**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTS**

**PURSUANT TO SECTIONS 13 OR 15(d) OFTHE**

**SECURITIES EXCHANGE ACT OF 1934**

 

| **ý**                                                                                                                                                                                                                                                                                                                                                   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                         |                                                                                                     |
| **For the fiscal year ended January 31,  2005.**                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                         |                                                                                                     |
| **o**                                                                                                                                                                                                                                                                                                                                                        | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                         |                                                                                                     |
| **For the transition period from                              to                          .** |
|                                                                                                                                                                                                                                                                                                                                                         |                                                                                                     |
| **Commission File No. 1-7062**                                                                                                                                                                                                                                                                                                                          |

 

| **InnSuites  Hospitality Trust**                                                        |
|-----------------------------------------------------------------------------------------|
| (Exact Name  of Registrant as Specified in Its Charter)                                 |
|                                                                                    |   |   |
| **Ohio**                                                                                | ** ** | **34-6647590** |
| (State or  Other Jurisdiction of Incorporation or Organization)                         |   | (I.R.S.  Employer Identification Number) |
|                                                                                    |   |   |
| **InnSuites Hotels Centre, 1615 E. Northern Avenue,  Suite 102, Phoenix, Arizona** | ** ** | **85020** |
| (Address of  Principal Executive Offices)                                               |   | (ZIP Code) |
|                                                                                    |   |   |
| Registrant’s  Telephone Number, including area code: **(602)  944-1500**           |
|                                                                                    |

Securities registered pursuant to Section 12(b) of the Act:

 

| **Title of  Each Class**                      | ** ** | **Name of  Exchange on Which Registered** |
|----------------------------------------------------|------------|-------------------------------------------|
| Shares of  Beneficial Interest,  without par value |       | American  Stock Exchange                  |

 

Securities registered pursuant to Section 12(g) of theAct:  None

 

Indicate by check mark whether the Registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes ýNo o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. ý

 

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

 

Aggregate market value of voting stock held by non-affiliates of theRegistrant as of July 31, 2004:  $2,248,349

 

Number of shares of voting stock outstanding as of April 22,2005:  8,906,429.

 

 

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PART I

 

Item 1.             BUSINESS

 

INTRODUCTION TOOUR BUSINESS

 

InnSuites Hospitality Trust (the “Trust”) is headquartered in Phoenix,Arizona and is an unincorporated Ohio real estate investment trust. The Trust,with its affiliates RRF Limited Partnership, a Delaware limited partnership(the “Partnership”), and InnSuites Hotels, Inc., an Arizona corporation (“InnSuitesHotels”), owns and operates six hotels, provides management services for tenhotels, and provides trademark license services for 11 hotels.  On January 31, 2005, the Trust owned a64.75% sole general partner interest in the Partnership, which owned fiveInnSuites® hotels located in Arizona, New Mexico and southern California.  The Trust also owned one InnSuites® hotellocated in Yuma, Arizona (all six InnSuites® hotels are hereinafter referred toas the “Hotels”).  InnSuites Hotels, awholly owned subsidiary of the Trust, provides management services for theHotels, three hotels owned by affiliates of James F. Wirth, the Trust’sChairman, President and Chief Executive Officer, and one unrelated hotelproperty.  InnSuites Hotels also providestrademark and licensing services to the Hotels, three hotels owned byaffiliates of Mr. Wirth and two unrelated hotel properties.  The Trust has 488 employees.

 

The Hotels have an aggregate of 947 hotel suites and operate as moderateand full-service hotels, which apply a value studio and two-room suiteoperating philosophy formulated in 1980 by Mr. Wirth.  The Trust owns and operates hotels as studioand two-room suite hotels that offer services such as free hot breakfast buffetsand complementary afternoon social hours plus amenities, such as microwaveovens, refrigerators, free high speed internet access and coffee makers in eachstudio or two-room suite.

 

The Trust believes that the greatest opportunities for revenue growth andprofitability will arise from the skillful management and repositioning of theTrust’s Hotels and acquired or managed hotel properties.  The Trust’s primary business objectives areto maximize returns to its shareholders through increases in asset value andcash flow available for distribution and to increase long-term total returns toshareholders.  The Trust seeks to achievethese objectives through participation in increased revenues from the Hotels asa result of intensive management and marketing and selective acquisitions andexpansion of the InnSuites® hotels in the southwestern region of the UnitedStates.  At this time, the Trust does notplan to acquire any additional hotels.

 

The Trust has a single class of Shares of Beneficial Interest, withoutpar value, that are traded on the American Stock Exchange under the symbol “IHT”.  The Partnership has two outstanding classesof limited partnership interests, Class A and Class B, which areidentical in all respects.  Each Class Alimited partnership unit is convertible, at the option of the Class Aholder, into one newly-issued Share of Beneficial Interest of the Trust andeach Class B limited partnership unit is convertible, upon approval of theBoard of Trustees of the Trust, into one newly-issued Share of BeneficialInterest of the Trust.  The PartnershipAgreement of the Partnership subjects both general and limited partner units tocertain restrictions on transfer.

 

Until February 1, 2004, the Trust elected to be taxed as a realestate investment trust (“REIT”), as that term is defined and used in theInternal Revenue Code of 1986, and the regulations thereunder (all as amended,the “Code”).  Effective February 1,2004, the Trust relinquished its REIT tax status and will be taxed as a Ccorporation under the Code.

 

ACQUISITION OFINNSUITES HOTELS BY THE TRUST

 

Effective February 1, 2001, the Trust acquired all of the issuedand outstanding common and preferred equity stock of InnSuites Hotels for$11,531 in cash and the assumption of approximately $1.6 million of netliabilities.  Prior to the acquisition,InnSuites Hotels was owned 23% by Marc E. Berg, Executive Vice President,Secretary, Treasurer and Trustee of the Trust, 9.8% by InnSuites InnternationalHotels, Inc., a wholly owned affiliate of Mr. Wirth and his spouse,and 67.2% by unrelated parties.

 

The acquisition of InnSuites Hotels by the Trust resulted in thefollowing benefits: (1) a more direct relationship between the Hotels andthe Trust, (2) the inclusion of InnSuites Hotels’ revenues in excess ofrequired rent payments in the Trust’s consolidated financial reports, (3) theelimination of potential conflicts of interest and (4) the reduction ofcertain administrative costs relative to the operation of the Hotels.

 

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MANAGEMENTAND LICENSING CONTRACTS

 

As a REIT, through January 31, 2004, the Trust was prohibited fromoperating its properties other than through an independent management companyor a taxable REIT subsidiary.  Followingthe acquisition of InnSuites Hotels by the Trust effective February 1,2001, InnSuites Hotels operated and managed the Hotels with the assistance of Suite HospitalityManagement, Inc. (the “Management Company”), an entity in which Mr. Wirth,until July 1, 2003, held a 9.8% ownership interest, pursuant to managementagreements that provided for an annual management fee of 2.5% of grossrevenues.  On December 31, 2003, theTrust agreed to extend the current management agreements through January 31,2008 in exchange for the Management Company forgiving $183,248 of accrued butunpaid fees.  The Trust incurredmanagement fee expenses related to these contracts of $177,742, $440,530 and$369,896 for the twelve months ended January 31, 2005, 2004 and 2003,respectively.  Due to the adoption ofFinancial Accounting Standards Board Interpretation No. 46R (“FIN 46R”),which resulted in the consolidation of the Management Company with the Trust,these expenses have been eliminated in the consolidation for the twelve monthsended January 31, 2005.

 

Prior to June 8, 2004, InnSuites Hotels paid InnSuites LicensingCorp. (the “Licensing Corp.”), an entity owned by Mr. Wirth and his spouseuntil February 2, 2004, an annual licensing fee of 2.0% of gross roomrevenues (1.0% for those hotel properties which also carried a third-partyfranchise, such as Best Western® or Holiday Inn®) for trademark and licensingservices relating to the use of the InnSuites® name and marks.  On December 31, 2003, the Trust agreedto extend the trademark and licensing services agreements for the next twofiscal years through January 31, 2007 in exchange for the Licensing Corp.forgiving $347,473 of accrued but unpaid fees. The Management Company purchased the Licensing Corp. from Mr. and Mrs. Wirthon February 2, 2004.  The Trustincurred licensing fees of $94,703, $301,007 and $445,942 for the twelve monthsended January 31, 2005, 2004 and 2003, respectively.  Due to the adoption of FIN 46R, whichresulted in the consolidation of the Licensing Corp. with the Trust, theseexpenses have been eliminated in the consolidation for the twelve months ended January 31,2005.

 

In connection with the Trust’s relinquishment of itsREIT status, the Trust no longer required the services of a separate managementcompany. The Trust determined it was in its best interest to buy out themanagement contracts and licensing agreements and directly manage the Hotelsthrough the Trust’s wholly owned subsidiary, InnSuites Hotels. The Trustbelieves the management process of the Hotels will be simplified and that itwill benefit from increased revenues by offering additional management andlicensing services.  As a result of thisbuy out, the Management Company (which was the Trust’s variable interest entityunder FIN 46R) was no longer consolidated in the second quarter of fiscal year2005. 

 

Effective June 8, 2004, InnSuites Hotelsacquired the management agreements under which the Management Company providedmanagement services to the Hotels. In consideration of the acquisition, thestockholder of the Management Company received $20,000 and 90,000 Shares ofBeneficial Interest of the Trust, reflecting a transaction value ofapproximately $159,500 in the aggregate. Following the acquisition, InnSuitesHotels now self-manages the Hotels. InnSuites Hotels also manages one unrelated hotel in San Diego,California and three hotels owned by affiliates of Mr. Wirth. 

 

Under the management agreements, InnSuites Hotels provides thepersonnel at the hotels, the expenses of which are reimbursed at cost, andmanages the hotels’ daily operations. All such expenses and reimbursements between InnSuites Hotels and thePartnership have been eliminated in consolidation.  InnSuites Hotels received 2% of room revenuefrom the Hotels owned by the Partnership and the Trust in exchange formanagement services during fiscal year 2005. Effective February 1, 2005, InnSuites Hotels receives 2.5% of totalrevenues from these Hotels.  Theseagreements expire on January 31, 2008. InnSuites Hotels received 1% (or more depending on results) of roomrevenue from the three hotels owned by affiliates of Mr. Wirth in exchangefor management services during fiscal year 2005.  These agreements require these three hotelsto pay 2% of room revenue, unless these hotels fail to reach 80% of theirbudgeted profit, at which point the fees are reduced to 1% of roomrevenue.  These agreements expire onFebruary 1, 2007  and may be cancelled by either party with 90-dayswritten notice, or 30-days written notice in the event the propertychanges ownership.  InnSuites Hotelsreceived 5% of total revenue for managing the unrelated hotel in San Diego, California during fiscal year 2005.  This agreement expires on March 31,2007, and may be cancelled by either party with 90-days written notice or30-days written notice in the event the property changes ownership.  

 

Effective June 8, 2004, InnSuites Hotels acquired the licenseagreements under which Licensing Corp. provided licensing services to theHotels, and the related registered and unregistered InnSuites trademarks andtradenames.  In consideration of theacquisitions, the Management Company (as the sole stockholder of LicensingCorp.) received $60,000 and 10,000 Shares of Beneficial Interest of the Trustand InnSuites Hotels satisfied Licensing Corp.’s line of credit in the amountof $459,000, reflecting a transaction value of approximately $534,500 in theaggregate.  The Shares of BeneficialInterest issued by the Trust for both the management contracts and thelicensing agreements were valued at $155,000, which amount was recorded as anexpense.  Following the acquisition,

 

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the Trust provides licensing services to the Hotels and two unrelatedhotels in San Diego and Buena Park, California and three hotels owned byaffiliates of Mr. Wirth.  

