##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended September 30, 2005



OR



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



For the transition period from  to



Commission file number 0-24568



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INNKEEPERS USA TRUST

(Exact name of registrant as specified in its charter)



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



|                                                        |  |           
|------------------------------------------------------- |  | ----------
|340 Royal Poinciana Way, Suite 306, Palm Beach, Florida |  | 33480     
|(Address of principal executive offices)                |  | (Zip Code)



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



N/A

(former name)



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Indicate by check mark
whether the Registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such
report), and (ii) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



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



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 November 3, 2005, was 42,924,086.



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



i



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##### Table of Contents

PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS



Innkeepers USA Trust

Consolidated Balance Sheets

(in thousands, except share and per share data)



|                                                                                                                              |  |                   |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                              |  | September 30,2005 |          |   | December 31,2004 |  
|                                                                                                                              |  | (unaudited)       |          |   | (audited)        |  
|ASSETS                                                                                                                        |  |                   |          |   |                  |   |          |  
|Investment in hotels:                                                                                                         |  |                   |          |   |                  |   |          |  
|Land and improvements                                                                                                         |  | $                 | 146,610  |   |                  | $ | 127,392  |  
|Buildings and improvements                                                                                                    |  |                   | 728,149  |   |                  |   | 687,754  |  
|Furniture and equipment                                                                                                       |  |                   | 98,510   |   |                  |   | 101,909  |  
|Renovations in process                                                                                                        |  |                   | 16,148   |   |                  |   | 2,794    |  
|Hotels under development                                                                                                      |  |                   | 4,318    |   |                  |   | 3,864    |  
|Hotels held for sale                                                                                                          |  |                   |         |   |                  |   | 19,299   |  
|                                                                                                                              |  |                   |          |   |                  |   |          |  
|                                                                                                                              |  |                   | 993,735  |   |                  |   | 943,012  |  
|Accumulated depreciation                                                                                                      |  |                   | (221,009 | ) |                  |   | (207,853 | )
|                                                                                                                              |  |                   |          |   |                  |   |          |  
|Net investment in hotels                                                                                                      |  |                   | 772,726  |   |                  |   | 735,159  |  
|                                                                                                                              |  |                  
|Cash and cash equivalents                                                                                                     |  |                   | 14,658   |   |                  |   | 22,837   |  
|Restricted cash and cash equivalents                                                                                          |  |                   | 9,447    |   |                  |   | 10,781   |  
|Accounts receivable, net                                                                                                      |  |                   | 6,655    |   |                  |   | 4,577    |  
|Prepaid and other                                                                                                             |  |                   | 2,188    |   |                  |   | 2,539    |  
|Deferred and other                                                                                                            |  |                   | 17,283   |   |                  |   | 20,099   |  
|                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                  |  | $                 | 822,957  |   |                  | $ | 795,992  |  
|                                                                                                                              |  |                   |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                          |  |                   |          |   |                  |   |          |  
|Debt                                                                                                                          |  | $                 | 247,299  |   |                  | $ | 286,865  |  
|Accounts payable and accrued expenses                                                                                         |  |                   | 17,485   |   |                  |   | 12,663   |  
|Payable to manager                                                                                                            |  |                   | 245      |   |                  |   | 209      |  
|Franchise conversion fee obligations                                                                                          |  |                   | 10,825   |   |                  |   | 10,825   |  
|Distributions payable                                                                                                         |  |                   | 9,642    |   |                  |   | 5,450    |  
|                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                                             |  |                   | 285,496  |   |                  |   | 316,012  |  
|                                                                                                                              |  |                  
|Minority interest in Partnership                                                                                              |  |                   | 48,081   |   |                  |   | 51,088   |  
|                                                                                                                              |  |                  
|Shareholders equity:                                                                                                         |  |                   |          |   |                  |   |          |  
|Preferred shares, $0.01 par value, 20,000,000 shares authorized, 5,800,000 shares issued and outstanding                      |  |                   | 145,000  |   |                  |   | 145,000  |  
|Common shares, $0.01 par value, 100,000,000 shares authorized, 42,914,086 and 37,966,756 issued and outstanding, respectively |  |                   | 429      |   |                  |   | 380      |  
|Additional paid-in capital                                                                                                    |  |                   | 460,494  |   |                  |   | 396,631  |  
|Unearned compensation                                                                                                         |  |                   | (1,766   | ) |                  |   | (448     | )
|Distributions in excess of earnings                                                                                           |  |                   | (114,777 | ) |                  |   | (112,671 | )
|                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total shareholders equity                                                                                                    |  |                   | 489,380  |   |                  |   | 428,892  |  
|                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total liabilities and shareholders equity                                                                                    |  | $                 | 822,957  |   |                  | $ | 795,992  |  
|                                                                                                                              |  |                   |          |   |                  |   |          |  



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

(in thousands, except share and per share data)



