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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, 2004



OR



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



For the transition period from  to



Commission file number 0-24568



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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.)



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



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



N/A

(former name)



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



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



The number of common shares of beneficial interest, $.01 par value, outstanding on October 22, 2004, was 37,963,256.



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##### Table of Contents

TABLE OF CONTENTS



|              |  |                       |  |                                                                                                       |  |     
|------------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----
|              |  |                       |  |                                                                                                       |  | Page
|Part I        |  | Financial Information |  |                                                                                                      
|              |  |                       | 
|              |  | Item 1.               |  | Financial Statements (unaudited)                                                                      |  | 2   
|              |  |                       | 
|              |  |                       |  | Consolidated Balance Sheets at September 30, 2004 and December 31, 2003                               |  | 2   
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 |  | 3   
|              |  |                       | 
|              |  |                       |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003           |  | 4   
|              |  |                       | 
|              |  |                       |  | Notes to Consolidated Financial Statements                                                            |  | 5   
|              |  |                       | 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 10  
|              |  |                       | 
|              |  | 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 (UNAUDITED)



Innkeepers USA Trust

Consolidated Balance Sheets

(in thousands, except share and per share data)



|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                     |  | September 30,2004 |          |   | December 31,2003 |  
|ASSETS                                                                                                                               |  |                   |          |   |                  |   |          |  
|Investment in hotel properties:                                                                                                      |  |                   |          |   |                  |   |          |  
|Land and improvements                                                                                                                |  | $                 | 120,798  |   |                  | $ | 102,823  |  
|Buildings and improvements                                                                                                           |  |                   | 659,264  |   |                  |   | 654,847  |  
|Furniture and equipment                                                                                                              |  |                   | 93,301   |   |                  |   | 92,206   |  
|Renovations in process                                                                                                               |  |                   | 18,759   |   |                  |   | 3,161    |  
|Hotels held for sale                                                                                                                 |  |                   | 19,717   |   |                  |   | 2,979    |  
|Hotels under development                                                                                                             |  |                   | 3,664    |   |                  |   |         |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|                                                                                                                                     |  |                   | 915,503  |   |                  |   | 856,016  |  
|Accumulated depreciation                                                                                                             |  |                   | (199,651 | ) |                  |   | (189,156 | )
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Net investment in hotel properties                                                                                                   |  |                   | 715,852  |   |                  |   | 666,860  |  
|                                                                                                                                     |  |                  
|Cash and cash equivalents                                                                                                            |  |                   | 20,262   |   |                  |   | 9,586    |  
|Restricted cash and cash equivalents                                                                                                 |  |                   | 10,652   |   |                  |   | 7,586    |  
|Accounts receivable                                                                                                                  |  |                   | 7,041    |   |                  |   | 8,091    |  
|Prepaids and inventory                                                                                                               |  |                   | 740      |   |                  |   | 1,794    |  
|Deferred and other                                                                                                                   |  |                   | 19,214   |   |                  |   | 12,823   |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                         |  | $                 | 773,761  |   |                  | $ | 706,740  |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                 |  |                   |          |   |                  |   |          |  
|Debt                                                                                                                                 |  | $                 | 255,630  |   |                  | $ | 232,174  |  
|Accounts payable and accrued expenses                                                                                                |  |                   | 17,030   |   |                  |   | 8,982    |  
|Payable to Manager                                                                                                                   |  |                   | 345      |   |                  |   | 811      |  
|Franchise conversion fee obligations                                                                                                 |  |                   | 10,839   |   |                  |   | 5,249    |  
|Distributions payable                                                                                                                |  |                   | 5,449    |   |                  |   | 3,977    |  
|Minority interest in Partnership                                                                                                     |  |                   | 51,128   |   |                  |   | 51,689   |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                                                    |  |                   | 340,421  |   |                  |   | 302,882  |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                |  |                   |          |   |                  |   |          |  
|Preferred shares, $0.01 par value, 20,000,000 shares authorized, 5,800,000 and 4,630,000 shares issued and outstanding,
respectively |  |                   | 145,000  |   |                  |   | 115,750  |  
|Common shares, $0.01 par value, 100,000,000 shares authorized, 37,958,256 and 37,563,499 issued and outstanding, respectively        |  |                   | 379      |   |                  |   | 376      |  
|Additional paid-in capital                                                                                                           |  |                   | 396,655  |   |                  |   | 393,349  |  
|Unearned compensation                                                                                                                |  |                   | (641     | ) |                  |   | (897     | )
|Distributions in excess of earnings                                                                                                  |  |                   | (108,053 | ) |                  |   | (104,720 | )
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total shareholders equity                                                                                                           |  |                   | 433,340  |   |                  |   | 403,858  |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total liabilities and shareholders equity                                                                                           |  | $                 | 773,761  |   |                  | $ | 706,740  |  
|                                                                                                                                     |  |                   |          |   |                  |   |          |  



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



2



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##### Table of Contents

Innkeepers USA Trust

Consolidated Statements of Operations

(in thousands, except share and per share data)