 

InnSuites hotels received 1.0% (2.0% for the hotel which does not carrya third-party franchise) of room revenue from the Hotels owned by thePartnership and the Trust in exchange for use of the “InnSuites” trademarkduring fiscal year 2005.  The revenue andexpenses related to these contracts have been eliminated in consolidation.  Effective February 1, 2005, InnSuitesHotels receives 1.25% (2.5% for the hotel which does not carry a third-partyfranchise) of total revenues from these Hotels. These agreements expire on January 31, 2008.  InnSuites Hotels received 1% (or moredepending on results) of room revenue from the three hotels owned by affiliatesof Mr. Wirth in exchange for use of the “InnSuites” trademark duringfiscal year 2005.  These agreementsrequire that these hotels pay 2% of room revenue, unless these hotels fail toreach 80% of their budgeted profit, at which point the fees are reduced to 1%of room revenue.  These agreements have noexpiration date and may be cancelled by either party with 12-monthswritten notice, or 90-days written notice in the event the propertychanges ownership.  InnSuites Hotelsreceived 2% of total revenue from the unrelated hotel in San Diego, Californiain exchange for licensing services during fiscal year 2005.  This agreement may be cancelled by eitherparty with 90-days written notice.  InnSuites Hotels received 0.5% of room revenue from the unrelated hotelin Buena Park, California in exchange for licensing services during fiscal year2005.  This agreement has no expirationdate and may be cancelled by either party with 30-days writtennotice.  

 

FRANCHISE AGREEMENTS

 

InnSuites Hotels has entered into franchise arrangements with certainthird parties with respect to five of the Hotels, with four Best Western hotelsand one Holiday Inn hotel as of January 31, 2005.  In exchange for use of the Best Western name,trademark and reservation system, the participating Hotels pay fees to BestWestern International based on reservations received through the use of theBest Western reservation system and the number of available suites at theparticipating Hotels.  The agreementswith Best Western have no specific expiration terms and are cancelable at the optionof either party.  Best Western requiresthat the participating Hotels meet certain requirements for room quality, andsuch Hotels are subject to removal from its reservation system if theserequirements are not met.  In exchangefor use of the Holiday Inn name, trademark and reservation system, theparticipating Hotels pay fees based on gross room revenue.  Subsequent to January 31, 2005, theTrust ended its franchise agreement with Holiday Inn and entered into afranchise agreement with Best Western International for the Trust’s Ontario,California property.  The Hotels withthird-party franchise agreements received significant reservations through theBest Western and Holiday Inn reservation systems.  The Trust incurred $553,833, $628,521 and$656,375 in total fees related to these agreements for the twelve months ended January 31,2005, 2004 and 2003, respectively.

 

SALE OF HOTELPROPERTIES

 

On March 21, 2003, the Trust sold itsScottsdale, Arizona property to Eldorado Resort, L.L.C. (“Eldorado”), anaffiliate of Mr. Wirth, forits appraised and carrying value of $3.1 million.  During fiscal year 2003, the Trust recorded aloss on impairment of $590,000 on the property. The property’s decrease in value was due to changes in theeconomic condition, and decreased prospects for future development, in itsimmediate area.  Eldorado paid for the hotel by assuming $1.1 million of the Trust’snotes payable to Rare EarthFinancial, L.L.C. (“Rare Earth Financial”), an affiliate of Mr. Wirth,assuming $500,000 of the Partnership’s notes payable to Capital ResourceLenders-I, L.L.C., an affiliate of Mr. Wirth, and paying the Trust’s termloan of $1,500,000 to the lender in full.

 

On August 21, 2003, the Trust sold itsFlagstaff, Arizona property to Flagstaff Grand Canyon Resort, LLC (“FlagstaffResort”), an affiliate of Mr. Wirth, for a cash payment equal to itsappraised value of $2,775,000.  The Trustused the proceeds to fully satisfy its $1.5 million bank line of credit and toreduce its notes payable to Rare Earth Financial by $1,275,000.  As of August 21, 2003, the Trust’s bankline of credit and bank term loan were fully satisfied.  The purchase price exceeded the carryingvalue of the property by $377,330, which was recorded as a capital contributionto the Partnership, and which resulted in a net increase in shareholder equityin the amount of $192,080, net of minority interest.

 

On October 16, 2003, the Trust sold its Buena Park, Californiaproperty to CVTI, LLC, an unrelated third party (“CVTI”), for $6.5million.  The purchase price wassatisfied with $6.3 million in cash and a $200,000 promissory note issued byCVTI to the Trust.  The Trustsubsequently assigned the $200,000 promissory note to Rare Earth Financial tosatisfy $200,000 of a certain note payable held by Rare Earth Financial.  The Trust used the cash proceeds to fullysatisfy the bank mortgage note on the property in the amount of $3,082,574, toreduce certain notes payable to Mr. Wirth and his affiliates andSteven S. Robson, a Trustee of the Trust, in the aggregate amount of $1.5million and to reduce trade accounts payable. In connection with this sale, the Trust recorded a loss of $29,000.  During the second quarter of fiscal year2004, the Trust recorded a loss on impairment of $328,976 related to the BuenaPark property.  The loss was recorded toreduce the

 

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asset’s carryingvalue to the sales price.  The decreasein value was due to a slowdown in leisure travel to the southern Californiaarea caused by global terror concerns and an overall sluggish economicenvironment.

 

On March 25,2004, the Trust sold its Tempe, Arizona hotel to Tempe/Phoenix Airport ResortLLC (“Tempe Resort”), an affiliate of Mr. Wirth, for its appraised valueof $6.8 million, which was also its carrying value.  The purchase price was satisfied by TempeResort assuming the Trust’s mortgage note payable on the property of $1.7million and assuming notes payable to Mr. Wirth and his affiliates of $5.1million.

 

On April 1,2004, the Trust sold its San Diego, California hotel to an unrelated thirdparty for $9.7 million, which the Trust received in cash.  The Trust used $4.8 million of the proceedsto satisfy its mortgage note payable on the property, $1.4 million to satisfynotes and interest payable to related parties, and retained the remainingproceeds to reduce trade payables and to fund future operations and capitalimprovements.

 

HOTELPROPERTY HELD FOR SALE

 

On January 4, 2005, the Board ofTrustees approved the sale of the Phoenix, Arizona hotel to Phoenix NorthernResort LLC, an affiliate of Mr. Wirth, for its appraised value of $5.1million.  The property’s carrying valueis $3.1 million. On January 15, 2005, Rare Earth Financial, anotheraffiliate of Mr. Wirth, converted its $700,000 loan receivable into anon-interest bearing deposit for the purchase of the hotel.  The Trust expects to complete the sale duringthe second quarter of fiscal year 2006. Any gain or loss recognized on the transaction will be recorded as acontribution or distribution because the purchaser is a related party.  The Trust does not expect to incur a loss onthe sale of the property.

 

COMPETITION IN THEHOTEL INDUSTRY

 

The hotel industry is highly competitive and competition has intensifiedover the past three years due to the sluggish economy and a general slow downin the travel and hospitality industries primarily due to the negative impactof the threat of terrorism and the war with Iraq.  Each of the Hotels experiences competition primarilyfrom other mid-market hotels located in its immediate vicinity, but alsocompetes with hotel properties located in other geographic markets.  While none of the Hotels’ competitorsdominate any of the Trust’s geographic markets, some of those competitors havegreater marketing and financial resources than the Trust.

 

A number of additional hotel property developments have been announcedor have recently been completed by competitors in a number of the Hotels’markets, and additional hotel property developments may be built in thefuture.  Such hotel developments havehad, and could continue to have, an adverse effect on the revenue of the Hotelsin their respective markets.

 

The Trust has chosen to focus its hotel investments in the southwestregion of the United States.  The Trusthas a concentration of assets in the metropolitan Phoenix and Tucson, Arizonamarkets.  In the Phoenix and Tucson,Arizona and the Albuquerque, New Mexico markets, the supply of hotel rooms hasbeen increasing faster than the rate of demand. Supply rates also generally increased faster than demand rates in theYuma, Arizona market.  The southernCalifornia market continues to support balanced supply and demand rates.

 

The Trust may also compete for investment opportunities with otherentities that have greater financial resources. These entities also may generally accept more risk than the Trust canprudently manage.  Competition maygenerally reduce the number of suitable future investment opportunitiesavailable to the Trust and increase the bargaining power of owners seeking tosell their properties.

 

SEASONALITY OF THEHOTEL BUSINESS

 

The Hotels’ operations historically have been seasonal.  The four southern Arizona hotels experiencetheir highest occupancy in the first fiscal quarter and, to a lesser extent,the fourth fiscal quarter.  The secondfiscal quarter tends to be the lowest occupancy period at those four southernArizona hotels.  This seasonality patterncan be expected to cause fluctuations in the Trust’s quarterly revenues.  The two hotels located in California and NewMexico historically experience their most profitable periods during the secondand third fiscal quarters (the summer season), providing some balance to thegeneral seasonality of the hotel business. To the extent that cash flows from operations is insufficient during anyquarter, due to temporary or seasonal fluctuations in lease revenue, the Trustmay utilize other cash on hand or borrowings to make distributions to itsshareholders.  No assurance can be giventhat the Trust will make distributions in the future.

 

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FINANCIALINFORMATION

 

See “Item 6 - Selected Financial Data” herein for informationregarding the Trust’s revenues, net income and losses, dividends, total assets,notes and advances payable to banks and others and notes and advances payableto related parties.

 

OTHER AVAILABLEINFORMATION

 

We also make available, free of charge, on our Internet website atwww.innsuitestrust.com, our annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K andamendments to reports filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon asreasonably practicable after we file such material with, or furnish it to, theSecurities and Exchange Commission (the “Commission”).  The public may read and copy any materialsthat we file with the Commission at the Commission’s Public Reference Room at450 Fifth Street, N.W., Washington, D.C. 20549 and may obtain information onthe Public Reference Room by calling the Commission at 1-800-SEC-0330.  The Commission maintains an Internet sitethat contains reports, proxy and information statements, and other informationregarding issuers that file electronically with the Commission(http://www.sec.gov).

 

Item 2.             PROPERTIES

 

The Trust maintains its administrative offices at the InnSuites HotelsCentre in Phoenix, Arizona.  On January 31,2005, the Partnership owned five Hotels and the Trust owned one Hotel.  All of the Hotels are operated as InnSuites®Hotels, while four are also marketed as Best Western® Hotels and one is alsomarketed as a Holiday Inn® Hotel and Suites. All of the Hotels operate in the following locations:

 
| **PROPERTY**                                                          | ** ** | **NUMBER  OF  SUITES** | ** ** | **YEAR OF  CONSTRUCTION/  ADDITION** | ** ** | **MOST RECENT  RENOVATION (1)** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
|                                                                  |       |                   |       |                                 |       |                            |       |
| InnSuites  Hotel and Suites Airport Albuquerque Best Western          |       | 101                    |       | 1975/1985                            |       | 2004                            |       |
|                                                                  |       |                   |       |                                 |       |                            |       |
| InnSuites  Hotel and Suites Phoenix Best Western                      |       | 104                    |       | 1980                                 |       | 2004                            |       |
|                                                                  |       |                   |       |                                 |       |                            |       |
| InnSuites  Hotel and Suites Tucson, Catalina Foothills Best Western   |       | 159                    |       | 1981/1983                            |       | 2003                            |       |
|                                                                  |       |                   |       |                                 |       |                            |       |
| InnSuites  Hotels and Suites Yuma                                     |       | 166                    |       | 1982/1984                            |       | 2003                            |       |
|                                                                  |       |                   |       |                                 |       |                            |       |
| Holiday Inn  Airport Hotel and Suites/Ontario (an InnSuites Hotel)(2) |       | 150                    |       | 1990                                 |       | 2003                            |       |
|                                                                  |       |                   |       |                                 |       |                            |       |
| InnSuites  Hotels and Suites Tucson St. Mary’s                   |       | 267                    |       | 1960/1971                            |       | 2003                            |       |
|                                                                  |       |                   |       |                                 |       |                            |       |
| Total suites                                                          |       | 947                    |       |                                 |       |                            |       |

 

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(1) The Trust defines a renovation as the remodeling of more than10% of a property’s available suites.

 

(2) Subsequent to January 31, 2005, the Trust ended itsfranchise agreement with Holiday Inn and entered into a franchise agreementwith Best Western International for this property.

 

See “Item 7 – Management’s Discussion andAnalysis of Financial Condition and Results of Operations – General” herein fora discussion of occupancy rates at the Hotels.

 

See Note 5 to the Trust’s Consolidated FinancialStatements – “Mortgage Notes Payable” herein for a discussion of mortgagesencumbering the Hotels.

 

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Item 3.             LEGALPROCEEDINGS

 

The Trust is not a party to, nor are any of its properties subject to,any material litigation or environmental regulatory proceedings.