|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                              |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|                                              |  | 2005                             |            |   | 2004                            |   |            | 2005 |  |   | 2004       |  
|Revenue:                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Hotel operating                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Rooms                                         |  | $                                | 62,819     |   |                                 | $ | 57,151     |      |  | $ | 176,192    |   |  | $ | 143,747    |  
|Food and beverage                             |  |                                  | 1,984      |   |                                 |   | 420        |      |  |   | 3,900      |   |  |   | 791        |  
|Telephone                                     |  |                                  | 507        |   |                                 |   | 468        |      |  |   | 1,366      |   |  |   | 1,356      |  
|Other                                         |  |                                  | 1,643      |   |                                 |   | 1,404      |      |  |   | 4,410      |   |  |   | 3,300      |  
|Corporate                                     |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Percentage lease                              |  |                                  |           |   |                                 |   |           |      |  |   |           |   |  |   | 5,073      |  
|Other                                         |  |                                  | 142        |   |                                 |   | 54         |      |  |   | 396        |   |  |   | 243        |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                 |  |                                  | 67,095     |   |                                 |   | 59,497     |      |  |   | 186,264    |   |  |   | 154,510    |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Expenses:                                     |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Hotel operating                               |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Rooms                                         |  |                                  | 12,890     |   |                                 |   | 12,336     |      |  |   | 36,668     |   |  |   | 31,573     |  
|Food and beverage                             |  |                                  | 1,611      |   |                                 |   | 441        |      |  |   | 2,950      |   |  |   | 802        |  
|Telephone                                     |  |                                  | 739        |   |                                 |   | 612        |      |  |   | 2,144      |   |  |   | 1,794      |  
|Other                                         |  |                                  | 732        |   |                                 |   | 642        |      |  |   | 1,980      |   |  |   | 1,434      |  
|General and administrative                    |  |                                  | 5,740      |   |                                 |   | 5,069      |      |  |   | 17,432     |   |  |   | 13,338     |  
|Franchise and marketing fees                  |  |                                  | 4,313      |   |                                 |   | 3,866      |      |  |   | 12,263     |   |  |   | 9,982      |  
|Amortization of deferred franchise conversion |  |                                  | 292        |   |                                 |   | 274        |      |  |   | 948        |   |  |   | 774        |  
|Advertising and promotions                    |  |                                  | 2,239      |   |                                 |   | 2,019      |      |  |   | 5,952      |   |  |   | 4,859      |  
|Utilities                                     |  |                                  | 3,001      |   |                                 |   | 2,912      |      |  |   | 8,572      |   |  |   | 6,885      |  
|Repairs and maintenance                       |  |                                  | 3,368      |   |                                 |   | 3,050      |      |  |   | 9,232      |   |  |   | 7,760      |  
|Management fees                               |  |                                  | 2,007      |   |                                 |   | 1,891      |      |  |   | 5,569      |   |  |   | 4,764      |  
|Amortization of deferred lease acquisition    |  |                                  | 130        |   |                                 |   | 131        |      |  |   | 392        |   |  |   | 382        |  
|Insurance                                     |  |                                  | 356        |   |                                 |   | 447        |      |  |   | 1,136      |   |  |   | 1,145      |  
|Corporate                                     |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Depreciation                                  |  |                                  | 8,957      |   |                                 |   | 7,913      |      |  |   | 26,226     |   |  |   | 23,605     |  
|Amortization of franchise fees                |  |                                  | 16         |   |                                 |   | 16         |      |  |   | 51         |   |  |   | 38         |  
|Ground rent                                   |  |                                  | 132        |   |                                 |   | 129        |      |  |   | 391        |   |  |   | 376        |  
|Interest                                      |  |                                  | 4,687      |   |                                 |   | 4,718      |      |  |   | 13,836     |   |  |   | 13,809     |  
|Amortization of loan origination fees         |  |                                  | 216        |   |                                 |   | 235        |      |  |   | 651        |   |  |   | 718        |  
|Property taxes and insurance                  |  |                                  | 2,561      |   |                                 |   | 3,090      |      |  |   | 8,566      |   |  |   | 8,659      |  
|General and administrative                    |  |                                  | 2,016      |   |                                 |   | 1,280      |      |  |   | 5,907      |   |  |   | 4,110      |  
|Amortization of unearned compensation         |  |                                  | 182        |   |                                 |   | 312        |      |  |   | 437        |   |  |   | 753        |  
|Other charges                                 |  |                                  |           |   |                                 |   | 396        |      |  |   | 3,053      |   |  |   | 874        |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total expenses                                |  |                                  | 56,185     |   |                                 |   | 51,779     |      |  |   | 164,356    |   |  |   | 138,434    |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Income before minority interest               |  |                                  | 10,910     |   |                                 |   | 7,718      |      |  |   | 21,908     |   |  |   | 16,076     |  
|Minority interest, common                     |  |                                  | (119       | ) |                                 |   | (113       | )    |  |   | (195       | ) |  |   | (37        | )
|Minority interest, preferred                  |  |                                  | (1,068     | ) |                                 |   | (1,068     | )    |  |   | (3,205     | ) |  |   | (3,204     | )
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Income from continuing operations             |  |                                  | 9,723      |   |                                 |   | 6,537      |      |  |   | 18,508     |   |  |   | 12,835     |  
|Income from discontinued operations           |  |                                  | 14         |   |                                 |   | 116        |      |  |   | 1,377      |   |  |   | 1,204      |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income                                    |  |                                  | 9,737      |   |                                 |   | 6,653      |      |  |   | 19,885     |   |  |   | 14,039     |  
|Series A Preferred Share issuance costs       |  |                                  |           |   |                                 |   |           |      |  |   |           |   |  |   | (4,249     | )
|Preferred share dividends                     |  |                                  | (2,900     | ) |                                 |   | (2,900     | )    |  |   | (8,700     | ) |  |   | (8,589     | )
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income applicable to common shareholders  |  | $                                | 6,837      |   |                                 | $ | 3,753      |      |  | $ | 11,185     |   |  | $ | 1,201      |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Earnings per share data:                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic  continuing operations                 |  | $                                | 0.16       |   |                                 | $ | 0.10       |      |  | $ | 0.24       |   |  | $ | 0.00       |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic                                         |  | $                                | 0.16       |   |                                 | $ | 0.10       |      |  | $ | 0.27       |   |  | $ | 0.03       |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic  weighted average shares               |  |                                  | 42,730,549 |   |                                 |   | 37,603,379 |      |  |   | 41,726,975 |   |  |   | 37,501,727 |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted  continuing operations               |  | $                                | 0.16       |   |                                 | $ | 0.10       |      |  | $ | 0.23       |   |  | $ | 0.00       |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                       |  | $                                | 0.16       |   |                                 | $ | 0.10       |      |  | $ | 0.27       |   |  | $ | 0.03       |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted  weighted average shares             |  |                                  | 43,051,919 |   |                                 |   | 37,784,575 |      |  |   | 41,964,476 |   |  |   | 37,501,727 |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Per share dividends to common shareholders    |  | $                                | 0.15       |   |                                 | $ | 0.06       |      |  | $ | 0.31       |   |  | $ | 0.12       |  
|                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  



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



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##### Table of Contents

Innkeepers USA Trust

Consolidated Statements of Cash Flows

(in thousands)



|                                                                                  |  |                                 |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Nine Months Ended September 30, |         
|                                                                                  |  | 2005                            |          |   | 2004 |  
|Cash flows from operating activities:                                             |  |                                 |          |   |      |   |          |  
|Net income                                                                        |  | $                               | 19,885   |   |      | $ | 14,039   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |          |   |      |   |          |  
|Depreciation and amortization                                                     |  |                                 | 28,705   |   |      |   | 27,834   |  
|Write-off of deferred expenses included in extinguishment of debt                 |  |                                 | 124      |   |      |   |         |  
|Minority interests                                                                |  |                                 | 3,400    |   |      |   | 3,241    |  
|Gain on sale of hotel included in discontinued operations                         |  |                                 | (1,501   | ) |      |   | (786     | )
|Changes in operating assets and liabilities:                                      |  |                                 |          |   |      |   |          |  
|Accounts receivable, net                                                          |  |                                 | (2,078   | ) |      |   | 1,050    |  
|Prepaid and other                                                                 |  |                                 | 351      |   |      |   | 1,054    |  
|Accounts payable and accrued expenses                                             |  |                                 | 4,821    |   |      |   | 7,992    |  
|Payable to manager                                                                |  |                                 | 36       |   |      |   | (466     | )
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                                 | 53,743   |   |      |   | 53,958   |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Cash flows from investing activities:                                             |  |                                 |          |   |      |   |          |  
|Investment in hotels, net of insurance proceeds                                   |  |                                 | (81,623  | ) |      |   | (82,055  | )
|Deposits for acquisition of hotels                                                |  |                                 | (500     | ) |      |   | (154     | )
|Proceeds from sale of hotels                                                      |  |                                 | 20,860   |   |      |   | 8,727    |  
|Net withdrawals (deposits) into restricted cash and cash equivalents              |  |                                 | 1,334    |   |      |   | (3,066   | )
|Lease acquisitions                                                                |  |                                 |         |   |      |   | (1,336   | )
|Payment of franchise fees                                                         |  |                                 | (50      | ) |      |   | (192     | )
|Repayment of advances                                                             |  |                                 | 557      |   |      |   | 175      |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                                 | (59,422  | ) |      |   | (77,901  | )
|                                                                                  |  |                                 |          |   |      |   |          |  
|Cash flows from financing activities:                                             |  |                                 |          |   |      |   |          |  
|Proceeds from debt issuance                                                       |  |                                 | 71,000   |   |      |   | 53,074   |  
|Payments on debt                                                                  |  |                                 | (110,566 | ) |      |   | (29,618  | )
|Payments on franchise conversion fee obligations                                  |  |                                 | (948     | ) |      |   | (106     | )
|Distributions paid to unit holders                                                |  |                                 | (3,385   | ) |      |   | (3,307   | )
|Distributions paid to shareholders                                                |  |                                 | (17,832  | ) |      |   | (11,684  | )
|Redemption of shares or units                                                     |  |                                 |         |   |      |   | (115,730 | )
|Proceeds from issuance of common and preferred shares                             |  |                                 | 59,585   |   |      |   | 143,081  |  
|Loan origination fees and costs paid                                              |  |                                 | (354     | ) |      |   | (1,091   | )
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash (used in) provided by financing activities                               |  |                                 | (2,500   | ) |      |   | 34,619   |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net increase in cash and cash equivalents                                         |  |                                 | (8,179   | ) |      |   | 10,676   |  
|Cash and cash equivalents at beginning of period                                  |  |                                 | 22,837   |   |      |   | 9,586    |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                               | 14,658   |   |      | $ | 20,262   |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Supplemental cash flow information:                                               |  |                                 |          |   |      |   |          |  
|Interest paid                                                                     |  | $                               | 13,836   |   |      | $ | 13,643   |  