|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                             |  | Three Months EndedSeptember 30, |            |   | Nine Months Ended September 30, |  
|                                                                             |  | 2004                            |            |   | 2003                            |   |            | 2004 |  |   | 2003       |  
|Revenue:                                                                     |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Hotel operating                                                              |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Rooms                                                                        |  | $                               | 57,151     |   |                                 | $ | 1,346      |      |  | $ | 143,747    |   |  | $ | 1,681      |  
|Food and beverage                                                            |  |                                 | 420        |   |                                 |   |           |      |  |   | 791        |   |  |   |           |  
|Telephone                                                                    |  |                                 | 468        |   |                                 |   | 5          |      |  |   | 1,356      |   |  |   | 6          |  
|Other                                                                        |  |                                 | 1,404      |   |                                 |   | 30         |      |  |   | 3,300      |   |  |   | 52         |  
|Percentage lease                                                             |  |                                 |           |   |                                 |   | 18,938     |      |  |   | 5,073      |   |  |   | 49,878     |  
|Other                                                                        |  |                                 | 54         |   |                                 |   | 67         |      |  |   | 243        |   |  |   | 268        |  
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                                                |  |                                 | 59,497     |   |                                 |   | 20,386     |      |  |   | 154,510    |   |  |   | 51,885     |  
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Expenses:                                                                    |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Hotel operating                                                              |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Rooms                                                                        |  |                                 | 12,336     |   |                                 |   | 282        |      |  |   | 31,573     |   |  |   | 369        |  
|Food and beverage                                                            |  |                                 | 441        |   |                                 |   |           |      |  |   | 802        |   |  |   |           |  
|Telephone                                                                    |  |                                 | 612        |   |                                 |   | 14         |      |  |   | 1,794      |   |  |   | 16         |  
|Other                                                                        |  |                                 | 642        |   |                                 |   | 12         |      |  |   | 1,434      |   |  |   | 15         |  
|General and administrative                                                   |  |                                 | 5,069      |   |                                 |   | 145        |      |  |   | 13,338     |   |  |   | 178        |  
|Franchise and marketing fees                                                 |  |                                 | 3,866      |   |                                 |   | 103        |      |  |   | 9,982      |   |  |   | 129        |  
|Amortization of deferred franchise conversion                                |  |                                 | 274        |   |                                 |   |           |      |  |   | 774        |   |  |   |           |  
|Advertising and promotions                                                   |  |                                 | 2,019      |   |                                 |   | 35         |      |  |   | 4,859      |   |  |   | 53         |  
|Utilities                                                                    |  |                                 | 2,912      |   |                                 |   | 71         |      |  |   | 6,885      |   |  |   | 89         |  
|Repairs and maintenance                                                      |  |                                 | 3,050      |   |                                 |   | 52         |      |  |   | 7,760      |   |  |   | 66         |  
|Management and accounting fees                                               |  |                                 | 1,891      |   |                                 |   | 100        |      |  |   | 4,764      |   |  |   | 133        |  
|Amortization of deferred lease acquisition                                   |  |                                 | 131        |   |                                 |   |           |      |  |   | 382        |   |  |   |           |  
|Insurance                                                                    |  |                                 | 447        |   |                                 |   | 7          |      |  |   | 1,145      |   |  |   | 9          |  
|Corporate expenses                                                           |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Depreciation                                                                 |  |                                 | 7,913      |   |                                 |   | 7,899      |      |  |   | 23,605     |   |  |   | 23,622     |  
|Amortization of franchise costs                                              |  |                                 | 16         |   |                                 |   | 15         |      |  |   | 38         |   |  |   | 40         |  
|Ground rent                                                                  |  |                                 | 129        |   |                                 |   | 126        |      |  |   | 376        |   |  |   | 376        |  
|Interest                                                                     |  |                                 | 4,718      |   |                                 |   | 4,378      |      |  |   | 13,809     |   |  |   | 13,093     |  
|Amortization of loan origination fees                                        |  |                                 | 235        |   |                                 |   | 270        |      |  |   | 718        |   |  |   | 807        |  
|Property taxes and insurance                                                 |  |                                 | 3,090      |   |                                 |   | 3050       |      |  |   | 8,659      |   |  |   | 8,818      |  
|General and administrative (excluding amortization of unearned compensation) |  |                                 | 1,280      |   |                                 |   | 1,256      |      |  |   | 4,110      |   |  |   | 3,871      |  
|Amortization of unearned compensation                                        |  |                                 | 312        |   |                                 |   | 356        |      |  |   | 753        |   |  |   | 1,070      |  
|Other charges                                                                |  |                                 | 396        |   |                                 |   | 557        |      |  |   | 874        |   |  |   | 1,556      |  
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total expenses                                                               |  |                                 | 51,779     |   |                                 |   | 18,728     |      |  |   | 138,434    |   |  |   | 54,310     |  
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before minority interest                                       |  |                                 | 7,718      |   |                                 |   | 1,658      |      |  |   | 16,076     |   |  |   | (2,425     | )
|Minority interest, common                                                    |  |                                 | (113       | ) |                                 |   | 35         |      |  |   | (37        | ) |  |   | 336        |  
|Minority interest, preferred                                                 |  |                                 | (1,068     | ) |                                 |   | (1,069     | )    |  |   | (3,204     | ) |  |   | (3,205     | )
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations                                     |  |                                 | 6,537      |   |                                 |   | 624        |      |  |   | 12,835     |   |  |   | (5,294     | )
|Discontinued operations                                                      |  |                                 | 116        |   |                                 |   | 740        |      |  |   | 1,204      |   |  |   | 1,997      |  
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                                            |  |                                 | 6,653      |   |                                 |   | 1,364      |      |  |   | 14,039     |   |  |   | (3,297     | )
|Series A Preferred Share issuance costs                                      |  |                                 |           |   |                                 |   |           |      |  |   | (4,249     | ) |  |   |           |  
|Preferred share dividends                                                    |  |                                 | (2,900     | ) |                                 |   | (2,496     | )    |  |   | (8,589     | ) |  |   | (7,488     | )
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shareholders                          |  | $                               | 3,753      |   |                                 | $ | (1,132     | )    |  | $ | 1,201      |   |  | $ | (10,785    | )
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Earnings (loss) per share data:                                              |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic  continuing operations                                                |  | $                               | 0.10       |   |                                 | $ | (0.05      | )    |  | $ | 0.00       |   |  | $ | (0.34      | )
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                                        |  | $                               | 0.10       |   |                                 | $ | (0.03      | )    |  | $ | 0.03       |   |  | $ | (0.29      | )
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic  weighted average shares                                              |  |                                 | 37,603,379 |   |                                 |   | 37,387,302 |      |  |   | 37,501,727 |   |  |   | 37,386,938 |  
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted  continuing operations                                              |  | $                               | 0.10       |   |                                 | $ | (0.05      | )    |  | $ | 0.00       |   |  | $ | (0.34      | )
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                                                      |  | $                               | 0.10       |   |                                 | $ | (0.03      | )    |  | $ | 0.03       |   |  | $ | (0.29      | )
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted  weighted average shares                                            |  |                                 | 37,784,575 |   |                                 |   | 37,387,302 |      |  |   | 37,501,727 |   |  |   | 37,386,938 |  
|                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  



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, |         
|                                                                                         |  | 2004                            |          |   | 2003 |  
|Cash flows from operating activities:                                                    |  |                                 |          |   |      |   |         |  
|Net income (loss)                                                                        |  | $                               | 14,039   |   |      | $ | (3,297  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                 |          |   |      |   |         |  
|Depreciation and amortization                                                            |  |                                 | 27,834   |   |      |   | 27,419  |  
|Minority interests                                                                       |  |                                 | 3,241    |   |      |   | 2,869   |  
|Deferred percentage lease revenue                                                        |  |                                 |         |   |      |   | 10,249  |  
|(Gain) loss on sale of hotel                                                             |  |                                 | (786     | ) |      |   | 57      |  
|Changes in operating assets and liabilities:                                             |  |                                 |          |   |      |   |         |  
|Accounts receivable                                                                      |  |                                 | 1,050    |   |      |   | (1,027  | )
|Prepaids and inventory                                                                   |  |                                 | 1,054    |   |      |   | 1,157   |  
|Accounts payable and accrued expenses                                                    |  |                                 | 7,992    |   |      |   | (986    | )
|Payable to Manager                                                                       |  |                                 | (466     | ) |      |   |        |  
|                                                                                         |  |                                 |          |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                                 | 53,958   |   |      |   | 36,441  |  
|                                                                                         |  |                                 |          |   |      |   |         |  
|Cash flows from investing activities:                                                    |  |                                 |          |   |      |   |         |  
|Investment in hotel properties                                                           |  |                                 | (82,055  | ) |      |   | (26,097 | )
|Deposits for acquisition of hotel properties                                             |  |                                 | (154     | ) |      |   |         |  
|Proceeds from sale of hotels                                                             |  |                                 | 8,727    |   |      |   | 1,990   |  
|Net (deposits) withdrawals into restricted cash accounts                                 |  |                                 | (3,066   | ) |      |   | 3,479   |  
|Lease acquisition                                                                        |  |                                 | (1,336   | ) |      |   |        |  
|Payment of franchise fees                                                                |  |                                 | (192     | ) |      |   | (10     | )
|Repayment of advances                                                                    |  |                                 | 175      |   |      |   |        |  
|                                                                                         |  |                                 |          |   |      |   |         |  
|Net cash used by investing activities                                                    |  |                                 | (77,901  | ) |      |   | (20,638 | )
|                                                                                         |  |                                 |          |   |      |   |         |  
|Cash flows from financing activities:                                                    |  |                                 |          |   |      |   |         |  
|Proceeds from debt issuance                                                              |  |                                 | 53,074   |   |      |   |        |  
|Payments on debt                                                                         |  |                                 | (29,618  | ) |      |   | (3,383  | )
|Payments on franchise conversion obligations                                             |  |                                 | (106     | ) |      |   |        |  
|Distributions paid to unit holders                                                       |  |                                 | (3,307   | ) |      |   | (3,520  | )
|Distributions paid to shareholders                                                       |  |                                 | (11,684  | ) |      |   | (17,615 | )
|Redemption of shares or units                                                            |  |                                 | (115,730 | ) |      |   | (1,055  | )
|Net proceeds from issuance of preferred shares                                           |  |                                 | 140,251  |   |      |   |        |  
|Net proceeds from issuance of common shares                                              |  |                                 | 2,830    |   |      |   |        |  
|Loan origination fees and costs paid                                                     |  |                                 | (1,091   | ) |      |   | (245    | )
|                                                                                         |  |                                 |          |   |      |   |         |  
|Net cash provided (used) by financing activities                                         |  |                                 | 34,619   |   |      |   | (25,818 | )
|                                                                                         |  |                                 |          |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                                 | 10,676   |   |      |   | (10,015 | )
|Cash and cash equivalents at beginning of year                                           |  |                                 | 9,586    |   |      |   | 21,367  |  
|                                                                                         |  |                                 |          |   |      |   |         |  
|Cash and cash equivalents at end of year                                                 |  | $                               | 20,262   |   |      | $ | 11,352  |  
|                                                                                         |  |                                 |          |   |      |   |         |  
|Supplemental cash flow information:                                                      |  |                                 |          |   |      |   |         |  
|Interest paid                                                                            |  | $                               | 13,643   |   |      | $ | 13,128  |  