 

Item 4.             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Trust held its 2004 Annual Meeting of Shareholders on December 10,2004.  The nominees listed below wereelected as Trustees of the Trust to hold office for a term expiring at the 2007Annual Meeting of Shareholders and until their successors have been dulyelected and qualified.  Tabulated belowis the number of Shares of Beneficial Interest cast for and withheld withrespect to the election of the Trustee nominees:

 
| **Name**        | ** ** | **For**   | ** ** | **Withhold** | ** ** |
|-----------------|------------|-----------|------------|--------------|------------|
| James F.  Wirth |       | 2,117,824 |       | 13,280       |       |
| Peter A.  Thoma |       | 2,117,859 |       | 13,245       |       |

 

In addition to the election of Trustees, the security holders voted onthe following matters at the Annual Meeting:

 

•                  The issuance of6,577,732 Shares of Beneficial Interest in exchange for the cancellation ofindebtedness owed by the Trust to the Partnership.  

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 1,419,501 |       | 22,955      |       | 7,647       |       |

 

•                  The issuance of4,969,712 Shares of Beneficial Interest in consideration of the Trust’sacquisition of all general partner interests of Yuma Hospitality Properties,Ltd. which were held by the Partnership.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 1,417,001 |       | 24,809      |       | 7,524       |       |

 

•                  The issuance of457,645 Shares of Beneficial Interest in exchange for the cancellation ofindebtedness owed by the Trust to certain affiliates of Mr. Wirth.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 1,411,238 |       | 31,341      |       | 7,524       |       |

 

•                  The issuance of1,000,000 Shares of Beneficial Interest upon the conversion of 1,000,000 Class Blimited partnership units in the Partnership into Shares of Beneficial Interestby Mr. Wirth and certain of his affiliates.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 1,410,991 |       | 31,312      |       | 7,800       |       |

 

PART II

 

Item 5.             MARKETFOR THE TRUST’S SHARES AND RELATED SECURITY HOLDER MATTERS

 

The Trust’s Shares of Beneficial Interest are traded on the AmericanStock Exchange under the symbol “IHT.” On April 22, 2005, the Trust had 8,906,429 shares outstanding and525 holders of record.

 

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The following table sets forth, for the periods indicated, the high andlow sales prices of the Trust’s Shares of Beneficial Interest, as quoted by theAmerican Stock Exchange, as well as dividends declared thereon:

 
| **Fiscal Year 2005** | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|----------------------|------------|----------|------------|---------|------------|---------------|------------|
| First  Quarter       |       | 2.25     |       | 1.60    |       | —        |       |
| Second  Quarter      |       | 2.25     |       | 1.48    |       | —        |       |
| Third  Quarter       |       | 1.63     |       | 1.49    |       | —        |       |
| Fourth  Quarter      |       | 1.95     |       | 1.12    |       | .01           |       |

 
| **Fiscal Year 2004** | ** ** | **High** | ** ** | **Low** | ** ** | **Dividends** | ** ** |
|----------------------|------------|----------|------------|---------|------------|---------------|------------|
| First  Quarter       |       | 1.80     |       | 1.30    |       | —        |       |
| Second  Quarter      |       | 1.40     |       | 1.20    |       | —        |       |
| Third  Quarter       |       | 1.70     |       | 1.15    |       | —        |       |
| Fourth  Quarter      |       | 2.25     |       | 1.05    |       | .02           |       |

 

The Trust intends to maintain a conservative dividend policy tofacilitate the reduction of debt and internal growth.  In fiscal years 2005 and 2004, the Trust paiddividends of $0.01 and $0.02 per share, respectively, in the fourth quarter ofeach year. 

 

OnJanuary 2, 2001, the Board of Trustees approved a share repurchase programunder Rule 10b–18 of the Securities Exchange Act of 1934 for the purchase of upto 250,000 limited partnership units in the Partnership and/or Shares ofBeneficial Interest in open market or privately negotiated transactions.Additionally, on September 10, 2002, the Board of Trustees approved thepurchase of up to 350,000 additional limited partnership units in thePartnership and/or Shares of Beneficial Interest in open market or privatelynegotiated transactions. Acquired Shares of Beneficial Interest will be held intreasury and will be available for future acquisitions and financings and/orfor awards granted under the InnSuites Hospitality Trust 1997 Stock Incentiveand Option Plan.  During the three months ended January 31, 2005, theTrust acquired 32,300 Shares of Beneficial Interest in open market transactionsat an average price of $1.56 per share.  The Trust intends to continuerepurchasing Shares of Beneficial Interest in compliance with applicable legaland American Stock Exchange requirements.  The Trust remains authorized torepurchase an additional 47,765 limited partnership units and/or Shares ofBeneficial Interest pursuant to the share repurchase program, which has noexpiration date.

 
| ** **                               | ** ** | **Issuer Purchases of Equity Securities** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| **Period**                               | ** ** | **Total Number  of Shares  Purchased**    | ** ** | **Average Price  Paid per  Share** | ** ** | **Total Number of Shares  Purchased as Part of  Publicly Announced  Plans** | ** ** | **Maximum Number of  Shares that May Be Yet  Purchased Under the  Plans** | ** ** |
| November 1 – November 30, 2004 |       | 200                                       |       | $ | 1.50 |   | 200 |   | 79,865 |   |
| December 1 – December 31, 2004      |       | 22,900                                    |       | $ | 1.61 |   | 22,900 |   | 56,965 |   |
| January 1 – January 31, 2005        |       | 9,200                                     |       | $ | 1.45 |   | 9,200 |   | 47,765 |   |

 

See Part III, Item 12 for a description of our equity compensationplans.

 

Item 6.             SELECTEDFINANCIAL DATA

 

The following selected financial data of the Trust as of and for thefive fiscal years ended January 31, 2005, has been derived from theaudited consolidated financial statements of the Trust.  The consolidated financial statements of theTrust as of and for the fiscal year ended January 31, 2005 were audited byEpstein, Weber & Conover, P.L.C., independent public accountants.  The consolidated financial statements of theTrust as of and for the two fiscal years ended January 31, 2004  and 2003 were audited by McGladrey &Pullen, LLP, independent public accountants. The consolidated financial statements of the Trust as of and for the twofiscal years ended January 31, 2002 and 2001 were audited by KPMG, LLP, independent public accountants.

 
| ** **                                        | ** ** | **Year Ended January 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                              |       |                            |       |   |   |   |   |   |   |   |   |
| Total  revenue                                    |       | $                               | 22,875,187 |   | $ | 24,211,328 |   | $ | 26,940,473 |   | $ | 27,656,009 |   | $ | 9,727,206 |   |
|                                              |       |                            |       |   |   |   |   |   |   |   |   |
| Net income  (loss) from continuing operations     |       | $                               | 240,442    |   | $ | (2,594,317 | ) | $ | (3,445,948 | ) | $ | (3,539,402 | ) | $ | (2,594,754 | ) |
|                                              |       |                            |       |   |   |   |   |   |   |   |   |
| Income  (loss) per share – basic and diluted |       | $                               | 0.10       |   | $ | (1.27 | ) | $ | (1.67 | ) | $ | (1.66 | ) | $ | (1.12 | ) |
|                                              |       |                            |       |   |   |   |   |   |   |   |   |
| Cash  dividends paid and declared per share       |       | $                               | 0.01       |   | $ | 0.02 |   | $ | 0.01 |   | $ | 0.01 |   | $ | 0.03 |   |
|                                              |       |                            |       |   |   |   |   |   |   |   |   |
| Total assets                                      |       | $                               | 36,455,521 |   | $ | 47,961,594 |   | $ | 61,494,579 |   | $ | 64,264,516 |   | $ | 63,905,561 |   |
|                                              |       |                            |       |   |   |   |   |   |   |   |   |
| Notes and  advances payable to banks and others   |       | $                               | 24,755,858 |   | $ | 31,974,992 |   | $ | 38,922,408 |   | $ | 38,598,106 |   | $ | 37,053,593 |   |
|                                              |       |                            |       |   |   |   |   |   |   |   |   |
| Notes and  advances payable to related parties    |       | $                               | 93,512     |   | $ | 6,852,241 |   | $ | 9,901,153 |   | $ | 8,666,360 |   | $ | 7,471,707 |   |

 

See “Item 1 – Business” herein for a discussionof the change in the nature of the business of the Trust over the course of theyears presented above.  As a result, theinformation presented above is not comparative from year to year.

 

8

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Item 7.                       MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

The Trust is engaged in the ownership andoperation of hotel properties. At January 31, 2005, the InnSuites systemincluded six moderate and full-service hotels with 947 hotel suites. Certain ofour Hotels are branded through franchise agreements, which include four BestWestern hotels and one Holiday Inn hotel. Subsequent to January 31, 2005,the Trust ended its franchise agreement with Holiday Inn and entered into afranchise agreement with Best Western International for the Trust’s Ontario,California property.  All six Hotels aretrademarked as InnSuites Hotels. We are also involved in various operationsincidental to the operation of hotels, such as the operation of restaurants andmeeting/banquet room rentals.

 

Our operations consist of one reportablesegment, hotel ownership, which derives its revenue from the operation of theHotels.  In addition, we receivemanagement fees and trademark license fees.

 

Our results are significantly affected by occupancy and room rates at the Hotels, our ability to manage costs, and changes in the number of available suites caused by acquisition and disposition activities.  Results are also impacted by overall economic conditions and conditions in the travel industry. Unfavorable changes in these factors could negatively impact hotel room demand and pricing which would reduce our profit margins on rented suites.  Additionally, our ability to manage costs could be adversely impacted by significant increases in operating expenses, resulting in lower operating margins.

 

We anticipate that the improved economic conditions, combined with the disposition of previously underperforming properties, will create opportunities for the Trust in fiscal year 2006.  Better overall economic conditions are expected to result in increased business and leisure travel and support higher room rates, and therefore higher operating margins.  Challenges in fiscal year 2006 are expected to include continued competition for group business in the markets in which we operate and the Trust’s ability to increase room rates while maintaining market share. We will continue to focus on managing our costs, achieving increased daily rates in the markets where we operate and building occupancy.  We believe that our focus on customer service, adding more two-room suites and leveraging technology will enable us to remain competitive.

 

Effective February 1,2004, the Trust relinquished its REIT status. As of that date, anydistributions to its shareholders are not deductible for purposes of computingthe Trust’s taxable income and the Trust will be subject to income tax,including any applicable alternative minimum tax, on its taxable income atregular corporate rates, without offset for distributions of such income to itsshareholders.  

 

GENERAL

 

The following discussion should be read in conjunction with the Trust’sconsolidated financial statements and notes thereto.

 

The accounting policies that we believe are most critical and involvethe most subjective judgments include our estimates and assumptions of futurerevenue and expenditures used to project property cash flows.  Future cash flows are used in the valuationcalculation of our hotel properties to determine the recoverability (or impairment)of the carrying amounts in the event management is required to test the assetfor recoverability of its carrying value under Statement of FinancialAccounting Standards No. 144.  Ifthe carrying amount of an asset exceeds the estimated future cash flows overits estimated remaining life, the Trust recognizes an impairment expense toreduce the asset’s carrying value to its fair value.  Fair value is determined by either the mostcurrent third-party property appraisal, if available, or the present value offuture cash flows over the remaining life of the asset.  Our evaluation of future cash flows is basedon our historical experience and other factors, including certain economicconditions and committed future bookings. See “- Critical Accounting Policies and Estimates” below.

 

At January 31, 2005, the Trustowned a 64.8% interest in five of the Hotels through its sole general partner’sinterest in the Partnership and owned a 99.9% interest in one Hotel.  The Trust purchased 532,077, 57,509 and257,101 Partnership units during the years ended January 31, 2005, 2004and 2003, respectively.

 

Prior to May 1, 2004, the Partnership leased its hotel propertiesto InnSuites Hotels.  The correspondingrent expense for InnSuites Hotels and rent revenue for the Partnership, as wellas the resulting rent receivable and payable, eliminate in consolidation.  On May 1, 2004, the percentage leaseagreements between the Partnership and InnSuites Hotels were terminated.  During the fourth quarter of fiscal year2004, the Partnership agreed to waive InnSuites Hotels accrued but

 

9

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unpaid rent in exchange for InnSuites Hotels extending its leaseagreements one year.  The total amountwaived was $3,134,130.  This transactionhad a net effect of increasing the Trust’s stockholders equity by $1,518,834.

