 259        |  
|Interest                                            |  |                             | 5,168      |   |                           |   | 4,241      |      |  |   | 10,217     |   |  |   | 9,149      |  
|Amortization of loan origination fees               |  |                             | 213        |   |                           |   | 225        |      |  |   | 431        |   |  |   | 435        |  
|Property taxes and insurance                        |  |                             | 3,159      |   |                           |   | 3,112      |      |  |   | 6,185      |   |  |   | 6,005      |  
|General and administrative                          |  |                             | 2,068      |   |                           |   | 1,853      |      |  |   | 4,530      |   |  |   | 3,891      |  
|Amortization of unearned compensation               |  |                             | 744        |   |                           |   | 158        |      |  |   | 1,102      |   |  |   | 255        |  
|Other charges (income)                              |  |                             | 58         |   |                           |   | 355        |      |  |   | (446       | ) |  |   | 3,053      |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total expenses                                      |  |                             | 61,220     |   |                           |   | 54,756     |      |  |   | 118,697    |   |  |   | 108,171    |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income before minority interest                     |  |                             | 11,970     |   |                           |   | 9,314      |      |  |   | 19,095     |   |  |   | 10,998     |  
|Minority interest, common                           |  |                             | (95        | ) |                           |   | (97        | )    |  |   | (150       | ) |  |   | (77        | )
|Minority interest, preferred                        |  |                             | (502       | ) |                           |   | (1,068     | )    |  |   | (1,547     | ) |  |   | (2,136     | )
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income from continuing operations                   |  |                             | 11,373     |   |                           |   | 8,149      |      |  |   | 17,398     |   |  |   | 8,785      |  
|Loss from discontinued operations                   |  |                             |           |   |                           |   | (73        | )    |  |   |           |   |  |   | (127       | )
|Gain on sale of assets from discontinued operations |  |                             |           |   |                           |   |           |      |  |   | 75         |   |  |   | 1,490      |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income                                          |  |                             | 11,373     |   |                           |   | 8,076      |      |  |   | 17,473     |   |  |   | 10,148     |  
|Preferred share dividends                           |  |                             | (2,900     | ) |                           |   | (2,900     | )    |  |   | (5,800     | ) |  |   | (5,800     | )
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income applicable to common shareholders        |  | $                           | 8,473      |   |                           | $ | 5,176      |      |  | $ | 11,673     |   |  | $ | 4,348      |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Earnings per share data:                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic  continuing operations                       |  | $                           | 0.19       |   |                           | $ | 0.12       |      |  | $ | 0.27       |   |  | $ | 0.07       |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic                                               |  | $                           | 0.19       |   |                           | $ | 0.12       |      |  | $ | 0.27       |   |  | $ | 0.11       |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic  weighted average shares                     |  |                             | 43,741,548 |   |                           |   | 42,688,201 |      |  |   | 43,339,559 |   |  |   | 41,258,447 |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted  continuing operations                     |  | $                           | 0.19       |   |                           | $ | 0.12       |      |  | $ | 0.27       |   |  | $ | 0.07       |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                             |  | $                           | 0.19       |   |                           | $ | 0.12       |      |  | $ | 0.27       |   |  | $ | 0.10       |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted  weighted average shares                   |  |                             | 44,686,995 |   |                           |   | 42,867,121 |      |  |   | 44,314,582 |   |  |   | 41,429,414 |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Per share dividends to common shareholders          |  | $                           | 0.15       |   |                           | $ | 0.10       |      |  | $ | 0.30       |   |  | $ | 0.16       |  
|                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  

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(unaudited)

(in thousands)



|                                                                                  |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Six Months Ended June 30, |        
|                                                                                  |  | 2006                      |         |   | 2005 |  
|Cash flows from operating activities:                                             |  |                           |         |   |      |   |         |  
|Net income                                                                        |  | $                         | 17,473  |   |      | $ | 10,148  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                           | 19,055  |   |      |   | 17,739  |  
|Amortization of deferred costs                                                    |  |                           | 846     |   |      |   | 918     |  
|Amortization of unearned compensation                                             |  |                           | 1,102   |   |      |   | 255     |  
|Minority interests                                                                |  |                           | 1,697   |   |      |   | 2,213   |  
|Gain on sale of hotels                                                            |  |                           | (75     | ) |      |   | (1,490  | )
|Changes in operating assets and liabilities:                                      |  |                           |         |   |      |   |         |  
|Accounts receivable, net                                                          |  |                           | 578     |   |      |   | (2,850  | )
|Prepaid and other                                                                 |  |                           | (1,938  | ) |      |   | 394     |  
|Deferred expenses and other                                                       |  |                           | (1,462  | ) |      |   | 124     |  
|Accounts payable and accrued expenses                                             |  |                           | 5,102   |   |      |   | 4,611   |  
|Payable to manager                                                                |  |                           | (79     | ) |      |   | 186     |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                           | 42,299  |   |      |   | 32,248  |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Cash flows from investing activities:                                             |  |                           |         |   |      |   |         |  
|Investment in hotels, net of insurance proceeds                                   |  |                           | (19,560 | ) |      |   | (73,792 | )
|Proceeds from sale of assets                                                      |  |                           | 425     |   |      |   | 20,860  |  
|Net (deposits) withdrawals into restricted cash                                   |  |                           | (1,223  | ) |      |   | 2,175   |  
|Payment of franchise fees                                                         |  |                           |        |   |      |   | (50     | )
|Repayment of advances                                                             |  |                           |        |   |      |   | 322     |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                           | (20,358 | ) |      |   | (50,485 | )
|                                                                                  |  |                           |         |   |      |   |         |  
|Cash flows from financing activities:                                             |  |                           |         |   |      |   |         |  
|Proceeds from debt issuance                                                       |  |                           | 21,500  |   |      |   | 71,000  |  
|Payments on debt                                                                  |  |                           | (21,855 | ) |      |   | (94,257 | )
|Payments on franchise conversion fee obligations                                  |  |                           | (264    | ) |      |   | (560    | )
|Distributions paid to unit holders                                                |  |                           | (2,314  | ) |      |   | (2,246  | )
|Distributions paid to shareholders                                                |  |                           | (18,695 | ) |      |   | (10,644 | )
|Proceeds from issuance of shares for options exercised                            |  |                           | 1,579   |   |      |   | 59,585  |  
|Loan origination fees and costs paid                                              |  |                           | (85     | ) |      |   | (311    | )
|                                                                                  |  |                           |         |   |      |   |         |  
|Net cash (used) provided by financing activities                                  |  |                           | (20,134 | ) |      |   | 22,567  |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                         |  |                           | 1,807   |   |      |   | 4,330   |  
|Cash and cash equivalents at beginning of period                                  |  |                           | 11,897  |   |      |   | 22,837  |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                         | 13,704  |   |      | $ | 27,167  |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Supplemental cash flow information:                                               |  |                           |         |   |      |   |         |  
|Interest paid                                                                     |  | $                         | 10,063  |   |      | $ | 9,149   |  