Supplemental disclosure of non-cash information 



|1. | During 2005, an adjustment of $742 for future obligations under the Marriott Takeback Transaction was recorded in Deferred and other and Franchise conversion fee obligations. See
Note 1 for a description of the Marriott Takeback Transaction.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | A common unit holder in the Companys operating partnership redeemed 407,656 and 50,180 common units for common shares in the nine months ended September 30, 2005 and
2004, respectively, and the increase in equity and decrease in minority interest associated with these redemptions was $6,111 and $463, respectively.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | During 2005, the Company transferred $1,704 of costs associated with completed hotel acquisitions from deferred and other to investment in hotels.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------



|4. | During 2005, the Company capitalized interest of $480 related to the development and renovation of certain hotels.
|-- | ------------------------------------------------------------------------------------------------------------------



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



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##### Table of Contents

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 September 30, 2005, owned 69 hotels with an aggregate of 8,745 rooms/suites (the Hotels) through its partnership interests in Innkeepers USA Limited Partnership (with its
subsidiary partnerships, the Partnership). The Company has a series of indirect, wholly-owned taxable REIT subsidiaries that lease the Hotels from the Partnership (the TRSs, and collectively with Innkeepers and the
Partnership, the Company). Innkeepers Hospitality Management Inc. (the IH Manager) manages 66 of the Hotels for Innkeepers and a third party manages one of the Hotels. 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.



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



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



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



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##### Table of Contents

Management Conversion of Marriott-Managed Hotels. Between April 2003 and July 2003, the agreements
under which 17 of the Companys hotels were franchised and managed by Marriott were converted into long-term franchise agreements with Marriott. Under those franchise agreements, the TRSs will pay Marriott (1) a franchise royalty fee of
6.5% of room revenues for the first ten years (three years, for one hotel) of each franchise agreement and a 5% royalty thereafter (as compared to 5% of gross revenues under the previous management agreements with Marriott) and (2) $850 plus
50% of aggregate available cash flow (as defined in the agreement with Marriott) in excess of a specified threshold each year for 10 years beginning in 2004 (the Conversion Fee). A portion of the Conversion Fee will be waived for a year
if the converted Hotels room revenues decline below certain levels and certain other conditions are met. The Conversion Fee was subject to an aggregate credit of $750 from Marriott; the Company applied $375 of the credit to the $850 Conversion
Fee due for 2004 and plans to apply the balance of the credit to the Conversion Fee expected to be payable in 2005. Other than the fees discussed above, the fees required under the franchise agreements are generally similar to the fees (other than
management fees) that were required by the previous Marriott management agreements. This transaction is referred to as the Marriott Takeback Transaction, and the IH Manager now manages these 17 hotels.



Acquisitions and Sales of Hotels



In January 2005, the Company acquired an existing 83-room Hampton Inn hotel
in Columbia, Maryland for $10 million, including closing costs and anticipated capital expenditures. In January 2005, the Company acquired an existing 190-room hotel in Montvale, NJ, for $18 million, including closing costs. The Company closed the
hotel to begin a $5 million renovation to convert the hotel to a Courtyard by Marriott which is expected to open in 2006. In May 2005, the Company acquired the newly renovated 224-room Westin Governor Morris hotel in Morristown, N.J. for $35.1
million. The acquisitions were funded by borrowings under the Companys unsecured line of credit (Line of Credit).



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



Issuance of Common Shares



In February 2005, the Company completed a public offering of 4.4 million common shares at $13.71 per share. The net proceeds from the offering of
$59.6 million were used to pay down a portion of the Companys outstanding indebtedness under its unsecured Line of Credit. In March 2005, the Company issued 407,656 common shares in exchange for 407,656 common units redeemed by the
partnership. Additionally, the company granted performance awards to two executives, which are discussed in Note 3 below. On June 1, 2005, the Company granted two executives a total of 100,000 restricted shares. On July 20, 2005, the
Company granted one executive 25,000 restricted shares.



2. Basis of
Presentation



These unaudited financial statements have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC) and should be read in conjunction with the financial statements and notes thereto of the Company included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2004 (the 10-K). The notes to the financial statements included herein highlight significant changes to the notes included in the 10-K and present interim disclosures
required by the SEC. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The results of any interim period are not necessarily indicative of results
for the full year.



3. Stock Based Compensation



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



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##### Table of Contents

The Company has granted performance awards that may result in the issuance of 237,500 common shares and
225,000 common share equivalents (the equivalents may settle in cash). The common shares and equivalents will only be issued if the Companys compounded annual total shareholder return (share price appreciation plus dividends) exceeds a
targeted threshold over a measuring period. The measuring period ends May 30, 2008 or upon the termination without cause, death or disability of the executive, or a change of control of the Company. Any 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 executive is terminated without cause, dies or is disabled, or if a change of control occurs. The Company accounts for
these performance awards under variable accounting in accordance with APB Opinion No. 25, and no compensation expense is recognized for the performance awards as of September 30, 2005, as a minimum target threshold has not yet been
achieved. The Company will recognize an expense for its share based compensation beginning in 2006 due to the adoption of FAS 123(R).



If the Company had recognized compensation expense for performance awards and options granted to employees and trustees based on the fair
value method in accordance with FAS 123(R), the compensation cost would have been immaterial for the nine months ended September 30, 2005 and 2004.