 

The expenses of the Trust consist primarily of property taxes,insurance, corporate overhead, interest on mortgage debt, professional fees,depreciation of the Hotels, management and trademark fees to affiliates andhotel operating expenses.  Under theterms of its Partnership Agreement, the Partnership is required to reimbursethe Trust for all such expenses. Accordingly, management believes that a review of the historicalperformance of the operations of the Hotels, particularly with respect tooccupancy, average daily rate (“ADR”), calculated as total room revenue dividedby number of rooms sold, and revenue per available room (“REVPAR”), calculatedas total room revenue divided by number of rooms available, is appropriate forunderstanding revenue from the Hotels. ADR increased by $4.56 to $70.83 in fiscal year 2005 from $66.27 infiscal year 2004.  Occupancy increased5.76% to 68.55% in fiscal year 2005 from 62.79% in fiscal year 2004 primarilyas a result of the disposition of lower-occupancy properties.  These dispositions also resulted in anincrease in REVPAR of $6.94 to $48.55 in fiscal year 2005 from $41.61 in fiscalyear 2004.

 

The following table shows certain historical financial and otherinformation for the periods indicated:

 
| ** **                                | ** ** | **For the Year Ended January 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                      |       |                                    |       |   |   |   |   |
| Occupancy                                 |       | 68.55                                   | %          | 62.79 | % | 60.46 | % |
|                                      |       |                                    |       |   |   |   |   |
| Average  Daily Rate (ADR)                 |       | $                                       | 70.83      |   | $ | 66.27 |   | $ | 66.59 |   |
|                                      |       |                                    |       |   |   |   |   |
| Revenue Per  Available Room (REVPAR) |       | $                                       | 48.55      |   | $ | 41.61 |   | $ | 40.26 |   |

 

No assurance can be given that the trends reflected in this data willcontinue or that occupancy, ADR and REVPAR will not decrease as a result ofchanges in national or local economic or hospitality industry conditions.

 

The Trust enters into transactions with certain related parties fromtime to time.  For information relatingto such related party transactions see the following:

 

•                                          Fora discussion of management and licensing agreements with certain relatedparties, see “Item 1 – Business – Acquisition of Management andLicensing Contracts.”

 

•                                          Fora discussion of acquisitions involving certain related parties, see “Item 1 –Business – Acquisition of InnSuites Hotels by the Trust.”

 

•                                          Fora discussion of the sales of the Trust’s Scottsdale, Flagstaff and Tempe,Arizona hotels to a related party during fiscal years 2004 and 2005, see “Item1 – Business – Sale of Hotel Properties” and Note 19 to the Trust’sConsolidated Financial Statements – “Hotel Properties Held for Sale and Sale ofHotel Properties.”

 

•                                          Fora discussion of guarantees of the Trust’s mortgage notes payable by certainrelated parties, see Note 5 to the Trust’s Consolidated Financial Statements – “MortgageNotes Payable.”

 

•                                          Fora discussion of notes and advances payable by the Trust to certain relatedparties, see Note 7 to the Trust’s Consolidated Financial Statements – “Notesand Advances Payable to Related Parties.”

 

•                                          Fora discussion of the Trust’s employment agreement with Mr. Wirth, see Note12 to the Trust’s Consolidated Financial Statements – “AdvisoryAgreement/Employment Agreements.”

 

10

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***Results ofOperations of the Trust for the year ended January 31, 2005 compared tothe year ended January 31, 2004.***

 

*Overview*

 

A summary of operating results for the fiscal years ended January 31,2005 and 2004 is:

 
| ** **                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **%  Change** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|---------------|------------|
| Revenue                                           |       | $        | 22,875,187 |     | $          | 24,211,328 |       | $             | (1,336,141 | ) | (5.5 | )% |
| Operating  Loss                                   |       | $        | (221,647   | )        | $          | (272,479   | )          | $             | 50,832     |   | 18.7 | % |
| Net Income  (Loss)                                |       | $        | 240,442    |     | $          | (2,594,317 | )          | $             | 2,834,759  |   | >100.0 | % |
| Income  (Loss) Per Share – Basic and Diluted |       | $        | 0.10       |     | $          | (1.27      | )          | $             | 1.37       |   | >100.0 | % |

 

The Trust’s overall results in 2005 were positively affected by thedisposition of certain of its underperforming properties, the impact of whichwas partially offset by expenses related to its acquisition of the managementand licensing contracts from the Management Company, which will eliminate thoseexpenses in future years.

 

For the twelve months ended January 31, 2005, the Trust had totalrevenue of $22.9 million compared to $24.2 million for the twelvemonths ended January 31, 2004, a decrease of approximately $1.3million.  This decrease in total revenueis primarily due to the sale of the Tempe, Arizona and San Diego, Californiaproperties in the first quarter of fiscal year 2005.  Total expenses of $25.3 million for thetwelve months ended January 31, 2005 reflect a decrease of approximately$2.5 million compared to total expenses of $27.9 million for the twelvemonths ended January 31, 2004.  Thedecrease is primarily due to the sales of the Tempe, Arizona and San Diego,California properties in the first quarter of fiscal year 2005 and animpairment charge of $458,000 related to the Buena Park, California and Tempe,Arizona properties in fiscal year 2004.

 

Losson impairment of hotel property was approximately $458,000 for the twelvemonths ended January 31, 2004.  Thisloss resulted from write-downs for impairments of the Buena Park, Californiaand Tempe, Arizona hotel properties. During fiscal year 2004, the Trust entered into purchase agreementsrelated to both properties at amounts below their carrying values.  The Buena Park, California property waswritten down by $329,000 to its fair value of $6.5 million, which was itssubsequent sales price.  The Tempe,Arizona property was written down by $129,000 to its fair value of $6.8million, which was its subsequent sales price. See Note 19 to the Trust’s Consolidated Financial Statements - “HotelsHeld for Sale and Sale of Hotel Properties.” No such loss was recorded for thetwelve months ended January 31, 2005.

 

Generaland administrative expenses include overhead charges for management,accounting, shareholder and legal services for the Trust.  In comparing general and administrativeexpenses for the twelve months ended January 31, 2005 and 2004, theseexpenses decreased $258,000, or 5.5%, to $4.4 million in fiscal year 2005,from $4.7 million in fiscal year 2004. This decrease was primarily due to elimination of management andfranchise fees paid by the Trust due to the consolidation of the ManagementCompany and Licensing Corp. and subsequent purchase of those contracts, offsetby the increased expenses to effect those transactions.

 

Total operating expenses for the twelve months ended January 31,2005 were $23.1 million, a decrease of approximately $1.4 million, or 5.7%,from $24.5 million in the twelve months ended January 31, 2004.  The decrease was primarily due to the salesof the Tempe, Arizona and San Diego, California properties during the firstquarter of fiscal year 2005 and impairment charges of $458,000 recognizedduring fiscal year 2004.

 

Total interest expense for the twelve months ended January 31,2005 was $2.3 million, a decrease of $1.1 million, or 33.0%, from $3.4million in the twelve months ended January 31, 2004.  Interest on mortgage notes payable for thetwelve months ended January 31, 2005 was $2.1 million, a decrease of$675,000, or 24.4%, from $2.8 million in the twelve months ended January 31,2004. The decrease is primarily due to the satisfaction of the mortgage notespayable secured by the Tempe, Arizona and San Diego, California properties inconnection with the disposition of those properties.  Interest on notes payable to banks for thetwelve months ended January 31, 2005 was $24,000, a decrease of $30,000,or 56.2%, from $54,000 in the prior fiscal year, due to the Trust satisfying infull its term loan in March 2003 and its line of credit in full in August 2003.  Interest on notes payable to related partiesdecreased 77.0%, or $419,000, to $125,000 from $544,000 during the years ended January 31,2005 and 2004, respectively.  Thedecrease is primarily due to payments totaling $6.2 million on notes due toaffiliates of Mr. Wirth in connection with the sales of the Tempe, Arizonaand San Diego, California properties during the first quarter of fiscal year2005.

 

Real estate and personal property taxes, insurance and ground rentdecreased $340,000, or 20.4%, to $1.3 million from $1.7 million incomparing the twelve months ended January 31, 2005 and 2004,respectively.  Real estate and personal

 

11

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property taxes and property insurance decreased due to the sales of theTempe, Arizona and San Diego, California properties during the first quarter offiscal year 2005 and the sale of the Buena Park, California  property during the third quarter of fiscalyear 2004.

 

Hotel property depreciation for the twelve months ended January 31,2005 compared to 2004 decreased approximately $222,000, or 7.5%, to $2.8million from $3.0 million, respectively. The decrease was primarily due to the sale of certain hotel properties.

 

The Trust had income before minority interest, income taxes and cumulativeeffect of adoption of accounting principle of $2.6 million for the twelvemonths ended January 31, 2005, compared to a loss before minority interestof $3.6 million in the prior year. After deducting the income allocated to the minority interest of $1.4million, taxes of $160,000 and the cumulative effect of adoption of accountingprinciple of $854,402, the Trust had net income attributable to Shares ofBeneficial Interest of approximately $240,000. This represented an increase of approximately $2.7 million attributableto Shares of Beneficial Interest comparing the twelve months ended January 31,2005 and 2004.  Basic and diluted netincome per share was $0.10 for the twelve months ended January 31, 2005,compared to a loss of $1.27 for 2004. 

 

***Results ofOperations of the Trust for the year ended January 31, 2004 compared tothe year ended January 31, 2003.***

 

*Overview*

 

A summary of operating results for the fiscal years ended January 31,2004 and 2003 is:

 
| ** **                               | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|------------|------------|---------------|------------|
| Revenue                                  |       | $        | 24,211,328 |     | $          | 26,940,473 |       | $             | (2,729,145 | ) | (10.1 | )% |
| Operating  Loss                          |       | $        | (272,479   | )        | $          | (1,080,639 | )          | $             | 808,160    |   | 74.8 | % |
| Net Loss                                 |       | $        | (2,594,317 | )        | $          | (3,445,948 | )          | $             | 851,631    |   | 24.7 | % |
| Loss Per  Share – Basic and Diluted |       | $        | (1.27      | )        | $          | (1.67      | )          | $             | 0.40       |   | 24.0 | % |

 

The Trust’s overall results in both 2004 and 2003 were adverselyaffected by the sluggish economic environment and reduced travel due to the warin Iraq and other terror concerns. Decreased demand in both the leisure travel, particularly in southernCalifornia, and business travel markets resulted in declining revenues duringfiscal year 2004.

 

For the twelve months ended January 31, 2004, the Trust had totalrevenue of $24.2 million compared to $26.9 million for the twelvemonths ended January 31, 2003, a decrease of approximately $2.7million.  This decrease in total revenueis primarily due to fewer occupied rooms and the absence of revenue from theScottsdale, Arizona property due to its sale in the first quarter of fiscalyear 2004, and from the Flagstaff, Arizona and Buena Park, Californiaproperties, which were sold in the third quarter of fiscal year 2004.  Total expenses of $27.9 million for thetwelve months ended January 31, 2004 reflect a decrease of approximately$4.0 million compared to total expenses of $31.9 million for the twelvemonths ended January 31, 2003.  Thedecrease is primarily due to the impairment charge of $590,000 related to theScottsdale property in fiscal year 2003, reduced hotel expenses as a result ofreduced occupied rooms and the absence of expenses from the Scottsdale,Flagstaff and Buena Park properties due to their sale in fiscal year 2004.