Supplemental disclosure of non-cash information 



|1. | Common unit holders in the Companys operating partnership redeemed 2,058,925 and 407,656 common units for common shares in the six months ended June 30, 2006 and 2005,
respectively.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | The Company capitalized interest of $129 and $373 for the six months ended June 30, 2006 and 2005, respectively.
|-- | ----------------------------------------------------------------------------------------------------------------



|3. | 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.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | During 2005, the Company transferred $1,704 of costs associated with completed hotel acquisitions from deferred and other to investment in hotels.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------

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



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Innkeepers USA Trust

Notes to Consolidated Financial Statements(dollar amounts in thousands)

1. Organization and Recent Developments

Innkeepers USA Trust (Innkeepers) is a self-administered real estate investment trust (REIT), which at June 30, 2006, owned 70 hotels with an aggregate of 8,818 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 67 of the Hotels for Innkeepers and a third party manages one of the Hotels
at June 30, 2006. Two of the Companys hotels, comprising a total of 393 rooms, are closed for substantial renovation and re-branding, and upon re-opening, these hotels will be managed by the IH Manager.

The companys primary focus is acquiring or developing premium-branded upscale extended-stay, mid-priced limited service hotels, and select-service
hotels, the core of the companys portfolio; selected full-service hotels; and turn-around opportunities for hotels that operate under or can be converted to the industrys leading brands. Forty-nine of the hotels are in the upscale
extended-stay market and operate under brands such as Residence Inn by Marriott, Homewood Suites by Hilton or Summerfield Suites. The upscale extended-stay hotels typically have the following characteristics: (i) their principal customer base
is business travelers who are on assignment for executive training and consulting, project assignment and corporate relocations; (ii) their service and amenities include complimentary breakfast and evening hospitality hour, limited meeting
space, daily linen and room cleaning service, 24-hour front desk, guest grocery services, and an on-site maintenance staff; and (iii) their physical facilities include large suites, quality construction, full separate kitchens in each guest
suite, quality room furnishings, pool, and exercise facilities. Our mid-priced hotels operate under brands such as Hampton Inn and TownePlace Suites, which offer services and amenities such as complimentary breakfast, high-speed internet access,
local calls, an in-room movie channel, and daily linen and room cleaning service.

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 property taxes and insurance,
ground rent, and capital expenditures. Hotel-level revenue is reflected in the Companys financial statements as Hotel operating revenue and hotel-level expense is reflected as Hotel operating expense. The Companys
TRSs may pay corporate level income tax and may retain any after-tax income.

Management Conversion of Marriott-Managed Hotels. In
2003, the Company, the entities to which the Company leased substantially all of its hotels (the IH Lessee), and Marriott International, Inc. and various affiliates thereof (collectively, Marriott) completed a transaction
under which the IH Lessee (1) converted the agreements under which 17 of the Companys hotels were franchised and managed by Marriott into long-term franchise agreements with Marriott and (2) became the manager of the hotels. The TRSs
subsequently assumed the IH Lessees obligations under the agreements executed in connection with this transaction. Under those agreements, the TRSs will pay Marriott (1) a franchise fee of 6.5% of room revenues for the first ten years of
each franchise agreement and a 5% royalty thereafter and (2) $850,000 plus 50% of aggregate available cash flow (as defined in the agreement with Marriott) in excess of a specified threshold each year for 10 years, beginning in 2004 (the
Conversion Fee). We refer to this transaction as the Marriott Takeback Transaction.

Issuance of Common Shares

During the six months ended June 30, 2006, the Company granted 198,000 shares to employees, 160,500 of which were due to the
exercise of employee options, and 35,000 were cancelled. The Company also granted to its non-employee trustees 21,000 restricted shares during the six months ended June 30, 2006. Common unit holders in the Companys operating partnership
redeemed 2,058,925 common units and received in redemption 2,058,925 common shares during the six months ended June 30, 2006.



5



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##### Table of Contents

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, 2005 (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. Share Based Compensation

Effective January 1, 2006, the Company adopted the accounting provisions of SFAS No. 123R, Accounting for Share-Based Payment (SFAS
123R). Under this method, the Company applies the fair value recognition provisions of SFAS 123R to all employee awards granted, modified, or settled on or after January 1, 2006, which has resulted in compensation expense being recorded
based on the fair value of the awards. Prior to January 1, 2006, the Company followed Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25), and related interpretations.
Under APB 25, because the exercise price of the employee share options equaled the market price of the underlying share on the date of grant, no compensation expense was recognized.

The Companys share incentive plan for employees and officers (the 1994 Plan) reserves 4,700,000 common shares for issuance
(a) upon the exercise of incentive share options and non-qualified options or (b) as restricted shares and performance shares. Options granted under the 1994 Plan expire not more than ten years from the date of grant. The Company may grant
up to 2,200,000 restricted shares and performance shares under the 1994 Plan. Restricted shares issued to date have voting and dividend rights from the date granted. At June 30, 2006, 939,035 shares remained available for issuance in the form
of restricted or performance shares under the employees plan and 1,066,628 restricted shares were vested. The Company issues new shares upon the exercise of common share options.

The following table summarizes the changes in the Companys non-vested restricted shares under the 1994 Plan for the six months ended June 30,
2006.



|                                           |  |                 |   |  |                                      |      
|------------------------------------------ |  | --------------- | - |  | ------------------------------------ | -----
|Restricted shares                          |  | Number ofShares |   |  | WeightedaverageGrant-Date Fair Value
|Shares outstanding as of December 31, 2005 |  | 200,063         |   |  | $                                    | 12.01
|Shares granted                             |  | 37,500          |   |  |                                      | 17.25
|Shares vested                              |  | (71,687         | ) |  |                                      | 6.57 
|Shares cancelled                           |  | (35,000         | ) |  |                                      | 15.64
|                                           |  |                 |   |  |                                      |      
|Shares outstanding as of June 30, 2006     |  | 130,876         |   |  | $                                    | 14.10
|                                           |  |                 |   |  |                                      |      

The exercise price of common share options may not be less than fair market value of the common
shares at the date of grant. The table below delineates information concerning common share options granted under the 1994 Plan for the six months ended June 30, 2006.