Supplemental disclosure
of non-cash information  See Note 1 for a description of the assumption of

liabilities for non-cash consideration in connection with
the Marriott Takeback Transaction.



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



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##### Table of Contents

Innkeepers USA Trust

Notes to Consolidated Financial Statements



1. Organization and Recent Developments



Innkeepers USA Trust (Innkeepers) is a self-administered real
estate investment trust (REIT), which at September 30, 2004, owned 68 hotels with an aggregate of 8,579 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 hotels for Innkeepers, and a third party manages two of the hotels.



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



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



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



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



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



The Company periodically reviews the carrying value of the franchise
conversion fee asset in deferred and other to determine if circumstances that indicate impairment in the carrying value of the investment exist or that amortization periods should be modified. No circumstances have occurred that would give rise to
an impairment. If impairment is indicated in the future, the carrying value of the franchise conversion fee asset will be reduced to its estimated fair value based upon future cash flows.



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



Acquisitions. On May 19, 2004, the Company acquired an existing 216-room Four Points by Sheraton hotel located in Ft. Walton Beach, FL for $30.0
million, which was funded by borrowing on the Companys unsecured line of credit and available cash. The Company leased the hotel to a TRS and has a contract with Dimension Development Company, Inc. (Dimension) to manage the
property. In consideration for helping the Company acquire the hotel and for managing certain capital projects, including projects mandated by the franchiser, Dimension will also receive a project management fee of $125,000 plus a carried interest
in the ownership of the hotel. Dimensions carried interest entitles it to cash distributions equal to 20% of the net (a) operating cash flow after the Company receives a cumulative return of 7.875% on its invested capital and (b) capital
proceeds after the Company has received its cumulative preferred return and a reimbursement of its invested capital. Ft. Walton Beach was unaffected by the first three hurricanes that struck the state during the quarter; however, there was
substantial damage caused by Hurricane Jeanne. The property has closed 59 rooms indefinitely, while 157 rooms were reopened several weeks after Hurricane Jeanne. The Company currently believes that substantially all costs relating to the renovation
of the Ft. Walton Beach hotel are covered by insurance and estimates that the cost could range up to $2.5 million.



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



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



On September 14, 2004, the Company acquired a site in Valencia, CA, 30 miles north of downtown Los Angeles, for $3.7 million and will develop on the site
a 157-suite Embassy Suites hotel. The Company expects the IH Manager to manage the hotel.



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



Line of Credit.On July 23, 2004, the Company entered into a new $135,000,000 Line of Credit with a majority of its existing line of credit lenders on substantially the same terms as the maturing credit
facility. The new Line of Credit matures on July 23, 2007. The interest rate on the Line of Credit is LIBOR plus 122.5 to 225 basis points, depending on certain financial ratios. The Companys prior line of credit had a maturity date of July
31, 2004.These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC) and should be read in conjunction with the financial statements and notes thereto
of the Company and the IH Lessee included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003 (the 10-K). The notes to the financial statements included herein highlight significant changes to the notes
included in the 10-K and present interim disclosures required by the SEC. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. The results of any
interim period are not necessarily indicative of results for the full year.



2. Allowance for Doubtful Accounts



The
Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts of recorded receivables. That estimate is based on historical collection experience, current economic and market conditions and a review of the current
status of account receivable.



3. Stock Based Compensation



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



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4. Earnings per Share



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



|                                                                                                      |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                      |  | Three Months EndedSeptember 30, |            |   | Nine Months Ended September 30, |  
|                                                                                                      |  | 2004                            |            |   | 2003                            |   |            | 2004 |  |   | 2003       |  
|Numerator:                                                                                            |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations                                                              |  | $                               | 6,537      |   |                                 | $ | 624        |      |  | $ | 12,835     |   |  | $ | (5,294     | )
|Loss on redemption of Series A Preferred Shares                                                       |  |                                 |           |   |                                 |   |           |      |  |   | (4,249     | ) |  |   |           |  
|Preferred share dividends                                                                             |  |                                 | (2,900     | ) |                                 |   | (2,496     | )    |  |   | (8,589     | ) |  |   | (7,488     | )
|                                                                                                      |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) applicable to common shareholders from continuing operations                            |  |                                 | 3,637      |   |                                 |   | (1,872     | )    |  |   | (3         | ) |  |   | (12,782    | )
|Discontinued operations                                                                               |  |                                 | 116        |   |                                 |   | 740        |      |  |   | 1,204      |   |  |   | 1,997      |  
|                                                                                                      |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shareholders                                                   |  | $                               | 3,753      |   |                                 | $ | (1,132     | )    |  | $ | 1,201      |   |  | $ | (10,785    | )
|                                                                                                      |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Denominator:                                                                                          |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Denominator for basic earnings (loss) per share weighted average shares                              |  |                                 | 37,603,379 |   |                                 |   | 37,387,302 |      |  |   | 37,501,727 |   |  |   | 37,386,938 |  
|Effect of dilutive securities:                                                                        |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Share options                                                                                         |  |                                 | 54,580     |   |                                 |   |           |      |  |   |           |   |  |   |           |  
|Restricted shares                                                                                     |  |                                 | 126,616    |   |                                 |   |           |      |  |   |           |   |  |   |           |  
|                                                                                                      |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Denominator for diluted earnings per share  adjusted weighted average shares and assumed conversions |  |                                 | 37,784,575 |   |                                 |   | 37,387,302 |      |  |   | 37,501,727 |   |  |   | 37,386,938 |  
|                                                                                                      |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Earnings (loss) per share data:                                                                       |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic-continuing operations                                                                           |  | $                               | 0.10       |   |                                 | $ | (0.05      | )    |  | $ | 0.00       |   |  | $ | (0.34      | )
|Basic-discontinued operations                                                                         |  |                                 | 0.00       |   |                                 |   | 0.02       |      |  |   | 0.03       |   |  |   | 0.05       |  
|                                                                                                      |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                                                                 |  | $                               | 0.10       |   |                                 | $ | (0.03      | )    |  | $ | 0.03       |   |  | $ | (0.29      | )
|                                                                                                      |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted-continuing operations                                                                         |  | $                               | 0.10       |   |                                 | $ | (0.05      | )    |  | $ | 0.00       |   |  | $ | (0.34      | )
|Diluted-discontinued operations                                                                       |  |                                 | 0.00       |   |                                 |   | 0.02       |      |  |   | 0.03       |   |  |   | 0.05       |  
|                                                                                                      |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                                                                               |  | $                               | 0.10       |   |                                 | $ | (0.03      | )    |  | $ | 0.03       |   |  | $ | (0.29      | )
|                                                                                                      |  |                                 |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  



The conversion of
Common Units into common shares has no effect on earnings (loss) per share. The conversion of the Series A Preferred Shares (which were redeemed in January 2004), the Class B Preferred Units and 634,000 outstanding options are anti-dilutive (i.e.
assuming conversion into common shares would increase earnings per share or lower the loss per share) and, therefore, are not included in the calculation of diluted earnings (loss) per share.