 

Losson impairment of hotel property was approximately $458,000 for the twelvemonths ended January 31, 2004.  Thisloss resulted from the write-downs for impairments of the Buena Park,California and Tempe, Arizona hotel properties. During fiscal year 2004, the Trust entered into purchase agreementsrelated to both properties at amounts below their carrying values.  The Buena Park, California property waswritten down by $329,000 to its fair value of $6.5 million, which was itssubsequent sales price.  The Tempe,Arizona property was written down by $129,000 to its fair value of $6.8million, which was its subsequent sales price. See Note 19 to the Trust’s Consolidated Financial Statements – “HotelsHeld for Sale and Sale of Hotel Properties.” Loss on impairment of hotel property was approximately $590,000 for thetwelve months ended January 31, 2003. This loss resulted from the write-down for an impairment of theScottsdale, Arizona hotel property.  Theoperating performance of the Scottsdale property during that period indicatedthat it significantly decreased in value, which required management to test theproperty for recoverability of book value under SFAS No. 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of.”  Based on an appraisal ofthe property’s fair value, the hotel property’s carrying value was determinednot to be recoverable.  The hotelproperty, including land, buildings and improvements and furniture, fixturesand equipment, was written down by $590,000 to its fair value and new basis of$3.1 million.  The amount ofimpairment allocated to Shares of Beneficial Interest was $294,000 andthe amount allocated to minority interest was $296,000.  The hotel property’s decrease in value wasdue to changes in the economic conditions, and decreased prospects for futuredevelopment, in its immediate area. During fiscal year 2004, the impaired property was sold to ScottsdaleEldorado Resort, LLC, an affiliate of Mr. Wirth, for $3.1 million.

 

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General and administrative expenses include overhead charges formanagement, accounting, shareholder and legal services for the Trust.  In comparing general and administrativeexpenses for the twelve months ended January 31, 2004 and 2003, theseexpenses decreased $1.1 million, or 19.0%, to $4.7 million in fiscal year2004, from $5.8 million in fiscal year 2003.  This decrease was primarily due to $91,000 ofexpense related to the refinancing of the Tucson St. Mary’s and San Diegoproperties in fiscal year 2003, a decrease of $242,000 in trademark andmanagement fees in fiscal year 2004 due to amendments to the related contracts,and the absence of such expenses from the Scottsdale, Buena Park and Flagstaffproperties due to their sale during the first quarter of fiscal year 2004.

 

Total operating expenses for the twelve months ended January 31,2004 were $24.5 million, a decrease of approximately $3.5 million, or12.6%, from $28.0 million in the twelve months ended January 31,2003.  The decrease was primarily due tothe impairment charge of $590,000 related to the Scottsdale property in fiscalyear 2003, reduced hotel expenses as a result of reduced revenue and theabsence of expenses from the Scottsdale, Buena Park and Flagstaff propertiesdue to their sale in the first quarter of fiscal year 2004.

 

Total interest expense for the twelve months ended January 31,2004 was $3.4 million, a decrease of $424,000, or 11.2%, from $3.8 millionin the twelve months ended January 31, 2003.  Interest on mortgage notes payable for thetwelve months ended January 31, 2004 was $2.8 million, a decrease of$165,000, or 5.6%, from $2.9 million in the twelve months ended January 31,2003. Interest on notes payable to banks for the twelve months ended January 31,2004 was $54,000, a decrease of $111,000, or 67.4%, from $165,000 in the priorfiscal year, due to the Trust satisfying in full its term loan in March 2003and its line of credit in full in August 2003.  Interest on notes payable to related partiesdecreased 21.4%, or $148,000, to $544,000 from $692,000 due to a decrease of$2.9 million in net borrowings from Mr. Wirth and his affiliates.

 

Real estate and personal property taxes, insurance and ground rentdecreased $219,000, or 11.6%, to $1.7 million from $1.9 million incomparing the twelve months ended January 31, 2004 and 2003,respectively.  Real estate and personalproperty taxes and property insurance decreased due to the sale of theScottsdale property in the first quarter of fiscal year 2004 and decreasedproperty tax assessments at certain hotels.

 

Hotel property depreciation for the twelve months ended January 31,2004 compared to 2003 decreased approximately $418,000, or 12.3%, to$3.0 million from $3.4 million, respectively.  The decrease was primarily due to the sale ofcertain hotel properties and the cessation of depreciation on hotel propertiesclassified as held for sale.

 

The Trust had a loss before minority interest of $3.6 million forthe twelve months ended January 31, 2004, compared to a loss beforeminority interest of $4.9 million in the prior year.  After deducting the loss allocated to the minorityinterest of $1.0 million, the Trust had a net loss attributable to Shares ofBeneficial Interest of approximately $2.6 million.  This represented a decrease in total net lossof approximately $852,000 attributable to Shares of Beneficial Interest comparingthe twelve months ended January 31, 2004 and 2003.  Basic and diluted net loss per share was$1.27 for the twelve months ended January 31, 2004, compared to $1.67 for2003.

 

LIQUIDITY ANDCAPITAL RESOURCES

 

Overview

 

Net cash provided by operating activitiestotaled $660,000, $88,000, and $1.1 million for the years ended January 31,2005, 2004 and 2003, respectively. The increase in 2005 as compared to 2004 wasprimarily due to better operating results. The decrease in 2004 as compared to 2003 was primarily due to the Trust’sefforts to reduce its liabilities, especially trade payables.

 

Net cash provided by or used in investing activities totaled $8.0million, $10.2 million, and $(1.6) million for the years ended January 31,2005, 2004 and 2003, respectively.  Thedecrease in 2005 as compared to 2004 was primarily due to fewer dispositions infiscal year 2005.  The increase in 2004as compared to 2003 was primarily due to the sale of certain Hotels duringfiscal year 2004. 

 

Net cash provided by or used in financingactivities totaled $(8.6) million, $(10.4) million, and $513,000 for the yearsended January 31, 2005, 2004 and 2003, respectively.  The increase in 2005 as compared to 2004 wasprimarily due to reduced net payments on notes payable to Mr. Wirth andhis affiliates during fiscal year 2005. The decrease in 2004 as compared to 2003 was primarily due to the saleof certain Hotels in fiscal year 2004, the proceeds of which the Trust used toreduce its debt balances to related parties and satisfy its mortgage notes onthese properties. 

 

13

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The Trust received $9.4 million in proceedsfor the sales of hotel properties in fiscal year 2005.  The Trust used $4.8 million of these proceedsto satisfy a mortgage note payable, $1.4 million to satisfy related party notesand interest payable, and retained the remaining proceeds to reduce tradepayables and to fund future operations and capital improvements.

 

The Trust received $12.2 million in proceedsfor the sales of hotel properties in fiscal year 2004.  The Trust used $3.0 million of these proceedsto satisfy a mortgage note payable, $4.4 million to satisfy related party notespayable, $3.0 million to satisfy bank notes payable and the remaining proceedsto fund operations.

 

The Trust’s principal source of cash to meetits cash requirements, including distributions to its shareholders, is itsshare of the Partnership’s cash flow and, as of January 31, 2005, itsdirect ownership of the Yuma, Arizona property. The Partnership’s principal source of revenue after May 1, 2004 ishotel operations for the five properties it owns.  The Trust’s liquidity, including its abilityto make distributions to its shareholders, will depend upon the ability ofitself and the Partnership to generate sufficient cash flow from hoteloperations.

 

Historically, as a REIT, the Trust wasrequired to distribute to its shareholders at least 90% of its taxable income,excluding net capital gains.  Thetermination of the Trust’s status as a REIT, effective February 1, 2004,eliminated this requirement.  However, byrelinquishing its status as a REIT, the Trust will become subject to thepayment of income taxes.  

 

As of January 31, 2004, the Trust has no commitments for capitalexpenditures beyond a 4% reserve for refurbishment and replacements that is setaside annually, as described below.

 

The Trust is obligated under loan agreements relating to five of itshotels to deposit 4% of the individual hotel’s room revenue into an escrow accountto be used for capital expenditures.  These accounts are restricted by the mortgage lenders.  As of January 31, 2005, $250,642 washeld in these accounts and is reported on the Trust’s Consolidated BalanceSheet as “Restricted Cash.”  The accountsare required to be used for capital improvements to the Hotels andrefurbishment and replacement of furniture, fixtures and equipment.  During the twelve months ended January 31,2005 and 2004, the Hotels spent approximately $1.3 million and $1.8 million,respectively, for capital expenditures. The Trust considers the majority of these improvements to be revenueproducing.  Therefore, these amounts havebeen capitalized and are being depreciated over their estimated usefullives.  The Trust plans to spend approximately$691,000 for capital expenditures in fiscal year 2006.  The Hotels also spent approximately $1.4million and $1.8 million during fiscal years 2005 and 2004, respectively,on repairs and maintenance and these amounts have been charged to expense asincurred.

 

The Trust has minimum debt payments of $1.7 million and$1.2 million due during fiscal years 2006 and 2007, respectively.  The Trust plans to renew its bank line ofcredit when it matures during fiscal year 2006. The Trust believes it can satisfy its remaining obligations duringfiscal years 2006 and 2007 using revenue generated by the Hotels’operations.  

 

Management believes that cash on hand, future cash receipts fromoperations, proceeds from hotel sales and borrowings from affiliates in fiscalyear 2006 will be sufficient to meet the Trust’s obligations as they become duefor the next twelve months.

 

The Trust may seek to negotiate additional credit facilities or issuedebt instruments.  Any debt incurred orissued by the Trust may be secured or unsecured, long-term, medium-term orshort-term, bear interest at a fixed or variable rate and be subject to suchother terms as the Trust considers prudent.

 

The Trust will acquire or develop additional hotels only as suitableopportunities arise, and the Trust will not undertake acquisition orredevelopment of properties unless adequate sources of financing areavailable.  Funds for future acquisitionsor development of hotels are expected to be derived, in whole or in part, fromborrowings or from the proceeds of additional issuances of Shares of BeneficialInterest or other securities.  However,there can be no assurance that the Trust will successfully acquire or developadditional hotels or that proceeds from borrowings or issuances of Shares ofBeneficial Interest will be available or in amounts and on terms sufficient toallow such transactions.

 

CONTINUED LISTING WITH THEAMERICAN STOCK EXCHANGE

 

On June 13, 2003, the Trust receivednotice from the American Stock Exchange (“Amex”) indicating that the Trustfailed to meet certain of Amex’s continued listing standards as set forth underSection 1003(a) of the Amex Company Guide.  The Trust became non-compliant with Amex’scontinued listing standards due to losses incurred by the Trust in its mostrecent fiscal years.  These losses wereexacerbated by the terrorist attacks on September 11, 2001, the war inIraq during the spring of 2003, as well as the general slowdown in the economyand travel.

 

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In response to this notice, the Trust wasgiven the opportunity to submit a plan to Amex to regain compliance with thecontinued listing standards.  On August 26,2003, Amex notified the Trust that it had accepted the Trust’s plan and grantedthe Trust the opportunity to regain compliance with Amex’s continued listingstandards.  

 

On December 10, 2004, the shareholders of theTrust approved several proposals relating to the Trust’s plan to return tocompliance with Amex’s continued listing standards.  On January 4, 2005, the Board ofTrustees approved the implementation of the proposals.  The proposals were consummated on January 31,2005, and resulted in:

 

•                  The Trustissuing 6,577,732 Shares of Beneficial Interest in the Trust to the Partnershipto satisfy advances and interest payable to the Partnership totalingapproximately $8.6 million.  ThePartnership concurrently distributed the Shares of Beneficial Interest to itsunit holders.  Of the 6,577,732 Shares ofBeneficial Interest distributed by the Partnership, 3,761,071 were returned tothe Trust and became treasury shares. The remaining 2,816,661 Shares of Beneficial Interest remainedoutstanding.

 

•                  The Trustissuing 4,969,712 Shares of Beneficial Interest in the Trust, with a fair valueof approximately $6.5 million, to the Partnership to acquire its ownershipinterest in Yuma Hospitality Properties, Ltd., which owns and operates theYuma, Arizona hotel property.   ThePartnership concurrently distributed the Shares of Beneficial Interest to its unitholders.  Of the 4,969,712 Shares ofBeneficial Interest distributed by the Partnership, 2,841,624 were returned tothe Trust and became treasury shares. The remaining 2,128,088 Shares of Beneficial Interest remainedoutstanding.  The fair value was determinedusing the carrying values of assets and liabilities, except for fixed assets,which were valued using appraised value. The portion of the excess of fair value over book value that relates tothe minority interest in the Partnership totals $1.2 million, and has beenrecorded as an increase in the basis of those fixed assets.

 

•                  The Trustissuing 457,645 Shares of Beneficial Interest in the Trust to satisfy $594,938of notes and interest payable to affiliates of Mr. Wirth.  All of those Shares of Beneficial Interestremained outstanding.