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##### Table of Contents

|                                   |  |                                   |   |  |                               |      
|---------------------------------- |  | --------------------------------- | - |  | ----------------------------- | -----
|                                   |  | Number of SharesUnderlyingOptions |   |  | WeightedAverageExercise Price
|Outstanding at December 31, 2005   |  | 1,003,000                         |   |  | $                             | 11.99
|Granted                            |  | 12,500                            |   |  |                               | 16.00
|Exercised                          |  | (160,500                          | ) |  |                               | 9.85 
|Cancelled                          |  |                                  |   |  |                               |     
|Forfeited                          |  |                                  |   |  |                               |     
|                                   |  |                                   |   |  |                               |      
|Outstanding at June 30, 2006       |  | 855,000                           |   |  | $                             | 12.45
|                                   |  |                                   |   |  |                               |      
|Exercisable at June 30, 2006       |  | 842,500                           |   |  | $                             | 11.99
|                                   |  |                                   |   |  |                               |      
|Price range of shares under option |  | $10.25 to $ 16.00                 |   |  |                               |      
|                                   |  |                                   |   |  |                               |      

Of the 855,000 common share options outstanding as of June 30, 2006, 12,500 are incentive
share options and 842,500 are non-qualified options. The options vest over varying periods not exceeding ten years. All but the 12,500 common share options granted in 2006 are fully vested and exercisable, and have a weighted average remaining
contractual term of three years. As of June 30, 2006, the aggregate intrinsic value of fully vested common share options was $4,115.

The Companys non-employee trustee share incentive plan provided for the granting of up to 200,000 share options and restricted shares to trustees. Restricted shares have voting and dividend rights from the date granted. Options
granted under the 1994 trustees plan expire not more than ten years from the date of grant. The Company has granted to trustees an aggregate of 101,000 non-qualified options to acquire common shares, with exercise prices ranging from $6.93 to
$16.69. As of June 30, 2006, 101,000 of these options, with a weighted average exercise price of $10.46, were vested, 15,000 options had been exercised and no options had been forfeited or terminated. The Company has also granted to its
non-employee trustees an aggregate of 96,053 restricted shares at a weighted average grant date fair value per share of $12.23, which vest over varying periods not to exceed five years. At June 30, 2006, 92,677 of these restricted shares were
vested.

The Company has granted performance awards that contain a market condition (defined as a vesting condition based in whole or in
part upon the Companys share price) and 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
employee, or a change of control of the Company. Any common 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 employee is terminated
without cause, dies or is disabled, or if a change of control occurs. The fair value of the market condition awards is determined through the use of a financial model that considers the applicable risk free interest rate, expected dividend yield,
the volatility factor of the expected market price of the Companys common share and the term over which the performance conditions must be met to result in vesting of the awards. The resulting value is amortized to compensation expense over
the term of the award. Total amortization of compensation expense in relation to share based compensation under SFAS No. 123R was $545 as of June 30, 2006. Total compensation expense for non-vested awards not yet recognized is
approximately $2,040 and will be recognized over the next four years. The fair value of each share option was estimated on the date of grant using the following assumptions: (1) common dividend yield of 3.7%, (2) expected volatility in the
Companys common share price of 27.3%, (3) a risk-free interest rate of 5.13% and (4) an expected option life of four years and expected performance awards life of five years.



7



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##### Table of Contents

The following table illustrates the effect on net income and earnings per share if the fair value based
method had been applied to all outstanding and unvested awards in each period presented (in thousands except for per share data):



|                                                                                                                               |  |                                            |       |   |                                        |   |       |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------ | ----- | - | -------------------------------------- | - | ----- | -
|                                                                                                                               |  | Three Months Ended June 30, 2005 Pro
Forma |       |   | Six Months EndedJune 30, 2005Pro Forma |  
|Net income applicable to common shareholders                                                                                   |  | $                                          | 5,176 |   |                                        | $ | 4,348 |  
|Deduct: Total share-based compensation expense determined under the fair value method for all awards, net of minority interest |  |                                            | (68   | ) |                                        |   | (68   | )
|                                                                                                                               |  |                                            |       |   |                                        |   |       |  
|Pro forma net income applicable to common shareholders                                                                         |  | $                                          | 5,108 |   |                                        | $ | 4,280 |  
|                                                                                                                               |  |                                            |       |   |                                        |   |       |  
|Basic earnings per share  as reported                                                                                         |  | $                                          | 0.12  |   |                                        | $ | 0.11  |  
|                                                                                                                               |  |                                           
|Basic earnings per share  pro forma                                                                                           |  | $                                          | 0.12  |   |                                        | $ | 0.11  |  
|                                                                                                                               |  |                                           
|Diluted earnings per share  as reported                                                                                       |  | $                                          | 0.12  |   |                                        | $ | 0.10  |  
|                                                                                                                               |  |                                           
|Diluted earnings per share  as reported                                                                                       |  | $                                          | 0.12  |   |                                        | $ | 0.10  |  

4. Recently Issued Accounting Pronouncements

In July 2006, The Financial Accounting Standards Board has published FASB Interpretation (FIN) No. 48 ( FIN No. 48 ), Accounting for Uncertainty
in Income Taxes, to address the non-comparability in reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement of Financial Accounting Standards (SFAS) No. 109 ( SFAS No. 109 ), Accounting for Income
Taxes, on the uncertainty in income taxes recognized in an enterprises financial statements. Specifically, FIN No. 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN
No. 48 will apply to fiscal years beginning after December 15, 2006, with earlier adoption permitted. The Company evaluated FIN 48 and it had no impact as of June 30, 2006.

5. Allowance for Doubtful Accounts

The Company
provides an allowance for doubtful accounts equal 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 allowance for doubtful accounts was $110 as of June 30, 2006 and $96 as of December 31, 2005.



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##### Table of Contents

6. Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2006 and 2005 (in thousands, except share and per share data):