4. Recently Issued Accounting Pronouncements



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS
123(R)). The statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, focusing primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. The statement will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based generally on the fair value of the award on the
grant date; such cost will be recognized over the period during which the employee is required to provide service in exchange for the award (generally the vesting period). No compensation cost is recognized for equity instruments for which
employees do not render the requisite service. SFAS 123(R) was to be effective for the Company in June 2005 for applicability to all awards granted, modified, repurchased or cancelled after July 1, 2005; the statement also was to
require that the Company recognize compensation cost on or after July 1, 2005 for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the fair value of those awards on the date of grant. In
April 2005, the Securities and Exchange Commission (the SEC) extended the effective date of SFAS 123(R) to the beginning of our next fiscal year (January 1, 2006). The SECs new rule does not change the
accounting required by SFAS 123(R); it changes only the dates for compliance with the standard.



The Company plans to adopt Statement 123R beginning in 2006 and will continue reviewing the statement and evaluating the impact of this statement.



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



In June 2005, the FASB issued SFAS No. 154, Account Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 will become effective for accounting changes and
corrections of errors made in fiscal year 2006. The adoption of this statement is not expected to affect the Companys consolidated financial statements.



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 $90 as of September 30, 2005.



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6. Earnings per Share



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



|                                                                                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                      |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|                                                                                                      |  | 2005                             |            |   | 2004                            |   |            | 2005 |  |   | 2004       |  
|Numerator:                                                                                            |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Income from continuing operations                                                                     |  | $                                | 9,723      |   |                                 | $ | 6,537      |      |  | $ | 18,508     |   |  | $ | 12,835     |  
|Series A Preferred Share issuance costs                                                               |  |                                  |           |   |                                 |   |           |      |  |   |           |   |  |   | (4,249     | )
|Preferred share dividends                                                                             |  |                                  | (2,900     | ) |                                 |   | (2,900     | )    |  |   | (8,700     | ) |  |   | (8,589     | )
|                                                                                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shareholders from continuing operations                        |  |                                  | 6,823      |   |                                 |   | 3,637      |      |  |   | 9,808      |   |  |   | (3         | )
|Discontinued operations                                                                               |  |                                  | 14         |   |                                 |   | 116        |      |  |   | 1,377      |   |  |   | 1,204      |  
|                                                                                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income applicable to common shareholders                                                          |  | $                                | 6,837      |   |                                 | $ | 3,753      |      |  | $ | 11,185     |   |  | $ | 1,201      |  
|                                                                                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Denominator:                                                                                          |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Denominator for basic earnings per share  weighted average shares                                    |  |                                  | 42,730,549 |   |                                 |   | 37,603,379 |      |  |   | 41,726,975 |   |  |   | 37,501,727 |  
|Effect of dilutive securities:                                                                        |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Share options                                                                                         |  |                                  | 258,082    |   |                                 |   | 54,580     |      |  |   | 183,191    |   |  |   |           |  
|Restricted shares                                                                                     |  |                                  | 63,288     |   |                                 |   | 126,616    |      |  |   | 54,310     |   |  |   |           |  
|                                                                                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Denominator for diluted earnings per share  adjusted weighted average shares and assumed conversions |  |                                  | 43,051,919 |   |                                 |   | 37,784,575 |      |  |   | 41,964,476 |   |  |   | 37,501,727 |  
|                                                                                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Earnings per share data:                                                                              |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic-continuing operations                                                                           |  | $                                | 0.16       |   |                                 | $ | 0.10       |      |  | $ | 0.24       |   |  | $ | 0.00       |  
|Basic-discontinued operations                                                                         |  | $                                | 0.00       |   |                                 | $ | 0.00       |      |  | $ | 0.03       |   |  | $ | 0.03       |  
|                                                                                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                                                                 |  | $                                | 0.16       |   |                                 | $ | 0.10       |      |  | $ | 0.27       |   |  | $ | 0.03       |  
|                                                                                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted-continuing operations                                                                         |  | $                                | 0.16       |   |                                 | $ | 0.10       |      |  | $ | 0.23       |   |  | $ | 0.00       |  
|Diluted-discontinued operations                                                                       |  | $                                | 0.00       |   |                                 | $ | 0.00       |      |  | $ | 0.03       |   |  | $ | 0.03       |  
|                                                                                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                                                                               |  | $                                | 0.16       |   |                                 | $ | 0.10       |      |  | $ | 0.27       |   |  | $ | 0.03       |  
|                                                                                                      |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  



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



7. Dividends Declared and Paid



The Company declared common share dividends of $0.15 and $0.31 for the three and nine months ended September 30, 2005, respectively, compared to common
share dividends declared of $.06 and $0.12 for the three and nine months ended September 30, 2004, respectively. The Company paid common share dividends of $4,287 and $9,131 for the three and nine months ended September 30, 2005, respectively,
compared to common share dividends paid of $1,130 and $3,384 for the three and nine months ended September 30, 2004, respectively.



8. Other Charges



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



|                       |  |                                  |   |                                 |   |      |  |      |       |  |   |    
|---------------------- |  | -------------------------------- | - | ------------------------------- | - | ---- |  | ---- | ----- |  | - | ---
|                       |  | Three Months Ended September 30, |   | Nine Months Ended September 30,
|                       |  | 2005                             |   | 2004                            |   | 2005 |  | 2004
|Advisory services      |  | $                                |  |                                 | $ |     |  | $    |      |  | $ | 32 
|TRS Transaction costs  |  |                                  |  |                                 |   | 4    |  |      |      |  |   | 450
|Personnel cost         |  |                                  |  |                                 |   | 392  |  |      | 355   |  |   | 392
|Extinguishment of Debt |  |                                  |  |                                 |   |     |  |      | 2,698 |  |   |   
|                       |  |                                  |   |                                 |   |      |  |      |       |  |   |    
|                       |  | $                                |  |                                 | $ | 396  |  | $    | 3,053 |  | $ | 874
|                       |  |                                  |   |                                 |   |      |  |      |       |  |   |    



Extinguishment of debt
includes prepaid interest, loan origination fees and other costs associated with the partial defeasance of outstanding debt of $16,500 encumbering three hotels that were sold during the first quarter of 2005. The personnel cost was incurred in
connection with the retirement of the Companys former chief financial officer.



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9. Discontinued Operations



The Company classified three hotels as held for sale at December 31, 2004. The Company recognized an impairment loss of
$11,400 in 2003 relating to two of these three hotels and an additional impairment loss of $380 was recognized in 2004 relating to one of those two hotels. The Company recognized a loss of $246 relating to the third hotel in 2004. The Company sold
the three hotels in the first quarter of 2005, and recognized a net gain of $1,501 on the sale as of September 30, 2005.