5. Other Charges



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



|                      |  |                                 |     |                                |   |      |  |      |     |  |   |      
|--------------------- |  | ------------------------------- | --- | ------------------------------ | - | ---- |  | ---- | --- |  | - | -----
|                      |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|                      |  | 2004                            |     | 2003                           |   | 2004 |  | 2003
|Severance             |  | $                               | 392 |                                | $ |     |  | $    | 392 |  | $ |     
|Litigation settlement |  |                                 |    |                                |   | 18   |  |      |    |  |   | 60   
|Advisory services     |  |                                 |    |                                |   | 267  |  |      | 32  |  |   | 872  
|TRS Transaction costs |  |                                 | 4   |                                |   | 272  |  |      | 450 |  |   | 624  
|                      |  |                                 |     |                                |   |      |  |      |     |  |   |      
|                      |  | $                               | 396 |                                | $ | 557  |  | $    | 874 |  | $ | 1,556
|                      |  |                                 |     |                                |   |      |  |      |     |  |   |      



The severance cost is
related to the departure of the Companys Chief Accounting Officer. The litigation settlement is related to litigation with the Companys former Chief Operating Officer, and the advisory services (which include legal fees to the special
committee of the Board of Trustees) and TRS Transaction costs are related to the TRS Transaction. Included in TRS Transaction costs for 2004 is a $250,000 reimbursement to the IH Lessee for costs it incurred in assuming management of 17 hotels
formerly managed by Marriott (see Marriott Takeback Transaction under Note 1 above).



6. Discontinued Operations



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



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##### Table of Contents

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



In 2003, the Company recognized an impairment loss of
$3,870,000 related to its Hampton Inn hotel located in Norcross, GA. During the first quarter of 2004, the Company classified this hotel as held for sale. During the third quarter of 2004, the Company classified three additional hotels,
the Residence Inn by Marriott located in Lake Oswego, OR, the Residence Inn by Marriott located in Vancouver, WA and the Holiday Inn Express located in Lexington, MA., as held for sale. On July 20, 2004, the Company sold the Hampton Inn
hotel located in Norcross, GA for net proceeds of approximately $4.7 million and recognized a loss on the sale of $243,000.



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



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



|                               |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                               |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                               |  | 2004                            |        |   | 2003                           |   |       | 2004 |  |   | 2003   |  
|Hotel operating revenue        |  | $                               | 2,585  |   |                                |   |      |      |  | $ | 7,164  |   |  |   |       |  
|Percentage Lease revenue       |  |                                 |       |   |                                | $ | 1,650 |      |  |   | 74     |   |  | $ | 4,610  |  
|Other income                   |  |                                 | 13     |   |                                |   | 14    |      |  |   | 52     |   |  |   | 51     |  
|Hotel operating expenses       |  |                                 | (1,682 | ) |                                |   |      |      |  |   | (4,931 | ) |  |   |       |  
|Depreciation                   |  |                                 | (482   | ) |                                |   | (624  | )    |  |   | (1,564 | ) |  |   | (1,870 | )
|Amortization of franchise fees |  |                                 | (2     | ) |                                |   | (4    | )    |  |   | (9     | ) |  |   | (10    | )
|Property taxes and insurance   |  |                                 | (72    | ) |                                |   | (239  | )    |  |   | (353   | ) |  |   | (724   | )
|General and administrative     |  |                                 | (1     | ) |                                |   |      |      |  |   | (3     | ) |  |   | (3     | )
|Interest                       |  |                                 |       |   |                                |   |      |      |  |   | (2     | ) |  |   |       |  
|Other charges                  |  |                                 |       |   |                                |   |      |      |  |   | (10    | ) |  |   |       |  
|Gain on sale of hotel          |  |                                 | (243   | ) |                                |   | (57   | )    |  |   | 786    |   |  |   | (57    | )
|                               |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  
|                               |  | $                               | 116    |   |                                | $ | 740   |      |  | $ | 1,204  |   |  | $ | 1,997  |  
|                               |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   |        |  



7. Income Taxes



The Companys TRSs are subject to federal and state income taxes. The
TRSs have cumulative future income tax deductions of approximately $2.7 million (related primarily to accumulated net operating losses) at September 30, 2004 and the gross deferred tax asset associated with these future tax deductions was
approximately $1.1 million. The TRSs have recorded a valuation allowance equal to 100% of the gross deferred tax asset due to the uncertainty of realizing the benefit of this asset due to the TRSs limited operating history and the taxable losses
incurred by the TRSs since their inception.



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##### Table of Contents

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



General



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



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



|                              |  |                 |  |                      
|----------------------------- |  | --------------- |  | ---------------------
|Franchise Affiliation         |  | Number ofHotels |  | Number ofRooms/Suites
|Upscale Extended-Stay         |  |                 |  |                      
|Residence Inn by Marriott     |  | 44              |  | 5,276                
|Summerfield Suites by Wyndham |  | 5               |  | 650                  
|Sunrise Suites                |  | 1               |  | 96                   
|Homewood Suites               |  | 1               |  | 146                  
|                              |  |                 |  |                      
|                              |  | 51              |  | 6,168                
|                              |  |                 |  |                      
|Upscale                       |  |                 |  |                      
|Four Points by Sheraton       |  | 1               |  | 216                  
|Courtyard by Marriott         |  | 1               |  | 136                  
|                              |  |                 |  |                      
|                              |  | 2               |  | 352                  
|                              |  |                 |  |                      
|Mid-Priced                    |  |                 |  |                      
|Hampton Inn                   |  | 11              |  | 1,375                
|TownePlace Suites by Marriott |  | 1               |  | 95                   
|Holiday Inn Express           |  | 1               |  | 204                  
|Quality Inn (Note 1)          |  | 1               |  | 203                  
|Clarion Hotel (Note 2)        |  | 1               |  | 182                  
|                              |  |                 |  |                      
|                              |  | 15              |  | 2,059                
|                              |  |                 |  |                      
|                              |  | 68              |  | 8,579                
|                              |  |                 |  |                      