|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                      |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                                      |  | 2006                        |            |   | 2005                      |   |            | 2006 |  |   | 2005       |  
|Numerator:                                                                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income from continuing operations                                                                     |  | $                           | 11,373     |   |                           | $ | 8,149      |      |  | $ | 17,398     |   |  | $ | 8,785      |  
|Preferred share dividends                                                                             |  |                             | (2,900     | ) |                           |   | (2,900     | )    |  |   | (5,800     | ) |  |   | (5,800     | )
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Income applicable to common shareholders from continuing operations                                   |  |                             | 8,473      |   |                           |   | 5,249      |      |  |   | 11,598     |   |  |   | 2,985      |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Gain on sale of assets in discontinued operations                                                     |  |                             |           |   |                           |   |           |      |  |   | 75         |   |  |   |           |  
|Discontinued operations                                                                               |  |                             |           |   |                           |   | (73        | )    |  |   |           |   |  |   | 1,363      |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income applicable to common shareholders                                                          |  | $                           | 8,473      |   |                           | $ | 5,176      |      |  | $ | 11,673     |   |  | $ | 4,348      |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Common minority interest                                                                              |  |                             | 95         |   |                           |   |           |      |  |   | 150        |   |  |   |           |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net income before common minority interest                                                            |  | $                           | 8,568      |   |                           | $ | 5,176      |      |  | $ | 11,823     |   |  | $ | 4,348      |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Denominator:                                                                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Denominator for basic earnings per share  weighted average shares                                    |  |                             | 43,741,548 |   |                           |   | 42,688,201 |      |  |   | 43,339,559 |   |  |   | 41,258,447 |  
|Effect of dilutive securities:                                                                        |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Common units                                                                                          |  |                             | 666,891    |   |                           |   |           |      |  |   | 666,891    |   |  |   |           |  
|Share options                                                                                         |  |                             | 236,934    |   |                           |   | 141,003    |      |  |   | 261,243    |   |  |   | 134,084    |  
|Restricted shares                                                                                     |  |                             | 41,622     |   |                           |   | 37,917     |      |  |   | 46,889     |   |  |   | 36,883     |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Denominator for diluted earnings per share  adjusted weighted average shares and assumed conversions |  |                             | 44,686,995 |   |                           |   | 42,867,121 |      |  |   | 44,314,582 |   |  |   | 41,429,414 |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Earnings per share data:                                                                              |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic-continuing operations                                                                           |  | $                           | 0.19       |   |                           | $ | 0.12       |      |  | $ | 0.27       |   |  | $ | 0.07       |  
|Basic-discontinued operations                                                                         |  | $                           | 0.00       |   |                           | $ | 0.00       |      |  | $ | 0.00       |   |  | $ | 0.03       |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                                                                 |  | $                           | 0.19       |   |                           | $ | 0.12       |      |  | $ | 0.27       |   |  | $ | 0.11       |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted-continuing operations                                                                         |  | $                           | 0.19       |   |                           | $ | 0.12       |      |  | $ | 0.27       |   |  | $ | 0.07       |  
|Diluted-discontinued operations                                                                       |  | $                           | 0.00       |   |                           | $ | 0.00       |      |  | $ | 0.00       |   |  | $ | 0.03       |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                                                                               |  | $                           | 0.19       |   |                           | $ | 0.12       |      |  | $ | 0.27       |   |  | $ | 0.10       |  
|                                                                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  

The conversion of the Preferred Shares, and Preferred Units for the three and six month ended
June 30, 2006 and 2005, respectively, are anti-dilutive (i.e. assuming conversion into common shares would increase earnings per share).

7.
Dividends Declared and Paid

The Company declared common share dividends of $0.15 per share and $0.10 per share for the three months
ended June 30, 2006 and 2005, respectively, and $0.30 per share and $0.16 per share for the six months ended June 30, 2006 and 2005, respectively. The Company paid common share dividends of $6,454 and $2,566 in the three months ended
June 30, 2006 and 2005, respectively and $12,895 and $4,844 in the six months ended June 30, 2006 and 2005, respectively.

8. Other Charges

Other charges for the three and six months ended June 30, 2006 and 2005 include the following (in thousands):



|                       |  |                             |    |                           |   |      |  |   |      |   |  |   |      
|---------------------- |  | --------------------------- | -- | ------------------------- | - | ---- |  | - | ---- | - |  | - | -----
|                       |  | Three Months Ended June 30, |    | Six Months Ended June 30,
|                       |  | 2006                        |    | 2005                      |   | 2006 |  |   | 2005
|Transaction costs      |  | $                           | 58 |                           | $ |     |  | $ | 299  |   |  | $ |     
|Personnel cost         |  |                             |   |                           |   | 355  |  |   |     |   |  |   | 355  
|Other income           |  |                             |   |                           |   |     |  |   | (745 | ) |  |   |     
|Extinguishment of debt |  |                             |   |                           |   |     |  |   |     |   |  |   | 2,698
|                       |  |                             |    |                           |   |      |  |   |      |   |  |   |      
|                       |  | $                           | 58 |                           | $ | 355  |  | $ | (446 | ) |  | $ | 3,053
|                       |  |                             |    |                           |   |      |  |   |      |   |  |   |      



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##### Table of Contents

Other income includes business interruption insurance proceeds for the Sheraton Four Points, Fort Walton
Beach, FL, which had a substantial number of rooms out of service for an extended period following hurricanes in September 2004. Transaction costs include legal costs associated with the Companys exploration of a possible sale of the Company.
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.

9. Discontinued Operations

The Company classified
three hotels as held for sale at December 31, 2004. The Company sold the three hotels in the first quarter of 2005, and recognized a net gain on the sale of those hotels of $1,490.

The results of operations from the three hotels classified as held for sale were recognized as discontinued operations for the three and six months ended
June 30, 2005. During the first quarter of 2006, the Company sold one land site in Binghamton, NY and recognized a gain of $75 on the sale. The Company had no hotels classified as held for sale as of June 30, 2006.

The following table sets forth the components of income (loss) from discontinued operations for the three and six months ended June 30, 2006 and
2005 (in thousands):



|                                           |  |                            |   |      |                          |     |      |  |      |    |  |   |       |  
|------------------------------------------ |  | -------------------------- | - | ---- | ------------------------ | --- | ---- |  | ---- | -- |  | - | ----- | -
|                                           |  | Three Months EndedJune 30, |   |      | Six Months EndedJune 30, |    
|                                           |  | 2006                       |   | 2005 |                          |     | 2006 |  | 2005 |   
|Hotel operating revenue                    |  | $                          |  |      | $                        |    |      |  | $    |   |  | $ | 918   |  
|Other revenue                              |  |                            |  |      |                          |    |      |  |      |   |  |   | 28    |  
|Hotel operating expenses                   |  |                            |  |      |                          | (73 | )    |  |      |   |  |   | (996  | )
|Amortization of franchise fees             |  |                            |  |      |                          |    |      |  |      |   |  |   | (2    | )
|Property taxes and insurance               |  |                            |  |      |                          |    |      |  |      |   |  |   | (75   | )
|Gain on sale of assets                     |  |                            |  |      |                          |    |      |  |      | 75 |  |   | 1,490 |  
|                                           |  |                            |   |      |                          |     |      |  |      |    |  |   |       |  
|Income (loss) from discontinued operations |  | $                          |  |      | $                        | (73 | )    |  | $    | 75 |  | $ | 1,363 |  
|                                           |  |                            |   |      |                          |     |      |  |      |    |  |   |       |  

10. Income Taxes

The Companys TRSs are subject to federal and state income taxes. The TRSs have cumulative future income tax deductions of approximately $3,609 (related primarily to accumulated net operating losses) at
June 30, 2006 and the gross deferred tax asset associated with these future tax deductions was approximately $1,379. 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

The components of the deferred taxes recognized in the accompanying consolidated balance sheets at
June 30, 2006 and December 31, 2005 are as follows (dollars in thousands):



|                     |  |      |        |   |      |   |        |  
|-------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                     |  | 2006 |        |   | 2005 |  
|Deferred tax assets: |  |      |        |   |      |   |        |  
|Net operating loss   |  | $    | 926    |   |      | $ | 1,468  |  
|Lease termination    |  |      | 453    |   |      |   | 432    |  
|Valuation allowance  |  |      | (1,379 | ) |      |   | (1,900 | )
|                     |  |      |        |   |      |   |        |  
|Total                |  | $    | 0      |   |      | $ | 0      |  
|                     |  |      |        |   |      |   |        |  

Net operating loss carry forwards for federal and state income tax purposes amounting to $2,344
expire in 2024.