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



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



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



|                                    |  |                                 |    |      |                                |        |      |  |   |       |   |  |   |        |  
|----------------------------------- |  | ------------------------------- | -- | ---- | ------------------------------ | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                    |  | Three Months EndedSeptember 30, |    |      | Nine Months EndedSeptember 30, |       
|                                    |  | 2005                            |    | 2004 |                                |        | 2005 |  |   | 2004  |  
|Hotel operating revenue             |  | $                               |   |      | $                              | 2,585  |      |  | $ | 918   |   |  | $ | 7,164  |  
|Percentage Lease revenue            |  |                                 |   |      |                                |       |      |  |   |      |   |  |   | 74     |  
|Other revenue                       |  |                                 |   |      |                                | 13     |      |  |   | 28    |   |  |   | 52     |  
|Hotel operating expenses            |  |                                 | 3  |      |                                | (1,682 | )    |  |   | (993  | ) |  |   | (4,931 | )
|Depreciation                        |  |                                 |   |      |                                | (482   | )    |  |   |      |   |  |   | (1,564 | )
|Amortization of franchise fees      |  |                                 |   |      |                                | (2     | )    |  |   | (2    | ) |  |   | (9     | )
|Property taxes and insurance        |  |                                 |   |      |                                | (72    | )    |  |   | (75   | ) |  |   | (353   | )
|General and administrative          |  |                                 |   |      |                                | (1     | )    |  |   |      |   |  |   | (13    | )
|Interest                            |  |                                 |   |      |                                |       |      |  |   |      |   |  |   | (2     | )
|Gain on sale of hotels              |  |                                 | 11 |      |                                | (243   | )    |  |   | 1,501 |   |  |   | 786    |  
|                                    |  |                                 |    |      |                                |        |      |  |   |       |   |  |   |        |  
|Income from discontinued operations |  | $                               | 14 |      | $                              | 116    |      |  | $ | 1,377 |   |  | $ | 1,204  |  
|                                    |  |                                 |    |      |                                |        |      |  |   |       |   |  |   |        |  



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 $2,797 (related primarily to accumulated net operating losses) at September 30, 2005 and the gross deferred tax asset associated with these future tax deductions was
approximately $1,542. 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

11. Insurance Recovery



The Company recorded a $431 charge to general and administrative expense during the three months ended March 31, 2005 to reflect the estimated
loss from misappropriation of receipts on hotel accounts receivable by an employee at one of the 69 Hotels. The Company increased the charge to $617 during the three months ended September 30, 2005. The Company received insurance proceeds to
offset the total charge during the three months ended September 30, 2005.



12. Subsequent Events



The company sustained
some property damage at three of its Florida hotels from Hurricane Wilma in October, 2005. One of the hotels is closed and expected to re-open in November, 2005, and the other two hotels sustained minor property damage and have both since reopened.
The properties are insured for both property damage and business interruption, subject to customary deductibles.



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##### Table of Contents

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



General



The following discussion and analysis should be read in conjunction with (a) the financial statements and accompanying notes included in this report
and (b) Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes thereto included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2004 (the 10-K). Capitalized terms used but not defined in this section have the meanings ascribed in the notes to the consolidated financial statements included in this Report on Form 10-Q. An investment in the Company
is subject to significant risks, which the Company discloses in reports filed from time to time with the SEC, including a discussion of Risk Factors included in the Form 10-K. The Companys 2004 annual report (including the 10-K) is
posted on the Companys website at www.innkeepersusa.com, and the Form 10-K may be found at the SECs EDGAR website at www.sec.gov.



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



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

---

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

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

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



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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 September 30, |        |   | Percentage increase (decrease) |   |        | Nine Months Ended September 30, |      |      | Percentage increase (decrease) |     
|                          |  | 2005                             |        |   | 2004                           |   |        |                                 | 2005 |      |                                | 2004 |   |       
|Portfolio (1)             |  |                                  |        |   |                                |   |        |                                 |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                       |  | $                                | 104.97 |   |                                | $ | 99.58  |                                 |      | 5.4  | %                              |      | $ | 103.95 |   |  | $ | 97.72  |   |  | 6.4  | %
|Occupancy                 |  |                                  | 78.97  | % |                                |   | 78.77  | %                               |      | 0.3  |                                |      |   | 76.70  | % |  |   | 76.15  | % |  | 0.7  |  
|RevPAR                    |  | $                                | 82.90  |   |                                | $ | 78.45  |                                 |      | 5.7  |                                |      | $ | 79.73  |   |  | $ | 74.41  |   |  | 7.2  |  
|                          |  |                                  |        |   |                                |  
|By Price Segment          |  |                                  |        |   |                                |   |        |                                 |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|Upscale Extended Stay (2) |  |                                  |        |   |                                |   |        |                                 |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                       |  | $                                | 105.87 |   |                                | $ | 100.67 |                                 |      | 5.2  | %                              |      | $ | 103.82 |   |  | $ | 98.19  |   |  | 5.7  | %
|Occupancy                 |  |                                  | 82.43  | % |                                |   | 81.71  | %                               |      | 0.9  |                                |      |   | 79.69  | % |  |   | 78.87  | % |  | 1.0  |  
|RevPAR                    |  | $                                | 87.27  |   |                                | $ | 82.26  |                                 |      | 6.1  |                                |      | $ | 82.73  |   |  | $ | 77.44  |   |  | 6.8  |  
|Upscale (3)               |  |                                  |        |   |                                |   |        |                                 |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                       |  | $                                | 120.56 |   |                                | $ | 122.25 |                                 |      | (1.4 | )%                             |      | $ | 126.70 |   |  | $ | 117.79 |   |  | 7.6  | %
|Occupancy                 |  |                                  | 71.65  | % |                                |   | 70.76  | %                               |      | 1.3  |                                |      |   | 69.88  | % |  |   | 77.44  | % |  | (9.8 | )
|RevPAR                    |  | $                                | 86.38  |   |                                | $ | 86.50  |                                 |      | (0.1 | )                              |      | $ | 88.54  |   |  | $ | 91.22  |   |  | (2.9 | )
|Mid Price (4)             |  |                                  |        |   |                                |   |        |                                 |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                       |  | $                                | 95.94  |   |                                | $ | 87.98  |                                 |      | 9.1  | %                              |      | $ | 97.56  |   |  | $ | 88.57  |   |  | 10.2 | %
|Occupancy                 |  |                                  | 67.91  | % |                                |   | 69.91  | %                               |      | (2.9 | )                              |      |   | 67.28  | % |  |   | 65.35  | % |  | 3.0  | %
|RevPAR                    |  | $                                | 65.16  |   |                                | $ | 61.51  |                                 |      | 5.9  |                                |      | $ | 65.64  |   |  | $ | 57.88  |   |  | 13.4 |  
|                          |  |                                  |        |   |                                |  
|Comparable hotels (5)     |  |                                  |        |   |                                |   |        |                                 |      |      |                                |      |   |        |   |  |   |        |   |  |      |  
|ADR                       |  | $                                | 103.15 |   |                                | $ | 97.51  |                                 |      | 5.8  | %                              |      | $ | 101.88 |   |  | $ | 95.72  |   |  | 6.4  | %
|Occupancy                 |  |                                  | 79.28  | % |                                |   | 79.09  | %                               |      | 0.2  |                                |      |   | 76.96  | % |  |   | 75.89  | % |  | 1.4  |  
|RevPAR                    |  | $                                | 81.78  |   |                                | $ | 77.13  |                                 |      | 6.0  |                                |      | $ | 78.41  |   |  | $ | 72.64  |   |  | 7.9  |  

---

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

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

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

|(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
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

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



Results of Operations



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



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



The Company had total revenue for 2005 of $67,095 consisting of $66,953 of Hotel operating revenue and $142 of other revenue compared to total revenue of $59,497 for 2004, consisting of $59,443 of Hotel operating
revenue and $54 of other revenue.