---

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

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



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##### Table of Contents

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



|                                 |  |                                 |        |   |                     |   |        |                                |  |       |                     |  |   |        |   |  |            |        |   |  |      |  
|-------------------------------- |  | ------------------------------- | ------ | - | ------------------- | - | ------ | ------------------------------ |  | ----- | ------------------- |  | - | ------ | - |  | ---------- | ------ | - |  | ---- | -
|                                 |  | Three Months EndedSeptember 30, |        |   | Percentage increase |   |        | Nine Months EndedSeptember 30, |  |       | Percentage increase | 
|                                 |  | 2004                            |        |   | 2003                |   |        | (decrease)                     |  |       | 2004                |  |   | 2003   |   |  | (decrease) |       
|Portfolio (1)                    |  |                                 |        |   |                     |   |        |                                |  |       |                     |  |   |        |   |  |            |        |   |  |      |  
|ADR                              |  | $                               | 97.68  |   |                     | $ | 93.67  |                                |  | 4.3   | %                   |  | $ | 95.64  |   |  | $          | 93.18  |   |  | 2.6  | %
|Occupancy                        |  |                                 | 78.5   | % |                     |   | 76.0   | %                              |  | 3.3   |                     |  |   | 75.2   | % |  |            | 72.0   | % |  | 4.5  |  
|RevPAR                           |  | $                               | 76.71  |   |                     | $ | 71.23  |                                |  | 7.7   |                     |  | $ | 71.92  |   |  | $          | 67.08  |   |  | 7.2  |  
|                                 |  |                                 |        |   |                     |  
|By Segment                       |  |                                 |        |   |                     |   |        |                                |  |       |                     |  |   |        |   |  |            |        |   |  |      |  
|Upscale Extended-Stay Hotels (2) |  |                                 |        |   |                     |   |        |                                |  |       |                     |  |   |        |   |  |            |        |   |  |      |  
|ADR                              |  | $                               | 100.08 |   |                     | $ | 95.45  |                                |  | 4.9   | %                   |  | $ | 97.21  |   |  | $          | 94.83  |   |  | 2.5  | %
|Occupancy                        |  |                                 | 81.7   | % |                     |   | 79.2   | %                              |  | 3.2   |                     |  |   | 78.7   | % |  |            | 74.6   | % |  | 5.4  |  
|RevPAR                           |  | $                               | 81.75  |   |                     | $ | 75.55  |                                |  | 8.2   |                     |  | $ | 76.47  |   |  | $          | 70.78  |   |  | 8.0  |  
|Upscale (3)                      |  |                                 |        |   |                     |   |        |                                |  |       |                     |  |   |        |   |  |            |        |   |  |      |  
|ADR                              |  | $                               | 107.91 |   |                     | $ | 103.91 |                                |  | 3.9   | %                   |  | $ | 108.77 |   |  | $          | 105.39 |   |  | 3.2  | %
|Occupancy                        |  |                                 | 66.1   | % |                     |   | 76.9   | %                              |  | (14.0 | )                   |  |   | 73.1   | % |  |            | 75.7   | % |  | (3.5 | )
|RevPAR                           |  | $                               | 71.35  |   |                     | $ | 79.92  |                                |  | (10.7 | )                   |  | $ | 79.52  |   |  | $          | 79.82  |   |  | (0.4 | )
|Mid-Priced Hotels (4)            |  |                                 |        |   |                     |   |        |                                |  |       |                     |  |   |        |   |  |            |        |   |  |      |  
|ADR                              |  | $                               | 85.22  |   |                     | $ | 83.04  |                                |  | 2.6   | %                   |  | $ | 86.25  |   |  | $          | 83.77  |   |  | 3.0  | %
|Occupancy                        |  |                                 | 69.5   | % |                     |   | 64.4   | %                              |  | 8.0   |                     |  |   | 62.9   | % |  |            | 61.8   | % |  | 1.8  |  
|RevPAR                           |  | $                               | 59.25  |   |                     | $ | 53.45  |                                |  | 10.9  |                     |  | $ | 54.26  |   |  | $          | 51.79  |   |  | 4.8  |  

---

|(1) | 66 hotels, excludes one hotel acquired on June 1, 2003 and one hotel acquired on June 28, 2004
|--- | ----------------------------------------------------------------------------------------------

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

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

|(4) | 13 hotels, excludes one hotel acquired on June 1, 2003 and one hotel acquired on June 28, 2004
|--- | ----------------------------------------------------------------------------------------------



Results of Operations



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



The Companys revenues (as recognized in the accompanying financial
statements) increased $39,111,000 to $59,497,000 in 2004 from $20,386,000 for 2003. The Companys 2004 revenue consists of $59,443,000 of hotel operating revenue, and $54,000 of other revenue, compared with the 2003 revenue consisting of
$18,938,000 of Percentage Lease revenue from the Lessees, $1,381,000 of hotel operating revenue and $67,000 of other revenue. The decrease in Percentage Lease revenue was due to the completion of the TRS Transaction and the Wyndham Lease Termination
Transaction. With the completion of these transactions as of April 1, 2004, the Company does not anticipate recognizing any Percentage Lease revenue in future periods.



The Companys hotel operating expenses (as recognized in the accompanying financial statements) were $33,690,000 in
2004 compared to $821,000 in 2003. With the completion of the TRS transaction and the Wyndham Lease Termination Transaction, the Company recognizes hotel level operating expenses for hotels leased to TRSs.



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



|                                                                    |  |         |        |   |              |   |    |       |  |   |               |   |  |   |        |  
|------------------------------------------------------------------- |  | ------- | ------ | - | ------------ | - | -- | ----- |  | - | ------------- | - |  | - | ------ | -
|                                                                    |  | 2004    |        |   | 2003         |  
|                                                                    |  | TRS (1) |        |   | IH Lessee(2) |   |    | Total |  |   | IH Lessee (3) |  
|Hotel operating revenue                                             |  | $       | 59,443 |   |              | $ | 0  |       |  | $ | 59,443        |   |  | $ | 43,968 |  
|Hotel operating expenses                                            |  |         | 33,690 |   |              |   | 36 |       |  |   | 33,726        |   |  |   | 23,892 |  
|Hotel operating expenses as a percentage of hotel operating revenue |  |         | 56.7   | % |              |   |   | %     |  |   | 56.7          | % |  |   | 54.3   | %

---

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



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##### Table of Contents

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

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



The increase in hotel operating revenue
of $15,477,000 was due primarily to (a) the 7.7% RevPAR increase at the Hotels for 2004 over the 2003 comparable period ($3,386,000), (b) the revenue from the operation of the Sunrise Suites hotel located in Tinton Falls, NJ ($779,000) beginning
March 1, 2004, (c) the revenue from the operation of five Summerfield Suites by Wyndham hotels ($4,178,000) beginning April 1, 2004, (d) the revenue from the Four Points by Sheraton hotel located in Fort Walton Beach, FL ($2,042,000), which was
acquired on May 19, 2004 and (f) the revenue from the Homewood Suites hotel located in San Antonio, TX ($1,315,000), which was acquired on May 26, 2004.



Hotel operating expenses increased 2.4% when expressed as a percentage of hotel operating revenue from 54.3% in 2003 to 56.7% in 2004. This was due
primarily to management fees due to the IH Manager as a result of the TRS Transaction, which increased management and accounting fees 2.4% as a percentage of hotel operating revenue from 0.8% in 2003 to 3.2% in 2004.



Depreciation, amortization of franchise costs, amortization of loan
origination fees, and amortization of unearned compensation (Depreciation and Amortization) was $8,476,00,000 in the aggregate for 2004 compared with $8,540,000 for 2003. The decrease in Depreciation and Amortization was primarily due to
a decrease in the amortization of unearned compensation which was attributable to fewer restricted shares being amortized due to previous restricted shares becoming fully amortized during 2004.



Interest expense for 2004 was $4,718,000 compared with $4,378,000 for 2003.
This increase was due primarily to interest expense on the franchise conversion fee obligations to Marriott ($161,000) and interest expense for the funds drawn on the line of credit ($218,000).