 

•                  The Trustissuing 1,000,000 Shares of Beneficial Interest in the Trust to Mr. Wirthand his affiliates upon conversion of 1,000,000 Class B limitedpartnership units in the Partnership, which increased the Trust’s ownershipinterest in the Partnership by 7.6%.  Allof those Shares of Beneficial Interest remained outstanding.

 

In total, the Trust issued 13,005,089 Shares ofBeneficial Interest in the Trust, of which 6,602,695 returned to the Trust astreasury shares and 6,402,394 remained outstanding.  Mr. Wirth and his affiliates, throughthese transactions, received 5,182,186 Shares of Beneficial Interest in theTrust.

 

As of January 31, 2005, the Trust has totalshareholders’ equity of $6.3 million, which exceeds the minimum amount of $6.0million required to regain compliance with Amex’s continued listing standards.

 

SHARE REPURCHASEPROGRAM

 

On January 2, 2001, the Board of Trustees of the Trust approved ashare repurchase program under Rule 10b-18 of the SecuritiesExchange Act of 1934, as amended, for the purchase of up to 250,000 limitedpartnership units in the Partnership and/or Shares of Beneficial Interest inopen market or privately negotiated transactions.  Additionally, on September 10, 2002, theBoard of Trustees approved the purchase of up to 350,000 additional limitedpartnership units in the Partnership and/or Shares of Beneficial Interest inopen market or privately negotiated transactions.  Acquired Shares of Beneficial Interest areheld in treasury and are available for future acquisitions and financingsand/or for awards granted under the Trust’s 1997 Stock Incentive and OptionPlan.  During fiscal year 2005, the Trustacquired 130,717 Shares of Beneficial Interest in open market and privately negotiatedtransactions at an average price of $1.73 per share, and 532,077 limitedpartnership units in privately negotiated transactions at an average price of$2.17 per unit.  The Trust intends tocontinue repurchasing Shares of Beneficial Interest in compliance withapplicable legal and Amex requirements. The Trust is authorized to repurchase an additional 40,133 limitedpartnership units and/or Shares of Beneficial Interest pursuant to the sharerepurchase program.

 

OFF-BALANCE SHEETFINANCINGS AND LIABILITIES

 

Other than lease commitments, legal contingencies incurred in thenormal course of business and employment contracts for key employees, the Trustdoes not have any off-balance sheet financing arrangements or liabilities.  The Trust does not have any majority-ownedsubsidiaries that are not included in the consolidated financialstatements.  See “Item 7 – Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Accounting Matters” below for a discussion of new accounting interpretationswith respect to variable interest entities and the impact of suchinterpretations on

 

15

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the Trust.  See also Note 2 tothe Trust’s Consolidated Financial Statements – “Summary of SignificantAccounting Policies – Application of New Accounting Standards.”

 

CONTRACTUALOBLIGATIONS

 

The following summarizes our contractual obligations at January 31,2005, and the effect such obligations are expected to have on our liquidity andcash flow in future periods:

 
| ** **                                                                                                              | ** ** | **PAYMENTS DUE BY PERIOD** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **CONTRACTUAL OBLIGATIONS**                                                                                             | ** ** | **TOTAL**                  | ** ** | **LESS  THAN  1 YEAR** | ** ** | **1-3  YEARS** | ** ** | **3-5  YEARS** | ** ** | **THEREAFTER** | ** ** |
|                                                                                                                    |       |                       |       |   |   |   |   |   |   |   |   |
| Mortgage  notes payable, notes payable to banks, other notes payable and notes and  advances payable to related parties |       | $                          | 24,849,370 |   | $ | 1,673,537 |   | $ | 2,564,700 |   | $ | 6,643,302 |   | $ | 13,967,831 |   |
|                                                                                                                    |       |                       |       |   |   |   |   |   |   |   |   |
| Operating  leases                                                                                                       |       | 7,128,793                  |       | 196,186 |   | 392,372 |   | 392,372 |   | 6,147,863 |   |
|                                                                                                                    |       |                       |       |   |   |   |   |   |   |   |   |
| TOTAL                                                                                                                   |       | $                          | 31,978,163 |   | $ | 1,869,723 |   | $ | 2,957,072 |   | $ | 7,035,674 |   | $ | 20,115,694 |   |

 

InnSuites Hotels has entered into franchisearrangements with certain third parties for five of the hotel properties, withfour Best Western hotels and one Holiday Inn hotel.  Subsequent to January 31, 2005, theTrust ended its franchise agreement with Holiday Inn and entered into afranchise agreement with Best Western International for the Trust’s Ontario,California property.  These agreementsprovide for fees to be paid by InnSuites Hotels based on revenue andreservations received, and contain no minimum payment provisions.

 

CRITICALACCOUNTING POLICIES AND ESTIMATES

 

The Trust believes that the policies it follows for the valuation ofits hotel properties, which constitute the majority of Trust assets, are itsmost critical policies.  The Trustapplies SFAS No. 144 to determine when it is necessary to test an assetfor recoverability.  On an events andcircumstances basis, the Trust reviews the carrying value of its hotelproperties both held for use and held for sale. The Trust will record an impairment loss and reduce the carrying valueof a property when anticipated undiscounted future cash flows and/or a currentappraisal of the property do not support its carrying value.  In cases where the Trust does not expect torecover the carrying cost of hotel properties held for use, it will reduce thecarrying value to the fair value of the hotel, as determined by a currentappraisal.  In cases where the Trust doesnot expect to recover the carrying cost of hotel properties held for sale, it willreduce the carrying value to the sales price less costs to sell.  The Trust did not recognize impairmentexpense in fiscal year 2005.  For thetwelve months ended January 31, 2004 and 2003, the Trust recordedimpairment losses of $458,000 and $590,000, respectively.  As of January 31, 2005, the Trustmanagement does not believe that the carrying values of any of its hotelproperties are impaired.

 

ACCOUNTING MATTERS

 

In December 2004, Statement of FinancialAccounting Standards No. 123 (revised 2004) was issued.  This Statement is a revision of FASBStatement No. 123, Accounting for Stock Based Compensation, and supercedesAPB Opinion No. 25, Accounting for Stock Issued to Employees.  This Statement establishes standards foraccounting for transactions in which an entity exchanges its equity securitiesfor goods and services.  The Trust isrequired to adopt this Statement as of August 31, 2005.  The Trust believes that the adoption of thisStatement will not affect future financial results, as all options granted bythe Trust are fully vested. 

 

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets,an amendment of APB Opinion No. 29,” (“SFAS No. 153”), which iseffective for fiscal years beginning after June 15, 2005. SFAS No. 153replaces APB Opinion No. 29’s exceptions to recording these transfers atfair value.  SFAS No. 153 is notexpected to have a material impact on the Company’s financial statements orresults of operations.  

 

In February 2004, the Trust adopted FIN 46R,which amended FIN 46, “Consolidation of Variable Interest Entities,” aninterpretation of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements.”  FIN 46R requiresan existing unconsolidated variable interest entity to be consolidated by itsprimary beneficiary if the entity does not effectively

 

16

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disperserisk among all parties involved or if other parties do not have significantcapital to finance activities without subordinated financial support from theprimary beneficiary.  The primarybeneficiary is the party that absorbs a majority of the entity’s expectedlosses, receives a majority of its expected residual returns, or both, as aresult of holding variable interests, which are the ownership, contractual orother pecuniary interests in an entity. 

 

As of February 1, 2004, the Trust recorded acharge for the cumulative effect of a change in accounting principle resultingfrom its recognition of the $854,000 net stockholder’s deficit of theManagement Company, which was the Trust’s variable interest entity under FIN46R.  The $854,000 charge represented thenet effect of the Trust reporting $160,000 in net assets (consisting primarilyof receivables) and $1,014,000 in net liabilities (consisting primarily ofdebt) upon consolidating the financial results of the Management Company. 

 

All revenue and expense items for the ManagementCompany and Licensing Corp. relating to services provided to the Hotels wereeliminated when their financial results were consolidated with the Trust’sresults.  Revenues and expenses relatingto services provided by the Management Company and Licensing Corp. to hotelsnot owned by the Trust, however, were not eliminated.  Payroll reimbursements shown in the currentperiod represent amounts received from hotels not owned by the Trust. 

 

The effect of consolidating the financial results ofthe Management Company and Licensing Corp. was accounted for as a cumulativeeffect of a change in accounting principle. As a result of consolidating the financial results of the ManagementCompany with its results, as of February 1, 2004, the Trust’s financialresults include a $854,402 charge for the cumulative effect of a change inaccounting principle on the Statements of Operations resulting in a reductionin its Stockholders’ Equity which represents the aggregate stockholders’deficit reported by the Management Company as of February 1, 2004. 

 

After June 8, 2004, consolidation of the financialresults of the Management Company and Licensing Corp. is no longer required byFIN 46R since InnSuites Hotels acquired the management contracts and licensingagreements from the Management Company on that date.  See Note 20 to the Trust’s ConsolidatedFinancial Statements – “Purchase of Management and Licensing Contracts.” 

 

INFLATION

 

The Trust’s revenue is based on the underlying Hotel revenue.  Therefore, the Trust relies entirely on theperformance of the Hotels and InnSuites Hotels’ ability to increase revenue tokeep pace with inflation.  Operators ofhotels in general, and InnSuites Hotels in particular, can change room ratesquickly, but competitive pressures may limit InnSuites Hotels’ ability to raiserates faster than inflation.

 

FORWARD-LOOKINGSTATEMENTS

 

Certain statements in this Form 10-K, including statementscontaining the phrases “believes,” “intends,” “expects,” “anticipates,” “predicted,”“will be,” “should be,” “looking ahead” or similar words, constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934.  The Trust intends that such forward-lookingstatements be subject to the safe harbors created by such Acts.  These forward-looking statements includestatements regarding the intent, belief or current expectations of the Trust,its Trustees or its officers in respect of (i) the declaration or paymentof dividends; (ii) the leasing, management or operation of the Hotels; (iii) theadequacy of reserves for renovation and refurbishment; (iv) the Trust’sfinancing plans; (v) the Trust’s position regarding investments,acquisitions, developments, financings, conflicts of interest and othermatters; (vi) the Trust’s continued listing on Amex; and (vii) trendsaffecting the Trust’s or any Hotel’s financial condition or results ofoperations.

 

These forward-looking statements reflect the Trust’s current views inrespect of future events and financial performance, but are subject to manyuncertainties and factors relating to the operations and business environmentof the Hotels which may cause the actual results of the Trust to differmaterially from any future results expressed or implied by such forward-lookingstatements.  Examples of such uncertaintiesinclude, but are not limited to:

 

•                  fluctuations inhotel occupancy rates;

•                  changes in roomrental rates which may be charged by InnSuites Hotels in response to marketrental rate changes or otherwise;

•                  interest ratefluctuations;

•                  changes in federalincome tax laws and regulations;

 

17

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**•**                  competition;

•                  any changes in theTrust’s financial condition or operating results due to acquisitions ordispositions of hotel properties;

•                  real estate andhospitality market conditions;

•                  hospitalityindustry factors;

•                  terrorist attacksor other acts of war;

•                  outbreaks ofcommunicable diseases;

•                  natural disasters;

•                  local or nationaleconomic and business conditions, including, without limitation, conditionswhich may affect public securities markets generally, the hospitality industryor the markets in which the Trust operates or will operate; and

•                  uncertainties theTrust might encounter in changing from a REIT to a tax-paying entity.

 

The Trust does not undertake any obligation to update publicly orrevise any forward-looking statements whether as a result of new information,future events or otherwise.  Pursuant to Section 21E(b)(2)(E) ofthe Securities Exchange Act of 1934, the qualifications set forth hereinaboveare inapplicable to any forward-looking statements in this Form 10-Krelating to the operations of the Partnership.

 

Item 7A.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Trust is exposed to interest rate risk primarily as a result of itsmortgage notes payable, notes payable to banks, other notes payable and notesand advances payable to related parties. The proceeds from these loans were used to maintain liquidity, fundcapital expenditures and expand the Trust’s real estate investment portfolioand operations.  The Trust’s interestrate risk management objective is to limit the impact of interest rate changeson earnings and cash flow and to lower its overall borrowing costs.  To achieve its objectives, the Trust borrowsusing fixed rate debt, when possible. The Trust could enter into derivative financial instruments such asinterest rate swaps, caps and treasury locks in order to mitigate its interestrate risk on a related financial instrument. To date, the Trust has not entered into any such derivativetransactions.