Room revenue increased
$5,668 to $62,819 in 2005 from $57,151 for 2004. The increase was a result of a 5.7% RevPAR increase at 65 of our Hotels (excludes four Hotels closed for renovation and conversion during part or all of 2005 and 2004) and additional revenue
associated with hotels acquired in 2005 and 2004. Room revenue for the Comparable Hotels increased $3,154, or 6.0%, to $55,674 in 2005 from $52,520 in 2004. This increase was due to a 6.0% RevPAR increase which was driven mainly by a 5.8% increase
in ADR. The remaining increase of $2,514 to $7,145 in 2005 from $4,631 in 2004 was primarily due to the hotels acquired in 2005 and 2004.



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##### Table of Contents

Food and beverage revenue increased $1,564 to $1,984 in 2005 from $420 in 2004. Food and beverage revenue
for the Comparable Hotels increased $28 to $132 in 2005 from $104 in 2004. The remaining increase of $1,536 was primarily due to the acquisitions of the full service Westin Governor Morris hotel in Morristown, N.J. and the Four Points Sheraton hotel
in Ft. Walton Beach, FL.



The Company had Hotel operating
expenses (excluding amortization of deferred franchise conversion and lease acquisition) for 2005 of $36,996 compared to Hotel operating expenses in 2004 of $33,285. Hotel operating expenses for the Comparable Hotels increased $222, or 0.7%, to
$30,789 in 2005 from $30,567 in 2004. This increase was due primarily to higher occupancies and increases in payroll related expenses. Hotel operating expenses as a percentage of revenue for the Comparable Hotels decreased in 2005 to 53.7% in 2005
from 56.4% in 2004. The remaining increase of $3,489 to $6,207 in 2005 from $2,718 in 2004 was primarily due to the Hotels acquired in 2005 and 2004.



Depreciation, amortization of franchise fees, amortization of loan origination fees, amortization of deferred franchise conversion fees, amortization of
deferred lease acquisition cost, and amortization of unearned compensation increased $912 in 2005 to $9,793 in the aggregate in 2005 from $8,881 in 2004. This increase is primarily due to depreciation on the three Hotels acquired in 2005 and 2004.



Interest expense for 2005 was $4,687 compared to $4,718 for
2004. This decrease was due primarily to a lower interest rate on borrowings under the Line of Credit in 2005 due to the Companys results.



Property taxes and insurance decreased in 2005 to $2,561 compared to $3,090 for 2004. This decrease was due primarily to a lower property insurance rate
on renewed policies and successful property tax appeals.



Corporate general and administrative expenses increased $736 to $2,016 in 2005 from $1,280 in 2004. This increase was due primarily to an increase in salaries, benefits, recruiting and relocation costs associated with the hiring of new
employees, as well as costs associated with complying with certain of Sarbanes-Oxley rules.



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



Net income applicable to common shareholders for 2005 was $6,837 or $0.16 per diluted share, compared with net income applicable to common shareholders of
$3,753, or $0.10 per diluted share for 2004. This increase was due primarily to the factors discussed previously.



Comparison of the nine Months Ended September 30, 2005 (2005) to the nine Months Ended September 30, 2004 (2004)



The Company had total revenue for 2005 of $186,264 consisting of $185,868 of
Hotel operating revenue and $396 of other revenue compared to total revenue of $154,510 for 2004, consisting of $5,073 of Percentage Lease revenue from the Lessees, $149,194 of Hotel operating revenue and $243 of other revenue. The increase in Hotel
operating revenue and decline in Percentage Lease revenue from 2004 to 2005 was due to (1) the completion of the TRS Transaction and the Wyndham Lease Termination Transaction, (2) improved hotel operating performance as discussed below,
and (3) hotels acquired in 2005 and 2004.



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



Room revenue increased $32,445 to
$176,192 in 2005 from $143,747 for 2004. This increase was a result of a 7.2% RevPAR increase at 65 of our Hotels (excludes four Hotels closed for renovation and conversion during part or all of the periods presented). Room revenue for the
Comparable Hotels increased $11,204, or 7.6%, to $158,402 in 2005 from $147,198 in 2004. This increase was due to a 7.9% RevPAR increase which was driven mainly by a 6.4% increase in ADR.



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##### Table of Contents

Food and beverage revenue increased $3,109 to $3,900 in 2005 from $791 in 2004. This increase was
primarily due to the acquisitions of the full service Westin Governor Morris hotel in Morristown, N.J. and the Four Points by Sheraton hotel in Ft. Walton Beach, FL. Food and beverage revenue for the Comparable Hotels decreased $19 to $437 in 2005
from $456 in 2004.



The Company had Hotel operating expenses
(excluding amortization of deferred franchise conversion and lease acquisition) for 2005 of $103,899 compared to Hotel operating expenses in 2004 of $84,336. Hotel operating expenses for the Comparable Hotels increased $3,037, or 3.5%, to $89,980 in
2005 from $86,943 in 2004. This increase was due primarily to higher occupancies and increases in payroll related expenses. Hotel operating expenses as a percentage of revenue decreased in 2005 to 55.1% in 2005 from 57.1% in 2004.



Depreciation, amortization of franchise fees, amortization of loan
origination fees, amortization of deferred franchise conversion fees, amortization of deferred lease acquisition cost, and amortization of unearned compensation increased $2,435 in 2005 to $28,705 in the aggregate from $26,270 for 2004. This
increase was primarily due to depreciation on the three Hotels acquired in 2005.



Interest expense remained relatively constant in 2005 at $13,836 compared with $13,809 for 2004.



Property taxes and insurance in 2005 was $8,566 compared to $8,659 for 2004. This decrease was due primarily to a lower property insurance rate on renewed
policies, and successful property tax appeals.



Corporate
general and administrative expenses increased $1,797, to $5,907 in 2005 from $4,110 in 2004. This increase was due primarily to an increase in salaries, benefits, and recruiting and relocation costs associated with the hiring of new employees, as
well as costs associated with complying with certain of Sarbanes-Oxley rules.



Other charges in 2005 increased to $3,053 compared to $874 in 2004. This increase is due to an extinguishment of debt which incurred $2,704 in interest, fees and costs in 2005, and personnel cost related to the
retirement of the Companys Chief Financial Officer.



Income from discontinued operations increased from $1,204 in 2004 to $1,377 in 2005.



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



Net income applicable to common shareholders for 2005 was $11,185, or $0.27 per diluted share, compared with net income applicable to common shareholders
of $1,201 or $0.03 per diluted share for 2004. This change was due primarily to the factors discussed previously.