Property taxes and insurance remained relatively constant during the third
quarter of 2004 at $3,090,000 compared with $3,050,000 for 2003.



General and administrative remained relatively constant during the third quarter of 2004 at $1,280,000 compared with $1,256,000 for the comparable period of 2003.



Other charges decreased $161,000 to $396,000 in 2004 compared to $557,000 in 2003. This decrease was primarily due to a
reduction ($553,000) in advisory fees related to the TRS transaction, which was completed during the first quarter of 2004, which was partially offset by an employee severance expense ($392,000) in the third quarter of 2004.



Income from discontinued operations decreased from $740,000 in 2003 to
$116,000 in 2004 due to two of the hotels being sold in January and July 2004, respectively.



Net income applicable to common shareholders for 2004 was $3,753,000, or $0.10 per diluted share, compared with net loss of $1,132,000, or $0.03 per diluted share, for 2003. This change was due primarily to the
factors discussed previously.



Comparison of the Nine Months Ended September
30, 2004 (2004) to the Nine Months Ended September, 2003 (2003)



The Companys revenues (as recognized in the accompanying financial statements) increased $102,625,000 to $154,510,000 in 2004 from $51,885,000 for 2003. The Companys 2004 revenue consists of $149,194,000
of hotel operating revenue, $5,073,000 of Percentage Lease revenue from the Lessees, and $243,000 of other revenue, compared with the 2003 revenue consisting of $49,878,000 of Percentage Lease revenue from the Lessees, $1,739,000 of hotel operating
revenue and $268,000 of other revenue. The decrease in Percentage Lease revenue was due to the completion of the TRS Transaction and the Wyndham Lease Termination Transaction. With the completion of these transactions as of April 1, 2004, the
Company does not anticipate recognizing any Percentage Lease revenue in future periods.



The Companys hotel operating expenses (as recognized in the accompanying financial statements) were $85,492,000 in 2004 compared to $1,057,000 in 2003. With the completion of the TRS transaction and the Wyndham
Lease Termination Transaction, the Company recognizes hotel level operating expenses for hotels leased to TRSs.



The TRS Transaction and the Wyndham Lease Termination Transaction result in financial statement presentations that are substantially different between
periods due to the Companys different operating structures



12



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##### Table of Contents

before and after the transactions. Therefore, the Company presents the following supplemental information, which it
believes may be useful in evaluating the performance of the Company for the transitional period. The following table summarizes the hotel operating revenue and hotel operating expenses for the Company and the IH Lessee for the nine months ended
September 30, 2004 and 2003 (dollar amounts in thousands):



|                                                                    |  |         |         |   |              |   |       |       |  |   |               |   |  |   |         |  
|------------------------------------------------------------------- |  | ------- | ------- | - | ------------ | - | ----- | ----- |  | - | ------------- | - |  | - | ------- | -
|                                                                    |  | 2004    |         |   | 2003         |  
|                                                                    |  | TRS (1) |         |   | IH Lessee(2) |   |       | Total |  |   | IH Lessee (3) |  
|Hotel operating revenue                                             |  | $       | 149,194 |   |              | $ | 6,617 |       |  | $ | 155,811       |   |  | $ | 124,236 |  
|Hotel operating expenses                                            |  |         | 85,492  |   |              |   | 3,911 |       |  |   | 89,403        |   |  |   | 68,132  |  
|Hotel operating expenses as a percentage of hotel operating revenue |  |         | 57.3    | % |              |   | 59.1  | %     |  |   | 57.4          | % |  |   | 54.8    | %

---

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

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

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



The increase in hotel operating revenue
of $31,576, 000 was due primarily to (a) the 7.2% RevPAR increase at the Hotels for 2004 over the 2003 comparable period ($8,945,000), (b) the revenue from the operation of the Quality Inn hotel located in Atlantic City, NJ ($1,013,000) which was
acquired in June 2003, (c) the revenue from the operation of the Sunrise Suites hotel located in Tinton Falls, NJ ($1,721,000) beginning March 1, 2004, (d) the revenue from the operation of 5 Summerfield Suites ($10,146,000) beginning April 1, 2004,
(e) the revenue from the Four Points by Sheraton hotel located in Fort Walton Beach, FL ($3,472,000), which was acquired on May 19, 2004, (f) the revenue from the Homewood Suites located in San Antonio, TX ($1,926,000), which was acquired on May 26,
2004, and (g) an extra day (February 29) of revenue in the 2004 period ($430,000).



Hotel operating expenses increased 2.5% when expressed as a percentage of hotel operating revenue from 54.8% in 2003 to 57.3% in 2004. This was due primarily to management fees due to the IH Manager as a result of the
TRS Transaction, which increased management and accounting fees 2.4% as a percentage of hotel operating revenue from 0.8% in 2003 to 3.2% on 2004.



Depreciation and Amortization was $25,114,000 in the aggregate for 2004 compared with $25,539,000 for 2003. The decrease in Depreciation and Amortization
was primarily due to a decrease in the amortization of unearned compensation, which was attributable to fewer restricted shares being amortized due to previous restricted shares becoming fully amortized during 2004. and a decrease in the
amortization of loan origination fees.



Interest expense for
2004 was $13,809,000 compared with $13,093,000 for 2003. This increase was due primarily to interest expense on the franchise conversion fees on the 17 Marriott Takeback properties ($485,000) and interest expense for the funds drawn on the line of
credit ($298,000).



Property taxes and insurance for 2004 was
$8,659,000 compared with $8,818,000 for 2003. This decrease was due primarily to a 40% reduction on the cost of premiums on the Companys property insurance.



General and administrative expenses increased $239,000, to $4,110,000 in 2004 from $3,871,000 in 2003. This increase was due
primarily to an increase in salaries and benefits of $240,000.



Other charges decreased $682,000 to $874,000 in 2004 compared to $1,556,000 in 2003. This decrease was primarily due to a reduction in advisory fees ($1,074,000) related to the TRS transaction, which was completed during the first quarter
of 2004, which was partially offset by an employee severance expense ($392,000) in the third quarter of 2004.



Income from discontinued operations decreased from $1,997,000 in 2003 to $1,204,000 in 2004 due to two of the hotels being sold in January and July 2004,
respectively.



Net income applicable to common shareholders for
2004 was $1,201,000, or $0.03 per diluted share, compared with net loss of $10,785,000, or $0.29 per diluted share, for 2003. This change was due primarily to the factors discussed previously and the $4,249,000 loss recognized on the redemption of
the Series A Preferred Shares.



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Liquidity and Capital Resources



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



Cash Flow Analysis



Cash and cash equivalents (including restricted cash and restricted cash
equivalents) at September 30, 2004 and 2003 were $30,914,000 and $22,023,000, including $0 and $1,283,000, respectively, which the Company was required, under the Percentage Leases, to make available to the Lessee for the replacement and
refurbishment of furniture and equipment and certain other capital expenditures. Additionally, cash and cash equivalents included $10,652,000 and $7,796,000 at September 30, 2004 and 2003, respectively, that was held in escrow by lenders to pay for
insurance, taxes, debt service, and capital expenditures for certain Hotels.



Net cash provided by operating activities for the nine months ended September 30, 2004 and 2003 was $53,958,000 and $36,441,000, respectively. The increase in net cash provided by operating activities was primarily
the result of a change from a net loss to net income between periods, a decrease in accounts receivable, and an increase in accounts payable and accrued expenses.