11. Insurance Recovery

The Company received net insurance proceeds of $1,238 during the first quarter of 2006 for the Ft. Walton Beach, FL hotel, which had a substantial number of rooms out of service following hurricanes in September 2004. Of this amount, $745
relates to proceeds from business interruption claims and $493 relates to amounts reimbursed for previously incurred repairs and maintenance expense.

12. Subsequent Events

In July 2006, the Company entered into an agreement to acquire from Bethesda, Md.-based RLJ Urban
Lodging Fund, L.P., an affiliate of RLJ Development, LLC, four hotel properties with 931 rooms in Southern California for a total cost of $215 million.

In August 2006, the Company entered into an agreement to acquire from Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT) a 155-room Sheraton Rockville in Maryland for $23.3 million.



11



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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, 2005 (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 2005 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, 2006:



|                          |  |                 |  |                      
|------------------------- |  | --------------- |  | ---------------------
|Franchise Affiliation     |  | Number ofHotels |  | Number ofRooms/Suites
|Upscale Extended-Stay     |  |                 |  |                      
|Residence Inn by Marriott |  | 42              |  | 5,045                
|Summerfield Suites        |  | 5               |  | 650                  
|Homewood Suites by Hilton |  | 1               |  | 146                  
|Sunrise Suites (1)        |  | 1               |  | 96                   
|                          |  |                 |  |                      
|                          |  | 49              |  | 5,937                
|                          |  |                 |  |                      
|Upscale                   |  |                 |  |                      
|Doubletree Guest Suites   |  | 1               |  | 105                  
|Four Points by Sheraton   |  | 1               |  | 216                  
|Courtyard by Marriott (2) |  | 3               |  | 529                  
|Westin (3)                |  | 1               |  | 224                  
|Bulfinch  Boston, MA     |  | 1               |  | 80                   
|                          |  |                 |  |                      
|                          |  | 7               |  | 1,154                
|                          |  |                 |  |                      
|Mid-Priced                |  |                 |  |                      
|Hampton Inn               |  | 13              |  | 1,632                
|TownePlace Suites         |  | 1               |  | 95                   
|                          |  |                 |  |                      
|                          |  | 14              |  | 1,727                
|                          |  |                 |  |                      
|                          |  | 70              |  | 8,818                
|                          |  |                 |  |                      

---

|(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.
|--- | -------------------------------------------



12



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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) |     
|                          |  | 2006                        |        |   | 2005                           |   |        |                           | 2006 |       |                                | 2005 |   |       
|Portfolio (1)             |  |                             |        |   |                                |   |        |                           |      |       |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                       |  | $                           | 112.30 |   |                                | $ | 104.14 |                           |      | 7.8   | %                              |      | $ | 111.00 |   |  | $ | 103.40 |   |  | 7.4  | %
|Occupancy                 |  |                             | 78.55  | % |                                |   | 78.70  | %                         |      | (0.2  | )                              |      |   | 75.83  | % |  |   | 75.53  | % |  | 0.4  |  
|RevPAR                    |  | $                           | 88.22  |   |                                | $ | 81.97  |                           |      | 7.6   |                                |      | $ | 84.17  |   |  | $ | 78.10  |   |  | 7.8  |  
|                          |  |                             |        |   |                                |  
|By Price Segment          |  |                             |        |   |                                |   |        |                           |      |       |                                |      |   |        |   |  |   |        |   |  |      |  
|Upscale Extended Stay (2) |  |                             |        |   |                                |   |        |                           |      |       |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                       |  | $                           | 112.01 |   |                                | $ | 103.55 |                           |      | 8.2   | %                              |      | $ | 110.73 |   |  | $ | 102.72 |   |  | 7.8  | %
|Occupancy                 |  |                             | 80.84  | % |                                |   | 81.39  | %                         |      | (0.7  | )                              |      |   | 78.53  | % |  |   | 78.28  | % |  | 0.3  |  
|RevPAR                    |  | $                           | 90.55  |   |                                | $ | 84.29  |                           |      | 7.4   |                                |      | $ | 86.96  |   |  | $ | 80.41  |   |  | 8.2  |  
|Upscale (3)               |  |                             |        |   |                                |   |        |                           |      |       |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                       |  | $                           | 149.07 |   |                                | $ | 140.40 |                           |      | 6.2   | %                              |      | $ | 139.20 |   |  | $ | 129.94 |   |  | 7.1  | %
|Occupancy                 |  |                             | 80.13  | % |                                |   | 69.00  | %                         |      | 16.13 |                                |      |   | 75.17  | % |  |   | 68.98  | % |  | 9.0  |  
|RevPAR                    |  | $                           | 119.45 |   |                                | $ | 96.87  |                           |      | 23.31 |                                |      | $ | 104.64 |   |  | $ | 89.63  |   |  | 16.8 |  
|Mid Price (4)             |  |                             |        |   |                                |   |        |                           |      |       |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                       |  | $                           | 101.09 |   |                                | $ | 96.40  |                           |      | 4.9   | %                              |      | $ | 102.76 |   |  | $ | 98.39  |   |  | 4.4  | %
|Occupancy                 |  |                             | 69.34  | % |                                |   | 71.28  | %                         |      | (2.7  | )                              |      |   | 65.66  | % |  |   | 66.92  | % |  | (1.9 | )
|RevPAR                    |  | $                           | 70.10  |   |                                | $ | 68.71  |                           |      | 2.0   |                                |      | $ | 67.48  |   |  | $ | 65.84  |   |  | 2.5  |  

---

|(1) | Includes 65 hotels, and excludes three hotels closed for renovation and conversion during part or all of the periods presented, and two hotels acquired during 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(3) | Includes three hotels, and excludes two hotels closed for renovation and conversion during part or all of the periods presented, and two hotels acquired in 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 13 hotels, and excludes the Hampton Inn hotel in Louisville, KY that was closed for renovation and conversion and re-opened in August, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

Results of Operations

Of the Companys 70 owned
hotels at June 30, 2006, 65 hotels with a total of 7,948 rooms are deemed Comparable Hotels whose operations are reflected in the Statements of Operations for the three and six months ended June 30, 2006 and 2005. The five
hotels excluded, with 870 rooms, consist of three hotels closed for renovation and conversion during part or all of the periods presented, and two hotels acquired during 2005.