Liquidity and Capital Resources



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



Cash Flow Analysis



Cash and cash equivalents at September 30, 2005 and 2004 were $14,658 and $20,262, respectively. Net cash provided by operating activities for the
nine months ended September 30, 2005 and 2004 was $53,743 and $53,958, respectively. The decrease in net cash provided by operating activities was primarily the result of an increase in accounts receivable and a decrease in cash provided by the
change in accounts payable and accrued expenses, partially offset by an increase in net income due to improved hotel operations.



Net cash used in investing activities was $59,422 for the nine months ended September 30, 2005. This was comprised primarily of the acquisition of
three hotels for $63,100 and capital expenditures of $19,023 (including $10,300 for hotels acquired in 2005 and 2004), offset by proceeds from the sales of hotels of $20,860.



14



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##### Table of Contents

Net cash used in investing activities was $77,901 for the nine months ended September 30, 2004. This
was comprised primarily of (a) renovations at certain hotels for $20,279, (b) the acquisition of three hotels for $57,400, and the acquisition of land for $3,700, and (c) net deposits of $3,066, which were partially offset by the net
proceeds from the sale of two hotels for $8,727.



Net cash used
in financing activities was $2,500 for the nine months ended September 30, 2005, consisting primarily of payments on the line of credit and principal amortization of $110,566, and distributions paid of $21,217, which were partially offset by
the proceeds from issuance of common shares of $59,585 and borrowing on the line of credit of $71,000.



Net cash provided by financing activities was $34,619 for the nine months ended September 30, 2004, consisting primarily of the proceeds from the
issuance of the Series C Preferred Shares of $140,251, proceeds from the issuance of common shares of $2,830 and draws under the Line of Credit of $53,074, partially offset by (a) the redemption of the Series A Preferred Shares of $115,730,
(b) distributions paid of $14,991, and (c) principal payments on the line of credit.



Distributions/Dividends



The Company has paid regular quarterly distributions on its common shares and common units since its inception. The 2005 distributions for the first, second and third quarters were $0.06, $0.10 and $0.15, respectively, per common share or
common unit. Quarterly preferred distributions between $0.275 and $0.289 are payable on each Class B Preferred Unit (depending on the level of common share dividend paid), and the 2005 first, second and third quarter distributions were $0.275 per
Class B Preferred Unit. Dividends of $0.50 were paid on each Series C Preferred Share for the first, second and third quarters of 2005. The third quarter distributions were paid on October 25, 2005 to shareholders of record on
September 30, 2005. 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. The Companys Declaration of Trust limits aggregate indebtedness to 50% of the Companys investment in hotels, at cost, after giving effect to the Companys use of
proceeds from any indebtedness. As of September 30, 2005 the Companys debt to investment at cost was 25%. The interest rate on the Companys $135.0 million unsecured Line of Credit is LIBOR plus 122.5 to 225 basis points, depending
on certain financial ratios. The interest rate was approximately 5.08% at September 30, 2005. The Line of Credit matures on July 23, 2007. The actual amount that can be borrowed under the Line of Credit is subject to borrowing base
availability and certain other conditions described in the loan agreement. At September 30, 2005, the Company (i) had $40.6 million of borrowings outstanding under the Line of Credit and (ii) had available approximately $82.8 million
under the Line of Credit (assuming the proceeds were used for the acquisition of hotel properties). At September 30, 2005, the Company was in compliance with all financial covenants contained in all of its various loan agreements.



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



15



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##### Table of Contents

Capital Expenditures



The Percentage Leases with the TRSs generally require the Company to make available an amount equal to 4% or 5% of room revenues from the Hotels, per
month on a cumulative basis, for the periodic replacement or refurbishment of furniture, fixtures and equipment and certain other capital expenditures at the Hotels. Each of the Companys term loans require that the Company make available for
such purposes, at the Hotels collateralizing those loans, amounts up to 5% of gross revenues from such Hotels. The Company intends to cause the expenditure of amounts in excess of such obligated amounts, if necessary, to comply with the reasonable
requirements of any franchise agreement and otherwise to the extent that the Company deems such expenditures to be in the best interests of the Company.



Management believes that the amounts required to be made available by the Company under the Percentage Leases will be sufficient to meet most of the
routine expenditures for furniture, fixtures and equipment at the Hotels. However, in the past, the Company has spent substantially more on capital expenditures than the Percentage Leases require. Management believed these additional expenditures
were necessary to meet competitive pressures from other hotels, many of which are newly constructed. In many cases, the expenditures were also required by franchisors of the Hotels. Management believes that for the foreseeable future the Company
will continue to spend substantially more on capital expenditures than it is required to make available to the TRSs under the Percentage Leases or loan agreements. The extent to which the actual expenditures exceed the amounts required to be made
available will vary from year to year, based on a number of factors. Those factors include, for any given year, market and franchisor requirements, the point in the normal recurring upgrade cycle the Hotels are at in that year, and the revenue of
the Hotels for that year. 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, controlled the IH Lessee and 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 hotels. These agreements are subject to customary conditions and due diligence.



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



Seasonality of Hotel Business



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



Inflation



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



16



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##### Table of Contents

Funds From Operations



The National Association of Real Estate Investment Trusts (NAREIT) adopted the definition of funds from operations (FFO) in order
to promote an industry standard measure of REIT financial and operating performance. Management believes that the presentation of FFO (defined below) provides useful supplemental information to investors regarding the Companys financial
condition and results of operations, particularly in reference to the Companys ability to service debt, fund capital expenditures and pay cash dividends. Many other real estate companies use FFO as a measure of their financial and operating
performance, which provides another basis for comparison for management. FFO, as defined, adds back historical cost depreciation. Historical cost depreciation assumes the value of real estate assets diminishes predictably over a certain period of
time. In fact, real estate asset values historically have increased or decreased with market conditions. Consequently, FFO may be a useful supplemental measure in evaluating financial and operating performance by disregarding, or adding back,
historical cost depreciation in the calculation of FFO. Additionally, FFO per share targets have historically been used to determine a significant portion of the incentive compensation of the Companys senior management.



NAREIT defines FFO as net income (loss) (computed in accordance with
generally accepted accounting principles (GAAP)), excluding gains (losses) from sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company calculates FFO in
compliance with the NAREIT definition.