Net cash used in investing activities was $77,901,000 for the nine months ended September 30, 2004. This was comprised
primarily of (a) renovations at certain hotels for $20,279,000, (b) the purchase of the San Antonio, TX hotel for $21,000,000, the Fort Walton Beach, FL hotel for $30,000,000 and the Louisville, KY hotel for $6,400,000 (the purchase prices do not
include $676,000 in costs incurred in connection with these acquisitions), and the purchase of land in Valencia for $3,700,000, (c) the acquisition of leases from the IH Lessee for $1,336,000, (d) net deposits of $3,066,000 into certain restricted
cash accounts, and (e) payment of franchise fees for $192,000, which were partially offset by the net proceeds from the sale of the Residence Inn by Marriott located in Eden Prairie, MN and the Hampton Inn in Norcross, GA of $8,727,000.



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



Net cash provided by financing activities was $34,619,000 for the nine months ended September 30, 2004, consisting primarily of the proceeds from the
issuance of the Series C Preferred Shares of $140,251,000, proceeds from the issuance of common shares of $2,830,000 and draws under the Line of Credit of $53,074,000, partially offset by (a) the redemption of the Series A Preferred Shares of
$115,730,000, (b) distributions paid of $14,991,000, (c) loan costs paid of $1,091,000, (d) principal payments on amortizing debt of $29,618,000 (26,095,000 of which was refinanced from the existing line of credit to the new line of credit), and (e)
franchise conversion fee obligation principal payments of $106,000.



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



Distributions/Dividends



The Company has paid regular quarterly distributions on its common shares and Common Units since its inception. The 2004
first and second quarter distribution was $0.03 per common share or unit. The 2004 third quarter distribution was $0.06 per common share or unit. Quarterly preferred distributions of between $0.275 and $0.28875 are payable on each Class B Preferred
Unit (depending on the level of common share dividend paid), and the 2004 first, second and third quarter distributions were $0.275 per Class B Preferred Unit. A dividend of $0.49114 was paid on each Series A Preferred Share when the Series A
Preferred Shares were redeemed on January 20, 2004. In addition, dividends of $0.539, $0.50 and $0.50 were paid on each Series C Preferred Share



14



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##### Table of Contents

for the first, second and third quarter of 2004, respectively. The timing and amount of any future dividends will be
determined by the Companys Board of Trustees in its sole discretion based on factors it deems relevant and no assurance can be given that the current dividend levels will be sustained. Under federal income tax law provisions applicable to
REITs, the Company is required to distribute at least 90% of its taxable income to maintain its REIT status.



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



Financing



In making future investments in hotel properties, the Company may incur additional indebtedness. The Company may also incur indebtedness to meet
distribution requirements imposed on a REIT under the Internal Revenue Code, to fund its renovation and upgrade program or to fund any other liquidity needs to the extent that working capital and cash flow from the Companys operations are
insufficient to fund such needs. The Companys Declaration of Trust limits aggregate indebtedness to 50% of the Companys investment in hotel properties, at cost, after giving effect to the Companys use of proceeds from any
indebtedness. On July 23, 2004, the Company entered into a new $135,000,000 Line of Credit with a majority of its existing line of credit lenders on substantially the same terms as the maturing credit facility. The interest rate on the Line of
Credit is LIBOR plus 122.5 to 225 basis points, depending on certain financial ratios. The Line of Credit matures on July 23, 2007. The actual amount that can be borrowed under the Line of Credit is subject to borrowing base availability and certain
other conditions described in the loan agreement. At September 30, 2004, the Company (i) had $27 million of borrowings outstanding under the Line of Credit and (ii) had available to it approximately $98 million under the Line of Credit (assuming the
proceeds were used for the acquisition of hotel properties). At September 30, 2004, the Company was in compliance with the financial covenants contained all of in its various loan agreements.



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



|                                                    |  |      |             |   |      |   |             |  
|--------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                    |  | 2004 |             |   | 2003 |  
|Investment in hotels, at cost                       |  | $    | 915,503,000 |   |      | $ | 864,840,000 |  
|Debt                                                |  |      | 255,630,000 |   |      |   | 233,347,000 |  
|Percentage of debt to investment in hotels, at cost |  |      | 27.9        | % |      |   | 27.0        | %
|Percentage of fixed rate debt to total debt         |  |      | 85.5        | % |      |   | 95.7        | %
|Weighted average implied interest rates on:         |  |      |             |   |      |   |             |  
|Fixed rate debt                                     |  |      | 7.54        | % |      |   | 7.54        | %
|Variable rate debt                                  |  |      | 3.55        | % |      |   | 0.93        | %
|Total debt                                          |  |      | 6.82        | % |      |   | 7.26        | %
|Number of hotels properties:                        |  |      |             |   |      |   |             |  
|Encumbered                                          |  |      | 39          |   |      |   | 39          |  
|Unencumbered                                        |  |      | 29          |   |      |   | 28          |  



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



Capital Expenditures



Each of the
Companys term loans require that the Company make available for the periodic replacement or refurbishment of furniture, fixtures and equipment and certain other capital expenditures at the Hotels collateralizing those loans, amounts up to 5%
of gross revenues from such Hotels. These funds are generally escrowed or reserved separately. The Company intends to cause the expenditure of amounts in excess of such obligated amounts, if necessary, to comply with the reasonable requirements of
any franchise agreement and otherwise to the extent that the Company deems such expenditures to be in the best interests of the Company. Management believes that the amounts required to be made available by the Company under the Term Loans will



15



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##### Table of Contents

be sufficient to meet most of the routine expenditures for furniture, fixtures and equipment at the Hotels. However, in
the past, the Company has spent substantially more on capital expenditures than the Term Loans require. Management believed these additional expenditures were necessary to meet competitive pressures from other hotels, many of which are newly
constructed. In many cases, the expenditures were also required by franchisors of the Hotels. Management believes that for the foreseeable future the Company will continue to spend substantially more on capital expenditures than it is required to
make available under the loan agreements. The extent to which the actual expenditures exceed the amounts required to be made available will vary from year to year, based on a number of factors. Those factors include, for any given year, market and
franchisor requirements, the point in the normal recurring upgrade cycle the hotels are at in that year, and the revenue of the hotels for that year. In 2004, management expects to spend approximately $25 million on capital expenditures. To the
extent that the Company spends more on capital expenditures than is available from the Companys operations, the Company intends to borrow under the Line of Credit or other facilities.



Related Party Transactions



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



Contractual Obligations and Commercial Commitments



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 10-K except for the acquisition commitments described in Note 1 to the accompanying financial statements.



Seasonality of Hotel Business



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



Inflation



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



Funds From Operations



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



NAREIT defines FFO as net income (loss) (computed in accordance with generally accepted accounting principles (GAAP),
excluding gains (losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The Company calculates FFO in compliance with the NAREIT definition. Therefore, FFO and FFO
per share are presented to assist investors in analyzing the performance of the Company. While we believe our calculation of FFO and FFO per share conforms to the NAREIT definition, our method of calculating FFO and FFO per share may be different
from methods used by other REITs.



16



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##### Table of Contents

Accordingly, the Companys method of calculating FFO and FFO per share may not be comparable to other REITs. Moreover, FFO (i) does not represent cash
flows from operating activities as defined by generally accepted accounting principles, (ii) does not include the cost of capital or capitalized interest, (iii) is not indicative of cash available to fund all cash flow and liquidity needs, including
the Companys ability to make distributions, and (iv) should not be considered as an alternative to net income (as determined in accordance with GAAP) for purposes of evaluating the Companys operating performance.