 

The Trust’s interest rate risk is monitored using a variety oftechniques.  The table below presents theprincipal amounts, weighted average interest rates, fair value and other termsrequired, by year of expected maturity, in order to evaluate the expected cashflow and sensitivity to interest rate changes.

 
| ** **                                        | ** ** | **Fiscal** | ** ** |
|---------------------------------------------------|------------|------------|------------|
| **Debt Type**                                     | ** ** | **2006**   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
|                                              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate  debt (1)                              |       | $          | 1,079,440  |   | 1,132,126 |   | 1,224,769 |   | 1,283,189 |   | 1,376,512 |   | 13,967,829 |   | 20,063,865 |   | 21,711,504 |   |
|                                              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average  interest rate                            |       | 8.34       | %          | 8.34 | % | 8.33 | % | 8.33 | % | 8.32 | % | 8.30 | % | 8.32 | % | 7.00 | % |
|                                              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable  rate debt (1)                           |       | $          | 594,098    |   | 100,490 |   | 107,316 |   | 113,842 |   | 3,869,759 |   | — |   | 4,785,505 |   | 4,815,091 |   |
|                                              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate available on January 31, 2005 |       | 6.50       | %          | 6.50 | % | 6.50 | % | 6.50 | % | 6.50 | % | 6.50 | % | 6.50 | % | 6.50 | % |

 

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(1)          The fair value of fixedrate debt and variable rate debt were determined based on current rates offeredfor fixed rate debt and variable rate LIBOR debt with similar risks andmaturities.

 

The table incorporates only those exposures that exist as of January 31,2005 and does not consider those exposures or positions, which would ariseafter that date.  Moreover, because firmcommitments are not represented in the table above, the information presentedtherein has limited predictive value.  Asa result, the Trust’s interest rate fluctuations will depend on the exposuresthat arise during any particular period and future interest rates.

 

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Item 8.             FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

INNSUITES HOSPITALITY TRUST

LIST OF CONSOLIDATED FINANCIALSTATEMENTS AND SCHEDULES

 

The following consolidated financial statements ofInnSuites Hospitality Trust are included in Item 8:

 
|   | Independent  Auditors’ Report – January 31, 2005;                                                          |   |
|--------|---------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                      |   |
|   | Independent  Auditors’ Report – January 31, 2004 and 2003;                                                 |   |
|   |                                                                                                                      |   |
|   | Consolidated Balance Sheets  – January 31, 2005 and 2004;                                                       |   |
|   |                                                                                                                      |   |
|   | Consolidated  Statements of Operations – Years Ended January 31, 2005, 2004 and 2003;                           |   |
|   |                                                                                                                      |   |
|   | Consolidated Statements  of Shareholders’ (Deficit) Equity – Years Ended January 31, 2005, 2004  and 2003; |   |
|   |                                                                                                                      |   |
|   | Consolidated Statements  of Cash Flow – Years Ended January 31, 2005, 2004 and 2003; and                        |   |
|   |                                                                                                                      |   |
|   | Notes to the  Consolidated Financial Statements – January 31, 2005, 2004 and 2003.                              |   |

 

The following financial statement schedules ofInnSuites Hospitality Trust are included in Item 8:

 
|   | Schedule III – Real Estate and  Accumulated Depreciation. |   |
|--------|---------------------------------------------------------------------|--------|
|   |                                                                |   |
|   | Schedule IV - Mortgage Loans on  Real Estate.                  |   |

 

All other schedules are omitted, as the information isnot required or is otherwise furnished.

 

19

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**REPO****RT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 
| To the Shareholders and Board of Trustees  of |   |   |
|-----------------------------------------------|--------|--------|
| InnSuites  Hospitality Trust                  |   |   |
| Phoenix,  Arizona:                            |   |   |

 

We have audited the accompanying consolidated balance sheet ofInnSuites Hospitality Trust and subsidiaries as of January 31, 2005 and therelated consolidated statements of operations, shareholders’ equity/deficit andcash flows for the year then ended. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion of these financial statements based on our audit.  

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of InnSuitesHospitality Trust and subsidiaries as of January 31, 2005 and the results oftheir operations and their cash flows for the year then ended, in conformitywith accounting principles generally accepted in the United States of America.

 

 
| /s/EPSTEIN,  WEBER & CONOVER, PLC |   |
|---------------------------------------|--------|
|                                  |
|   Scottsdale,  Arizona      |
|   May 5, 2005               |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 
| To the Shareholders and Board  of Trustees of |
|-----------------------------------------------|
| InnSuites Hospitality Trust                   |
| Phoenix, Arizona:                             |

 

Our audit was conducted in accordance with the standards of the PublicCompany Accounting Oversight Board (United States) and was made for the purposeof forming an opinion on the basic consolidated financial statements taken as awhole.  The consolidated supplementalschedule III is presented for purposes of complying with the Securities andExchange Commission’s rules and is not a part of the basic consolidatedfinancial statements.  This schedule hasbeen subjected to the auditing procedures applied in our audits of the basicconsolidated financial statements and, in our opinion, is fairly stated in allmaterial respects in relation to the basic consolidated financial statementstaken as a whole.

 

 
| /s/EPSTEIN,  WEBER & CONOVER, PLC |   |
|---------------------------------------|--------|
|                                  |
|   Scottsdale,  Arizona      |
|   May 5, 2005               |

 

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REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM 

 

To the Shareholders andBoard of Trustees

InnSuites Hospitality Trustand Subsidiaries

Phoenix, Arizona

 

We have audited theaccompanying consolidated balance sheet of InnSuites Hospitality Trust (the “Trust”)and Subsidiaries as of January 31, 2004 and the related consolidatedstatements of operations, shareholders’ (deficit) equity and cash flows for eachof the two years in the period ended January 31, 2004.  These financial statements are theresponsibility of the Trust’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of InnSuites Hospitality Trust andSubsidiaries as of January 31, 2004 and the results of their operationsand their cash flows for each of the two years in the period ended January 31,2004 in conformity with U.S. generally accepted accounting principles.

 

 
| /s/  McGladrey & Pullen, LLP |   |
|----------------------------------|--------|
|                             |
| Phoenix, Arizona                 |
| March 12, 2004              |

 

22

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REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

 

To the Shareholders andBoard of Trustees

InnSuites Hospitality Trustand Subsidiaries

Phoenix, Arizona

 

Our audits on the 2004 and2003 financial statements were conducted in accordance with the standards ofthe Public Company Accounting Oversight Board (United States) and were made forthe purpose of forming an opinion on the basic consolidated financialstatements taken as a whole.  The relatedconsolidated supplemental schedules III and IV are presented for purposesof complying with the Securities and Exchange Commission’s rules and are not apart of the basic consolidated financial statements.  The schedules have been subjected to theauditing procedures applied in our audits of the basic consolidated financialstatements and, in our opinion, are fairly stated in all material respects inrelation to the basic consolidated financial statements taken as a whole.

 

 
| /s/ McGladrey &  Pullen, LLP |   |
|----------------------------------|--------|
|                             |
| Phoenix, Arizona                 |
| March 12, 2004              |

 

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                                                          | ** ** | **January 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2005**             | ** ** | **2004** | ** ** |
| ASSETS                                                                                                                                                                              |       |                 |       |   |   |
| Hotel  Properties, Net                                                                                                                                                              |       | $                    | 31,190,139 |   | $ | 34,085,320 |   |
| Hotel  Properties Held for Sale                                                                                                                                                     |       | 3,121,235            |       | 11,733,371 |   |
| Cash and  Cash Equivalents                                                                                                                                                          |       | 1,343                |       | — |   |
| Restricted  Cash                                                                                                                                                                    |       | 250,642              |       | 136,790 |   |
| Accounts  Receivable, including $144,928 and $105,667 from related parties, net of  Allowance for Doubtful Accounts of $278,000 and $107,000, respectively                          |       | 969,751              |       | 906,124 |   |
| Prepaid  Expenses and Other Assets                                                                                                                                                  |       | 922,411              |       | 1,099,989 |   |
| TOTAL ASSETS                                                                                                                                                                        |       | $                    | 36,455,521 |   | $ | 47,961,594 |   |
|                                                                                                                                                                                |       |                 |       |   |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)                                                                                                                                |       |                 |       |   |   |
|                                                                                                                                                                                |       |                 |       |   |   |
| LIABILITIES                                                                                                                                                                         |       |                 |       |   |   |
| Mortgage Notes Payable                                                                                                                                                              |       | $                    | 24,007,445 |   | $ | 31,805,715 |   |
| Notes  Payable to Banks                                                                                                                                                             |       | 500,000              |       | — |   |
| Notes and  Advances Payable to Related Parties                                                                                                                                      |       | 93,512               |       | 6,852,241 |   |
| Other Notes  Payable                                                                                                                                                                |       | 248,413              |       | 169,277 |   |
| Outstanding  Checks in Excess of Cash Balance                                                                                                                                       |       | —               |       | 240,520 |   |
| Accounts  Payable and Accrued Expenses, including $153,811 and $640,612 accrued  interest and payables to related parties, respectively                                             |       | 2,762,693            |       | 3,105,351 |   |
| Purchase  Deposit from Related Party                                                                                                                                                |       | 700,000              |       |   |   |
|                                                                                                                                                                                |       |                 |       |   |   |
| TOTAL  LIABILITIES                                                                                                                                                                  |       | 28,312,063           |       | 42,173,104 |   |
|                                                                                                                                                                                |       |                 |       |   |   |
| MINORITY  INTEREST IN THE PARTNERSHIP                                                                                                                                               |       | 1,878,824            |       | 7,362,089 |   |
|                                                                                                                                                                                |       |                 |       |   |   |
| SHAREHOLDERS’  EQUITY (DEFICIT)                                                                                                                                                |       |                 |       |   |   |
| Shares of  beneficial interest, without par value; unlimited authorization; 8,719,649  and 2,048,701 shares issued and outstanding at January 31, 2005 and  2004, respectively |       | 16,568,246           |       | 258,365 |   |
|                                                                                                                                                                                |       |                 |       |   |   |
| Treasury  Stock; 7,391,825 and 844,636 shares, held at January 31, 2005 and 2004,  respectively                                                                                |       | (10,303,612          | )          | (1,831,964 | ) |
|                                                                                                                                                                                |       |                 |       |   |   |
| TOTAL  SHAREHOLDERS’ EQUITY (DEFICIT)                                                                                                                                          |       | 6,264,634            |       | (1,573,599 | ) |
|                                                                                                                                                                                |       |                 |       |   |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)                                                                                                                          |       | $                    | 36,455,521 |   | $ | 47,961,594 |   |

 