Comparison of the Three Months Ended June 30, 2006 (2006) to the Three Months Ended June 30, 2005 (2005)

The Company had total revenue for 2006 of $73,190, consisting of $73,030 of hotel operating revenue and $160 of other revenue, compared to total revenue
of $64,070 for 2005, consisting of $63,922 of hotel operating revenue and $148 of other revenue.

Room revenue increased $8,019, or 13.3%,
to $68,361 in 2006 from $60,342 for 2005. Room revenue for the Comparable Hotels increased $4,521, or 7.6%, to $63,804 in 2006 from $59,283 in 2005. This increase was due to a 7.6% RevPAR increase which was driven mainly by a 7.8% increase in
average daily rate (ADR). These increases are reflective of the industry strength which is driven by the surging economy, hotel room demand, and historically low hotel supply growth. The remaining increase of $3,498 in 2006 was primarily
due to the hotels acquired in 2005.

Food and beverage revenue increased $979 to $2,596 in 2006 from $1,617 in 2005. Food and beverage
revenue for the Comparable Hotels remained relatively constant at $424 and $423 in 2006 and 2005, respectively. The increase of $978 in 2006 was primarily due to the acquisition of the full service Westin Governor Morris hotel in Morristown, NJ in
2005.



13



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##### Table of Contents

The Company had hotel operating expenses (excluding amortization of deferred franchise conversion and
lease acquisition) for 2006 of $39,859 compared to hotel operating expenses in 2005 of $35,473. Hotel operating expenses for the Comparable Hotels increased $1,085, or 3.2%, to $34,473 in 2006 from $33,388 in 2005. This increase was due primarily
due to increases in room costs of $306, franchise fees of $313, and management fees of $135 which were due to the increase in revenue; utilities of $179, and general and administrative costs increased $795 primarily due to an increase in payroll
related costs and legal costs. Offset by a decrease in repair and maintenance expenses of $702. Hotel operating expenses as a percentage of revenue for the Comparable Hotels decreased to 52.1% in 2006 from 54.1% in 2005. The remaining increase of
$3,301 was due to the Hotels acquired in 2005.

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 $1,177 in 2006 to $10,769 in the aggregate in 2006 from $9,592 in 2005. This increase is
primarily due to a $593 increase in depreciation due to hotels acquired in 2005, a $586 increase in unearned compensation due to the adoption of SFAS 123 (R) for the Companys share based compensation effective January 1, 2006 of $265
and $321 attributable to the grant of 3,000 shares to each of the seven external directors.

Interest expense increased $927 to $5,168 in
2006 from $4,241 for 2005. The weighted average interest rate on the Companys line of credit increased to 6.7% in 2006 from 4.9% in 2005, and average borrowings outstanding on the line of credit increased $27,667 from $48,907 in 2005 to
$76,574 in 2006.

Property taxes and insurance increased $47 in 2006 to $3,159 from $3,112 for 2005. This increase was primarily due to new
insurance policies and taxes for hotels acquired in 2005, offset by successful property tax appeals of $197.

Corporate general and
administrative expenses increased $215 to $2,068 in 2006 from $1,853 in 2005. This increase was primarily due to an increase in salaries, benefits, recruiting, and legal fees, as well as costs associated with complying with certain Sarbanes-Oxley
rules.

Other charges decreased $297 from $355 in 2005 to $58 in 2006. Other charges in 2005 consisted of personnel cost related to the
retirement of the Companys former Chief Financial Office in the second quarter of 2005.

The Company had no discontinued operations
in 2006 compared with the loss of discontinued operations of $73 in 2005.

Preferred share dividends remained constant at $2,900 in 2006
and 2005.

Net income applicable to common shareholders for 2006 was $8,473, or $0.19 per diluted share, compared with net income
applicable to common shareholders of $5,176, or $0.12 per diluted share, for 2005. This increase was due to the factors discussed previously.

Comparison of the Six Months Ended June 30, 2006 (2006) to the Six Months Ended June 30, 2005 (2005)

The Company had total revenue for 2006 of $137,792, consisting of $137,523 of hotel operating revenue and $269 of other revenue, compared to total revenue of $119,169 for 2005, consisting of $118,915 of hotel
operating revenue and $254 of other revenue.

Room revenue increased $15,534, or 13.7%, to $128,907 in 2006 from $113,373 for 2005. Room
revenue for the Comparable Hotels increased $8,768, or 7.8%, to $121,082 in 2006 from $112,314 in 2005. This increase was due to a 7.8% RevPAR increase which was driven mainly by a 7.4% increase in average daily rate (ADR). These
increases are reflective of the industry strength which is driven by the surging economy, hotel room demand, and historically low supply growth. The remaining increase of $6,766 in 2006 was primarily due to the hotels acquired in 2005.

Food and beverage revenue increased $2,758 to $4,674 in 2006 from $1,916 in 2005. Food and beverage revenue for the Comparable Hotels remained
relatively constant at $716 and $722 for 2006 and 2005, respectively. The remaining increase of $2,764 in 2006 was primarily due to the acquisition of the full service Westin Governor Morris hotel in Morristown, NJ in 2005.



14



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##### Table of Contents

The Company had hotel operating expenses (excluding amortization of deferred franchise conversion and
lease acquisition) for 2006 of $76,931 compared to hotel operating expenses in 2005 of $66,902. Hotel operating expenses for the Comparable Hotels increased $3,807, or 5.9%, to $67,875 in 2006 from $64,068 in 2005. This increase was due primarily
due to increases in room costs of $1,037, franchise fees of $1,042, and management fees of $284 which were due to the increase in revenue; utilities of $444, and general and administrative costs increased $862 primarily due to an increase in payroll
related costs and legal costs. Hotel operating expenses as a percentage of revenue for the Comparable Hotels remained relatively constant at 54.1% in 2006 and 54.8% in 2005. The remaining increase of $6,222 was due to the Hotels acquired in 2005.

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 $2,090 in 2006 to $21,002 in the aggregate in 2006 from $18,912 in 2005. This increase is primarily due to a $1,308 increase in depreciation due to
hotels acquired in 2005, and $847 increase in unearned compensation due to the adoption of SFAS 123 (R) for the Companys share based compensation effective January 1, 2006 of $545 and $302 attributable to the grant of 3,000 shares to
each of the seven external directors.

Interest expense increased $1,068 to $10,217 in 2006 from $9,149 for 2005. The weighted average
interest rate on the Companys line of credit increased to 6.7% in 2006 from 4.9% in 2005, and average borrowings outstanding on the line of credit increased $26,166 from $48,074 in 2005 to $74,240 in 2006.