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



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



|                                                                  |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |            |  
|----------------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------ | ---- | - | ---------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                  |  | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30, |     
|                                                                  |  | 2005                            |            |                                | 2004 |   | 2005       |  |   | 2004       |  
|Net income applicable to common shareholders                      |  | $                               | 6,837      |                                |      | $ | 3,753      |  | $ | 11,185     |   |  | $ | 1,201      |  
|Depreciation                                                      |  |                                 | 8,957      |                                |      |   | 7,913      |  |   | 26,226     |   |  |   | 23,605     |  
|Depreciation included in discontinued operations                  |  |                                 |           |                                |      |   | 482        |  |   |           |   |  |   | 1,564      |  
|Minority interest, common                                         |  |                                 | 119        |                                |      |   | 113        |  |   | 195        |   |  |   | 37         |  
|Loss (Gain) on sale of hotels included in discontinued operations |  |                                 | (11        | )                              |      |   | 243        |  |   | (1,501     | ) |  |   | (786       | )
|                                                                  |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |            |  
|Basic FFO                                                         |  | $                               | 15,902     |                                |      | $ | 12,504     |  | $ | 36,105     |   |  | $ | 25,621     |  
|                                                                  |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |            |  
|Minority interest, preferred                                      |  |                                 | 1,068      |                                |      |   | 1,068      |  |   | 3,205      |   |  |   |           |  
|                                                                  |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |            |  
|Diluted FFO                                                       |  | $                               | 16,970     |                                |      | $ | 13,572     |  | $ | 39,310     |   |  | $ | 25,621     |  
|                                                                  |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |            |  
|Denominator for basic earnings per share                          |  |                                 | 42,730,549 |                                |      |   | 37,603,379 |  |   | 41,726,975 |   |  |   | 37,501,727 |  
|Effect of dilutive securities:                                    |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |            |  
|Stock options                                                     |  |                                 | 258,082    |                                |      |   |           |  |   | 183,191    |   |  |   |           |  
|Restricted shares                                                 |  |                                 | 63,288     |                                |      |   |           |  |   | 54,310     |   |  |   |           |  
|Weighted average:                                                 |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |            |  
|Common Units                                                      |  |                                 | 692,657    |                                |      |   | 1,117,056  |  |   | 791,537    |   |  |   | 1,137,455  |  
|Preferred Units (1)                                               |  |                                 | 3,884,469  |                                |      |   | 3,884,469  |  |   | 3,884,469  |   |  |   |           |  
|                                                                  |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |            |  
|Denominator for diluted FFO per share                             |  |                                 | 47,629,045 |                                |      |   | 42,786,100 |  |   | 46,640,482 |   |  |   | 38,747,277 |  
|                                                                  |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |            |  
|Diluted FFO per share                                             |  | $                               | 0.36       |                                |      | $ | 0.32       |  | $ | 0.84       |   |  | $ | 0.66       |  
|                                                                  |  |                                 |            |                                |      |   |            |  |   |            |   |  |   |            |  

---

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



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##### Table of Contents

Forward-Looking Statements



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



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



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INNKEEPERS USA TRUST

ITEM 3 - QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK



The Companys primary market risk exposure is to changes in interest rates on its Line of Credit and other debt. The Companys interest rate
risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower its overall borrowing costs. To achieve these objectives, the Company manages its exposure to fluctuations in market interest rates for a
portion of its borrowings through the use of fixed rate debt instruments. 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 September 30, 2005, the following table presents principal repayments and related weighted average interest rates by expected maturity dates (in thousands):



|                      |  |      |       |   |      |   |       |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |         |   |  |   |         |  
|--------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | - |  | ---- | ----- | - | ---------- | - | ----- | ----- |  | - | ------- | - |  | - | ------- | -
|                      |  | 2005 |       |   | 2006 |   |       | 2007 |  |   | 2008   |   |  | 2009 |       |   | Thereafter |   |       | Total | 
|Debt:                 |  |      |       |   |      |   |       |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |         |   |  |   |         |  
|Fixed Rate            |  | $    | 1,865 |   |      | $ | 6,399 |      |  | $ | 27,566 |   |  | $    | 6,006 |   |            | $ | 5,196 |       |  | $ | 149,693 |   |  | $ | 196,725 |  
|Average Interest Rate |  |      | 7.81  | % |      |   | 7.97  | %    |  |   | 8.12   | % |  |      | 7.93  | % |            |   | 7.88  | %     |  |   | 7.75    | % |  |   | 7.82    | %
|Variable Rate         |  |      |      |   |      |   |      |      |  | $ | 40,574 |   |  |      |      |   |            |   |      |       |  | $ | 10,000  |   |  | $ | 50,574  |  
|Average Interest Rate |  |      |      |   |      |   |      |      |  |   | 5.10   | % |  |      |      |   |            |   |      |       |  |   | 2.60    | % |  |   | 4.60    | %



The Company believes
that the fair value of debt approximates the current debt balance recorded at September 30, 2005.



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



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##### Table of Contents

INNKEEPERS USA TRUST

ITEM 4  CONTROLS AND PROCEDURES



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



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



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



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##### Table of Contents

INNKEEPERS USA TRUST

PART II - OTHER INFORMATION



Item 6 - Exhibits



|        |  |                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                        
|3.1(a)  |  | Amended and Restated Declaration of Trust of the Registrant (previously filed as Exhibit 3.1 to the Companys Registration Statement on Form S-11, Registration No. 33-81362, and
incorporated herein by reference). *             
|        | 
|3.1(b)  |  | Form of Articles Supplementary to the Declaration of Trust of Innkeepers USA Trust (incorporated by reference to Exhibit 4.2 to the Companys Registration Statement on Form 8-A filed with
the Commission on December 17, 2003). *
|        | 
|        |  | 3.2 Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Companys Registration Statement on Form S-11, Registration No. 33-81362, and incorporated herein by reference).
*                                            
|        | 
|4.1(a)  |  | Form of Common Share Certificate (previously filed as Exhibit 4.1 to the Companys Registration Statement on Form S-11, Registration No. 33-81362, and incorporated herein by reference).
*                                        
|        | 
|4.1(b)  |  | Form of Preferred Share Certificate for 8.0% Series C Preferred Shares (previously filed as Exhibit 4.1 to the Companys Current Report on Form 8-K filed January 21, 2004, and incorporated
herein by reference). *               
|        | 
|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                                                                                                                                                       

---

|* | Incorporated by reference
|- | -------------------------



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##### Table of Contents

SIGNATURE



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



|                 |  |                        
|---------------- |  | -----------------------
|                 |  | INNKEEPERS USA TRUST   
|                 | 
|                 |  | /s/ Bruce Riggins      
|November 8, 2005 |  | Bruce Riggins          
|                 |  | Chief Financial Officer



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##### Table of Contents

EXHIBIT INDEX



|        |  |                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                        
|3.1(a)  |  | Amended and Restated Declaration of Trust of the Registrant (previously filed as Exhibit 3.1 to the Companys Registration Statement on Form S-11, Registration No. 33-81362, and
incorporated herein by reference). *             
|        | 
|3.1(b)  |  | Form of Articles Supplementary to the Declaration of Trust of Innkeepers USA Trust (incorporated by reference to Exhibit 4.2 to the Companys Registration Statement on Form 8-A filed with
the Commission on December 17, 2003). *
|        | 
|        |  | 3.2 Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Companys Registration Statement on Form S-11, Registration No. 33-81362, and incorporated herein by reference).
*                                            
|        | 
|4.1(a)  |  | Form of Common Share Certificate (previously filed as Exhibit 4.1 to the Companys Registration Statement on Form S-11, Registration No. 33-81362, and incorporated herein by reference).
*                                        
|        | 
|4.1(b)  |  | Form of Preferred Share Certificate for 8.0% Series C Preferred Shares (previously filed as Exhibit 4.1 to the Companys Current Report on Form 8-K filed January 21, 2004, and incorporated
herein by reference). *               
|        | 
|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                                                                                                                                                       

---

|* | Incorporated by reference
|- | -------------------------



23