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



|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | -------------------------------- | ---------- | ---- | ------------------------------- | ----------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | Three Months Ended September 30, |            |      | Nine Months Ended September 30, |            
|                                                    |  | 2004                             |            | 2003 |                                 |             | 2004 |  |   | 2003       |  
|Net income (loss) applicable to common shareholders |  | $                                | 3,753      |      | $                               | (1,132      | )    |  | $ | 1,201      |   |  | $ | (10,785    | )
|Depreciation                                        |  |                                  | 7,913      |      |                                 | 7,899       |      |  |   | 23,605     |   |  |   | 23,622     |  
|Depreciation included in discontinued operations    |  |                                  | 482        |      |                                 | 624         |      |  |   | 1,564      |   |  |   | 1,870      |  
|Minority interest, common                           |  |                                  | 113        |      |                                 | (35         | )    |  |   | 37         |   |  |   | (336       | )
|(Gain) loss on sale of hotel                        |  |                                  | 243        |      |                                 | 57          |      |  |   | (786       | ) |  |   | 57         |  
|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Basic FFO                                           |  | $                                | 12,504     |      | $                               | 7,413       |      |  |   | 25,621     |   |  | $ | 14,428     |  
|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Minority interest, preferred (1)                    |  |                                  | 1,068      |      |                                 |            |      |  |   |           |   |  |   |           |  
|Preferred share dividends (1)                       |  |                                  |           |      |                                 |            |      |  |   |           |   |  |   |           |  
|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Diluted FFO                                         |  | $                                | 13,572     |      | $                               | 7,413       |      |  | $ | 25,621     |   |  | $ | 14,428     |  
|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Denominator for basic earnings per share            |  |                                  | 37,603,379 |      |                                 | 37,387,302  |      |  |   | 37,501,727 |   |  |   | 37,386,938 |  
|Weighted average:                                   |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Common Units                                        |  |                                  | 1,117,056  |      |                                 | 1,167,236   |      |  |   | 1,137,455  |   |  |   | 1,167,489  |  
|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Denominator for basic FFO per share                 |  |                                  | 38,720,435 |      |                                 | 38,554,538  |      |  |   | 38,639,182 |   |  |   | 38,554,427 |  
|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Denominator for diluted earnings per share          |  |                                  | 37,784,575 |      |                                 | 37,387,3002 |      |  |   | 37,501,727 |   |  |   | 37,386,938 |  
|Effect of dilutive securities:                      |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Stock options                                       |  |                                  |           |      |                                 | 1,501       |      |  |   | 20,759     |   |  |   | 593        |  
|Restricted shares                                   |  |                                  |           |      |                                 | 141,639     |      |  |   | 87,336     |   |  |   | 74,723     |  
|Weighted average:                                   |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Common Units                                        |  |                                  | 1,117,056  |      |                                 | 1,167,236   |      |  |   | 1,137,455  |   |  |   | 1,167,489  |  
|Class B Preferred Units (1)                         |  |                                  | 3,884,469  |      |                                 |            |      |  |   |           |   |  |   |           |  
|Series A Preferred Shares (1)                       |  |                                  |           |      |                                 |            |      |  |   |           |   |  |   |           |  
|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Denominator for diluted FFO per share               |  |                                  | 42,786,100 |      |                                 | 38,697,678  |      |  |   | 38,747,277 |   |  |   | 38,629,743 |  
|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Basic FFO per share                                 |  | $                                | 0.32       |      | $                               | 0.19        |      |  | $ | 0.66       |   |  | $ | 0.37       |  
|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  
|Diluted FFO per share                               |  | $                                | 0.32       |      | $                               | 0.19        |      |  | $ | 0.66       |   |  | $ | 0.37       |  
|                                                    |  |                                  |            |      |                                 |             |      |  |   |            |   |  |   |            |  

---

|(1) | Except for the three months ended September 30, 2004, the conversion of the Class B Preferred Units into common shares is anti-dilutive and, therefore, is not included in the
calculation of diluted FFO per share for the other periods presented. For the three months ended September 30, 2004, the common units and class B preferred units have been converted into common shares in the calculation of diluted FFO per share.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The 2004 nine-month results include a loss on
the redemption of the Series A Preferred Shares of $4,249,000, or $0.11 per diluted share. The 2003 nine-month results exclude the recognition of $7,892,000, or $0.20 per diluted share, of Percentage Lease revenue that was deferred in accordance
with SAB 104.



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.



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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) more direct exposure to the operational risks of the hotel business (including decreasing hotel
revenues and increasing hotel expenses) under the companys new 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 that the performance and prospects of businesses and industries that are important hotel demand generators in the companys key
markets decline (e.g., technology, automotive, aerospace), (iv) risk that 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) changes in travel patterns or the prevailing means of commerce (i.e., e-commerce), (viii) the complex tax rules that the company
must satisfy to qualify as a REIT, and (ix) governmental regulation that may increase the companys cost of doing business or otherwise negatively effect its business or its attractiveness as an investment and create risk of liability for
non-compliance (e.g., changes in laws affecting taxes or dividends, compliance with the Americans with Disabilities Act, workers compensation law changes, the Sarbanes-Oxley law, etc.).



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INNKEEPERS USA TRUST

ITEM 3 - QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK



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



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



|                      |  |      |        |   |      |   |       |      |  |   |       |   |  |      |        |   |            |   |       |       |  |   |            |   |  |   |         |   |  |   |        
|--------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ------ | - | ---------- | - | ----- | ----- |  | - | ---------- | - |  | - | ------- | - |  | - | -------
|                      |  | 2004 |        |   | 2005 |   |       | 2006 |  |   | 2007  |   |  | 2008 |        |   | Thereafter |   |       | Total |  |   | Fair Value
|Debt:                 |  |      |        |   |      |   |       |      |  |   |       |   |  |      |        |   |            |   |       |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed Rate            |  | $    | 1,265  |   |      | $ | 5,884 |      |  | $ | 6,399 |   |  | $    | 27,566 |   |            | $ | 6,006 |       |  | $ | 171,436    |   |  | $ | 218,556 |   |  | $ | 218,556
|Average Interest Rate |  |      | 7.57   | % |      |   | 7.59  | %    |  |   | 7.59  | % |  |      | 8.03   | % |            |   | 7.46  | %     |  |   | 7.46       | % |  |   | 7.54    | % |  |   |       
|Variable Rate         |  |      | 27,074 |   |      |   |      |      |  |   |      |   |  |      |       |   |            |   |      |       |  | $ | 10,000     |   |  | $ | 37,074  |   |  | $ | 37,074 
|Average Interest Rate |  |      | 3.55   | % |      |   |      |      |  |   |      |   |  |      |       |   |            |   |      |       |  |   | 1.38       | % |  |   | 2.96    | % |  |   |       



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



At September 30, 2004, the Company had $27,000,000 in outstanding borrowings under its Line of Credit, which matures in July 2007. All of our other debt
matures in 2007 or thereafter.



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INNKEEPERS USA TRUST

ITEM 4  CONTROLS AND PROCEDURES



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



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



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



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INNKEEPERS USA TRUST

PART II - OTHER INFORMATION



ITEM 6  Exhibits Exhibits



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



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SIGNATURE



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



|                 |  |                                                                
|---------------- |  | ---------------------------------------------------------------
|                 |  | INNKEEPERS USA TRUST                                           
|                 | 
|                 |  | /s/ David Bulger                                               
|November 3, 2004 |  | David Bulger                                                   
|                 |  | Executive Vice President, Chief Financial Officer And Treasurer



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EXHIBIT INDEX



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



23