Property taxes and insurance increased $180 in 2006 to $6,185 from $6,005 for 2005. This increase was primarily due to new insurance policies and taxes
for hotels acquired in 2005 offset by successful property tax appeals of $258.

Corporate general and administrative expenses increased
$639 to $4,530 in 2006 from $3,891 in 2005. This increase was primarily due to an increase in salaries, benefits, recruiting, and legal costs, as well as costs associated with complying with certain Sarbanes-Oxley rules.

Other charges in 2006 of $(446) comprised of other income from insurance proceeds for one hotel which had a substantial number of rooms out of service
for an extended period following hurricanes in September 2004. Other charges in 2005 of $3,053 comprised of extinguishment of debt costs and personnel cost related to the retirement of the Companys former Chief Financial Office in the second
quarter of 2005.

The Company had no discontinued operations in 2006 compared with the loss of discontinued operations of $127 in 2005.

Gain on sale of assets of $75 was due to a sale of excess land in Binghamton, NY. In 2005, gain on sale of assets of $1,490 was
attributable to the sale of three hotels during the first quarter of 2005.

Preferred share dividends remained constant at $5,800 in 2006
and 2005.

Net income applicable to common shareholders for 2006 was $11,673, or $0.27 per diluted share, compared with net income
applicable to common shareholders of $4,348, or $0.10 per diluted share, for 2005. This increase was due 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 2006 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.



15



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##### Table of Contents

Cash Flow Analysis

Cash and cash equivalents at June 30, 2006 and 2005 were $13,704 and $27,167, respectively. Net cash provided by operating activities for the six months ended June 30, 2006 and 2005 was $42,299 and $32,248,
respectively. The increase in net cash provided by operating activities was primarily the result of an increase in net income of $7.3 million due to improved hotel operations, an increase in depreciation of $1.3 million, and an increase in
amortization of unearned compensation of $0.8 million.

Net cash used in investing activities was $20,358 for the six months ended
June 30, 2006. This was comprised primarily of investment in hotels of $19,560.

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 financing activities was $20,134 for the six months ended June 30, 2006, consisting primarily of payments on the line of credit of
$21,855 and distributions paid of $21,009, offset by proceeds from borrowings on the line of credit of $21,500.

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.

Distributions/Dividends

The Company has paid regular quarterly distributions on its common shares and common units since its inception. Distributions for the 2006 first and
second quarter were $0.15 and $0.15, respectively, per common share or common 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). The
first and second quarter of 2006 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 2006. The second quarter distributions were paid on July 25,
2006 to shareholders of record on June 30, 2006. The timing and amount of any future distributions 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 distributions 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. As of June 30, 2006 the Companys debt to investment in hotels at cost was 25.9%. 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. At June 30, 2006, the interest rate spread was 150 basis points. The interest rate was approximately 6.66% at
June 30, 2006. 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, 2006, the Company (i) had $66.6 million of borrowings outstanding under the line of credit and (ii) had available approximately $56.9 million under the line of credit. At June 30, 2006, 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 instruments, financial derivatives
or forward equity commitments.



16



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##### Table of Contents

Capital Expenditures

The Company leases all of its hotels to certain of the Companys whole subsidiaries under separate percentage leases (Percentage Leases). 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. 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.

Jeffrey H. Fisher, the Companys Chief Executive Officer, President and Chairman of the Board of Trustees, controls the IH Manager.

Contractual Obligations and Commercial Commitments

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

In the six months ended June 30, 2006, there were no significant changes, outside the normal course of business, in the
contractual obligations and commercial commitments disclosed in the Form 10-K.

In July 2006, the Company entered into an agreement to
acquire from Bethesda, Md.-based RLJ Urban Lodging Fund, L.P., an affiliate of RLJ Development, LLC, four hotel properties with 931 rooms in Southern California for a total cost of $215 million. Closing is expected to during the third quarter 2006.
This agreement is subject to customary conditions and due diligence.

Seasonality of Hotel Business

The hotel industry is seasonal in nature. Historically, the Companys 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.



17



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##### Table of Contents

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.

Funds From Operations

The National Association of
Real Estate Investment Trusts (NAREIT) adopted the definition of funds from operations (FFO) in order to promote an industry standard measure of REIT financial and operating performance. The Company believes that the
presentation of FFO (defined below) provides useful supplemental information to investors regarding the Companys financial condition and results of operations. FFO facilitates comparisons of operating performance between periods and between
other equity REITs. FFO was developed by NAREIT as a relative measure of performance and liquidity of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. Many
other real estate companies use FFO as a measure of their financial and operating performance, which provides another basis of 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 have historically increased or decreased with market conditions. 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
(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. FFO and FFO per share should not be considered as an alternative to net income, diluted net income per share, cash flow 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, 2006 and 2005 (in thousands, except share and per share data):



|                                                                  |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|----------------------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | - | ---------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                  |  | Three Months Ended June 30, |            | Six Months Ended June 30, |  
|                                                                  |  | 2006                        |            | 2005                      |   | 2006       |  |   | 2005       |  
|Net income applicable to common shareholders                      |  | $                           | 8,473      |                           | $ | 5,176      |  | $ | 11,673     |   |  | $ | 4,348      |  
|Depreciation                                                      |  |                             | 9,360      |                           |   | 8,767      |  |   | 18,577     |   |  |   | 17,269     |  
|Minority interest, common                                         |  |                             | 95         |                           |   | 97         |  |   | 150        |   |  |   | 77         |  
|Loss (gain) on sale of hotels included in discontinued operations |  |                             |           |                           |   |           |  |   | (75        | ) |  |   | (1,490     | )
|                                                                  |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Basic FFO                                                         |  | $                           | 17,928     |                           | $ | 14,040     |  | $ | 30,325     |   |  | $ | 20,204     |  
|                                                                  |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Minority interest, preferred                                      |  |                             | 502        |                           |   | 1,068      |  |   | 1,547      |   |  |   | 2,136      |  
|                                                                  |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Diluted FFO                                                       |  | $                           | 18,430     |                           | $ | 15,108     |  | $ | 31,872     |   |  | $ | 22,340     |  
|                                                                  |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Denominator for basic earnings per share                          |  |                             | 43,741,548 |                           |   | 42,688,201 |  |   | 43,339,559 |   |  |   | 41,258,447 |  
|Effect of dilutive securities:                                    |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Stock options                                                     |  |                             | 236,934    |                           |   | 141,003    |  |   | 261,243    |   |  |   | 134,084    |  
|Restricted shares                                                 |  |                             | 41,622     |                           |   | 37,917     |  |   | 46,889     |   |  |   | 36,883     |  
|Weighted average:                                                 |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Common Units                                                      |  |                             | 666,891    |                           |   | 709,400    |  |   | 666,891    |   |  |   | 842,283    |  
|Preferred Units                                                   |  |                             | 3,113,567  |                           |   | 3,884,469  |  |   | 3,461,270  |   |  |   | 3,884,469  |  
|                                                                  |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Denominator for diluted FFO per share                             |  |                             | 47,800,562 |                           |   | 47,460,990 |  |   | 47,775,852 |   |  |   | 46,156,166 |  
|                                                                  |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  
|Diluted FFO per share                                             |  | $                           | 0.39       |                           | $ | 0.32       |  | $ | 0.67       |   |  | $ | 0.48       |  
|                                                                  |  |                             |            |                           |   |            |  |   |            |   |  |   |            |  



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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), (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. 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, 2006, the following table presents principal repayments and related weighted average interest rates by
expected maturity dates (in thousands):



|                      |  |      |       |   |      |   |        |      |  |   |       |   |  |      |        |   |             |   |        |       |  |   |            |   |  |   |         |   |  |   |         |    
|--------------------- |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ----- | - |  | ---- | ------ | - | ----------- | - | ------ | ----- |  | - | ---------- | - |  | - | ------- | - |  | - | ------- | ---
|                      |  | 2006 |       |   | 2007 |   |        | 2008 |  |   | 2009  |   |  | 2010 |        |   | There-after |   |        | Total |  |   | Fair Value |  
|Debt:                 |  |      |       |   |      |   |        |      |  |   |       |   |  |      |        |   |             |   |        |       |  |   |            |   |  |   |         |   |  |   |         |    
|Fixed Rate (3)        |  | $    | 2,908 |   |      | $ | 26,875 |      |  | $ | 5,267 |   |  | $    | 74,642 |   |             | $ | 37,329 |       |  | $ | 45,477     |   |  | $ | 192,498 |   |  | $ | 188,987 | (1)
|Weighted              |  |      |       |   |      |   |        |      |  |   |       |   |  |      |        |   |             |   |        |       |  |   |            |   |  |   |         |   |  |   |         |    
|Average Interest Rate |  |      | 8.08  | % |      |   | 8.15   | %    |  |   | 8.05  | % |  |      | 7.60   | % |             |   | 8.02   | %     |  |   | 7.75       | % |  |   | 7.81    | % |  |   |        |    
|Variable Rate (2)     |  |      |      |   |      | $ | 66,574 |      |  |   |      |   |  |      |       |   |             |   |       |       |  | $ | 10,000     |   |  | $ | 76,574  |   |  | $ | 76,574  |    
|Weighted              |  |      |       |   |      |   |        |      |  |   |       |   |  |      |        |   |             |   |        |       |  |   |            |   |  |   |         |   |  |   |         |    
|Average Interest Rate |  |      |      |   |      |   | 6.76   | %    |  |   |      |   |  |      |       |   |             |   |       |       |  |   | 3.50       | % |  |   | 6.33    | % |  |   |        |    

---

|(1) | For purposes of disclosure, the Company calculates the fair value of its debt. The Company discounts the difference between the future contractual interest payments on its debt and
the future interest payments it would make on its debt calculated using a current market interest rate. In determining the current market interest rate, the Company adds its estimate of a market spread to the quoted yields on federal government
treasury securities with maturities similar to its debt.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | An increase of one percent in the interest rate on the Companys variable rate debt would have increased interest expense approximately $217 and $465 for the three and six
months ended June 30, 2006, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | An increase of one percent in the interest rate on the Companys fair value of fixed rate debt would have increased interest expense approximately $449 and $901 for the three
and six months ended June 30, 2006, respectively; and would have decreased the fair value of fixed rate debt as of June 30, 2006 to $178,624.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The table incorporates only those exposures that existed as of June 30, 2006 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.



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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, 2006.

There has been no change in the Companys internal control over financial reporting during the quarter ended June 30, 2006 that
has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

INNKEEPERS USA TRUST

PART II - OTHER INFORMATION

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

On April 21, 2006, the Company issued 20,000 common shares in redemption of 20,000 common units of Innkeepers USA Limited Partnership (the Partnership), and on June 1, 2006 the Company issued
1,955,863 common shares in redemption of preferred units of the Partnership, each in reliance on Section 4(2) of the Securities Act of 1933, as amended; the common shares are covered by an effective shelf registration statement.

Item 4 - Submission of Matters to a Vote of Security Holders

The 2006 annual meeting of shareholders was
held on May 3, 2006 to (a) elect three Class III trustees to serve on the Companys Board of Trustees until the Companys annual meeting of shareholders in 2009 or until their successors are elected and qualify; (b) approve
the proposal to delete Article XII of the Companys Amended and Restated Declaration of Trust(Declaration of Trust), which limits the Companys level of permitted indebtedness to 50% of its investment in hotel properties, at
cost(the Debt Limitation); (c) approve the 2006 Trustees Share Incentive Plan ( the 2006 Trustees Plan); (d) ratify PricewaterhouseCoopers LLC (PWC) as the Companys independent auditor
for 2006. Shareholders voted to (1) elect Mr. Thomas J. Crocker as a Class III trustee, with 19,255,254 shares voted for Mr.Crocker ( 20,357,942 shares withheld authority); (2) elect Mr. Jeffrey H. Fisher as a Class III
trustee, with 39,075,613 shares in favor of Mr. Fisher (537,584 shares withheld authority); (3) elect Mr. Rolf E. Ruhfus as a Class III trustee, with 37,098,941 shares voted for Mr. Ruhfus (2,514,255 shares withheld
authority); (4) amend the Declaration of Trust to delete the Debt Limitation, with 34,902,025 shares voted in favor of the proposal (839,949 shares were voted against the proposal and 60,577 shares abstained from voting); (5) approve the
2006 Trustees Plan, with 35,234,081 shares voted in favor of the proposal(527,039 shares were voted against the proposal and 41,431 shares abstained from voting); and (6) ratify PWC as the Companys independent auditor for 2006, with
39,479,037 shares voted in favor of the proposal ( 119,345 shares were against the proposal and 119,345 shares abstained from voting on the proposal).

Item 6 - Exhibits



|        |  |                                                                             
|------- |  | ----------------------------------------------------------------------------
|Exhibit |  | Description                                                                 
|3.1(a)  |  | Amendment to Amended and Restated Declaration of Trust of the Registrant    
|        | 
|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/ Dennis M. Craven   
|August 8, 2006 |  | Dennis M. Craven       
|               |  | Chief Financial Officer



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EXHIBIT INDEX



|        |  |                                                                             
|------- |  | ----------------------------------------------------------------------------
|Exhibit |  | Description                                                                 
|3.1(a)  |  | Amendment to Amended and Restated Declaration of Trust of the Registrant    
|        | 
|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



24