24

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 
| ** **                                                                                                                                                  | ** ** | **YEARS ENDED JANUARY 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| REVENUE                                                                                                                                                     |       |                             |       |   |   |   |   |
| Room                                                                                                                                                        |       | $                                | 17,729,550 |   | $ | 22,026,498 |   | $ | 24,434,186 |   |
| Food and  Beverage                                                                                                                                          |       | 1,238,808                        |       | 1,363,216 |   | 1,514,896 |   |
| Telecommunications                                                                                                                                          |       | 99,894                           |       | 154,231 |   | 186,936 |   |
| Other                                                                                                                                                       |       | 736,873                          |       | 667,383 |   | 804,455 |   |
| Management  and Trademark Fees, including $115,105, $0 and $0 from related parties for  2005, 2004 and 2003, respectively                                   |       | 278,888                          |       | — |   | — |   |
| Payroll Reimbursements,  including $2,191,474, $0 and $0 from related parties for 2005, 2004 and 2003,  respectively                                        |       | 2,791,174                        |       | — |   | — |   |
|                                                                                                                                                        |       |                             |       |   |   |   |   |
| TOTAL  REVENUE                                                                                                                                              |       | 22,875,187                       |       | 24,211,328 |   | 26,940,473 |   |
|                                                                                                                                                        |       |                             |       |   |   |   |   |
| OPERATING  EXPENSES                                                                                                                                         |       |                             |       |   |   |   |   |
| Room                                                                                                                                                        |       | 5,010,738                        |       | 6,019,634 |   | 6,737,985 |   |
| Food and  Beverage                                                                                                                                          |       | 1,226,074                        |       | 1,323,480 |   | 1,563,778 |   |
| Telecommunications                                                                                                                                          |       | 226,559                          |       | 311,408 |   | 310,682 |   |
| General and  Administrative (includes $0, $741,537 and $584,734 of management and  licensing fees to related parties for 2005, 2004 and 2003, respectively) |       | 4,445,613                        |       | 4,703,160 |   | 5,809,698 |   |
| Sales and  Marketing                                                                                                                                        |       | 1,642,232                        |       | 2,109,528 |   | 2,215,749 |   |
| Repairs and  Maintenance                                                                                                                                    |       | 1,387,407                        |       | 1,797,719 |   | 1,893,859 |   |
| Hospitality                                                                                                                                                 |       | 827,166                          |       | 1,066,854 |   | 1,237,379 |   |
| Utilities                                                                                                                                                   |       | 1,232,940                        |       | 1,686,040 |   | 1,929,179 |   |
| Hotel  Property Depreciation                                                                                                                                |       | 2,755,499                        |       | 2,977,583 |   | 3,395,844 |   |
| Real Estate  and Personal Property Taxes, Insurance and Ground Rent                                                                                         |       | 1,329,463                        |       | 1,669,510 |   | 1,888,821 |   |
| Other                                                                                                                                                       |       | 221,969                          |       | 360,490 |   | 448,451 |   |
| Payroll  Costs Related to Management Contracts                                                                                                              |       | 2,791,174                        |       | — |   | — |   |
| Loss on  Impairment of Hotel Property                                                                                                                       |       | —                           |       | 458,401 |   | 589,687 |   |
| TOTAL  OPERATING EXPENSES (includes $0, $7,389,988 and $8,756,842 in contract labor  expense to related party for 2005, 2004 and 2003, respectively)        |       | 23,096,834                       |       | 24,483,807 |   | 28,021,112 |   |
| OPERATING  LOSS                                                                                                                                             |       | (221,647                         | )          | (272,479 | ) | (1,080,639 | ) |
| Interest  Income                                                                                                                                            |       | 7,517                            |       | 981 |   | 1,453 |   |
| Gain on  Disposition of Hotels                                                                                                                              |       | 5,113,540                        |       | — |   | — |   |
| TOTAL OTHER  INCOME                                                                                                                                         |       | 5,121,057                        |       | 981 |   | 1,453 |   |
| Interest on  Mortgage Notes Payable                                                                                                                         |       | 2,089,708                        |       | 2,764,876 |   | 2,930,253 |   |
| Interest on  Notes Payable to Banks                                                                                                                         |       | 23,659                           |       | 53,984 |   | 165,362 |   |
| Interest on  Notes Payable and Advances Payable to Related Parties                                                                                          |       | 125,336                          |       | 544,069 |   | 691,978 |   |
| Interest on  Other Notes Payable                                                                                                                            |       | 20,878                           |       | 10,290 |   | 9,549 |   |
| TOTAL  INTEREST EXPENSE                                                                                                                                     |       | 2,259,581                        |       | 3,373,219 |   | 3,797,142 |   |
| INCOME  (LOSS) BEFORE MINORITY INTEREST, INCOME TAXES AND CUMULATIVE EFFECT OF  ADOPTION OF ACCOUNTING PRINCIPLE                                            |       | 2,639,829                        |       | (3,644,717 | ) | (4,876,328 | ) |
| LESS  MINORITY INTEREST                                                                                                                                     |       | 1,384,985                        |       | (1,050,400 | ) | (1,430,380 | ) |
| Income Tax  Provision                                                                                                                                       |       | (160,000                         | )          | — |   | — |   |
| INCOME  (LOSS) ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST BEFORE CUMULATIVE EFFECT  OF ADOPTION OF ACCOUNTING PRINCIPLE                                  |       | 1,094,844                        |       | (2,594,317 | ) | (3,445,948 | ) |
| CUMULATIVE  EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE                                                                                                      |       | (854,402                         | )          | — |   | — |   |
| INCOME  (LOSS) ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST                                                                                                |       | $                                | 240,442    |   | $ | (2,594,317 | ) | $ | (3,445,948 | ) |
| INCOME (LOSS)  PER SHARE BEFORE CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE– Basic  and Diluted                                              |       | $                                | 0.45       |   | $ | (1.27 | ) | $ | (1.67 | ) |
| NET LOSS  FROM CUMULATIVE EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE – Basic and  Diluted                                                              |       | (0.35                            | )          | — |   | — |   |
| NET INCOME  (LOSS) PER SHARE – Basic and Diluted                                                                                                       |       | $                                | 0.10       |   | $ | (1.27 | ) | $ | (1.67 | ) |
| WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING – Basic and Diluted                                                                                     |       | 2,424,837                        |       | 2,035,200 |   | 2,068,508 |   |
| CASH  DIVIDENDS PER SHARE                                                                                                                                   |       | $                                | .01        |   | $ | .02 |   | $ | .01 |   |

 

See accompanying notes toconsolidated financial statements

 

25

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFSHAREHOLDERS’ (DEFICIT) EQUITYFOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

 
| BALANCE, JANUARY 31,  2002                                                      |   | $          | 1,526,816 |   |
|--------------------------------------------------------------------------------------|--------|------------|-----------|--------|
| Net Loss  Attributable to Shares of Beneficial Interest                              |   | (3,445,948 | )         |
| Dividends                                                                            |   | (20,010    | )         |
| Purchase of  Treasury Stock                                                          |   | (382,135   | )         |
| Issuance of  Shares of Beneficial Interest for Compensation                          |   | 80,858     |      |
| Related  Party Fees Forgiven                                                         |   | 534,599    |      |
| Related  Party Debt Forgiven                                                         |   | 529,046    |      |
| Reallocation  of Minority Interest                                                   |   | (73,408    | )         |
|                                                                                 |   |       |      |
| BALANCE, JANUARY 31,  2003                                                      |   | (1,250,182 | )         |
| Net Loss  Attributable to Shares of Beneficial Interest                              |   | (2,594,317 | )         |
| Dividends                                                                            |   | (40,986    | )         |
| Purchase of  Treasury Stock                                                          |   | (29,095    | )         |
| Issuance of  Shares of Beneficial Interest                                           |   | 99,680     |      |
| Related  Party Fees Forgiven                                                         |   | 530,721    |      |
| Accrued Rent  Forgiven by the Partnership                                            |   | 1,518,834  |      |
| Proceeds  from Sale of Hotel Property to Related Party in Excess of Carrying Value   |   | 192,910    |      |
| Distribution  to Minority Interest Holders                                           |   | (128,049   | )         |
| Reallocation  of Minority Interest                                                   |   | 126,885    |      |
|                                                                                 |   |       |      |
| BALANCE, JANUARY 31,  2004                                                      |   | (1,573,599 | )         |
| Net Income  Attributable to Shares of Beneficial Interest                            |   | 240,442    |      |
| Dividends                                                                            |   | (23,220    | )         |
| Purchase of  Treasury Stock                                                          |   | (225,917   | )         |
| Shares of  Beneficial Interest issued for Services Received                          |   | 49,280     |      |
| Shares of  Beneficial Interest issued to Satisfy Notes Payable to Related Parties    |   | 690,820    |      |
| Shares of  Beneficial Interest issued to Purchase Management and Licensing Contracts |   | 155,000    |      |
| Shares of  Beneficial Interest issued to Satisfy Advances Payable to the Partnership |   | 3,661,659  |      |
| Shares of  Beneficial Interest issued to Purchase Yuma Hospitality Minority Interest |   | 2,766,515  |      |
| Purchase of  Yuma Hospitality Minority Interest Above Carrying Value                 |   | 1,177,425  |      |
| Purchase of  Partnership Units Above Carrying Value                                  |   | 98,684     |      |
| Reallocation  of Minority Interest                                                   |   | (752,455   | )         |
|                                                                                 |   |       |      |
| BALANCE, JANUARY 31,  2005                                                      |   | $          | 6,264,634 |   |

 

See accompanying notes toconsolidated financial statements

 

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFCASH FLOW

 
| ** **                                                                                                                               | ** ** | **YEARS ENDED JANUARY 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| CASH FLOW  FROM OPERATING ACTIVITIES                                                                                                     |       |                             |       |   |   |   |   |
| Net Income  (Loss) Attributable to Shares of Beneficial Interest                                                                         |       | $                                | 240,442    |   | $ | (2,594,317 | ) | $ | (3,445,948 | ) |
| Adjustments  to Reconcile Net Income (Loss) Attributable to Shares of Beneficial Interest  to Net Cash Provided by Operating Activities: |       |                             |       |   |   |   |   |
| Cumulative  Effect of Adoption of Accounting Principle                                                                                   |       | 854,402                          |       | — |   | — |   |
| Net Income  from Variable Interest Entities                                                                                              |       | 352,882                          |       | — |   | — |   |
| Issuance of  Shares for Management and Licensing Contracts                                                                               |       | 155,000                          |       | — |   | — |   |
| Impairment  of Hotel Property                                                                                                            |       | —                           |       | 458,401 |   | 589,687 |   |
| Provision  for Uncollectible Receivables                                                                                                 |       | 377,465                          |       | 198,448 |   | 375,209 |   |
| Minority  Interest                                                                                                                       |       | 1,032,103                        |       | (1,050,400 | ) | (1,430,380 | ) |
| Hotel  Property Depreciation                                                                                                             |       | 2,755,499                        |       | 2,977,583 |   | 3,395,844 |   |
| (Gain) Loss  on Disposal Sale of Hotel Property                                                                                          |       | (4,999,797                       | )          | 124,310 |   | 66,401 |   |
| Amortization  of Deferred Loan Fees                                                                                                      |       | 38,312                           |       | 49,036 |   | 54,209 |   |
| Capital  Contribution from Waived Management and Licensing Fee Expense                                                                   |       | —                           |       | 530,721 |   | 534,599 |   |
| Changes in  Assets and Liabilities:                                                                                                      |       |                             |       |   |   |   |   |
| Decrease  (Increase) in Prepaid Expenses and Other Assets                                                                                |       | 141,781                          |       | 126,318 |   | (61,844 | ) |
| (Increase)  in Accounts Receivable                                                                                                       |       | (439,814                         | )          | (507,907 | ) | (5,999 | ) |
| Increase in  Purchase Deposit from Related Party                                                                                         |       | 700,000                          |       | — |   | — |   |
| (Decrease)  Increase in Accounts Payable and Accrued Expenses                                                                            |       | (547,850                         | )          | (224,509 | ) | 1,058,596 |   |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                                                                               |       | 660,425                          |       | 87,684 |   | 1,130,374 |   |
|                                                                                                                                     |       |                             |       |   |   |   |   |
| CASH FLOW  FROM INVESTING ACTIVITIES                                                                                                     |       |                             |       |   |   |   |   |
| Sale of  Hotel Properties                                                                                                                |       | 9,377,138                        |       | 12,150,503 |   | — |   |
| Improvements  and Additions to Hotel Properties                                                                                          |       | (1,308,008                       | )          | (1,863,893 | ) | (1,684,244 | ) |
| Change in  Restricted Cash                                                                                                               |       | (113,852                         | )          | (91,003 | ) | 129,193 |   |
| NET CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES                                                                                     |       | 7,955,278                        |       | 10,195,607 |   | (1,555,051 | ) |
|                                                                                                                                     |       |                             |       |   |   |   |   |
| CASH FLOW  FROM FINANCING ACTIVITIES                                                                                                     |       |                             |       |   |   |   |   |
| Principal Payments  on Mortgage Notes Payable                                                                                            |       | (6,087,771                       | )          | (4,306,890 | ) | (1,226,308 | ) |
| Refinancing  of Mortgage Notes Payable                                                                                                   |       | —                           |       | — |   | 2,136,844 |   |
| Payments on  Notes Payable to Banks                                                                                                      |       | (720,000                         | )          | (3,087,250 | ) | (677,750 | ) |
| Borrowings  on Notes Payable to Banks                                                                                                    |       | 500,000                          |       | 440,000 |   | — |   |
| Repurchase  of Partnership Units                                                                                                         |       | (453,223                         | )          | (337 | ) | (2,788 | ) |
| Repurchase  of Treasury Stock                                                                                                            |       | (113,517                         | )          | (29,095 | ) | (73,066 | ) |
| Payment of  Dividends                                                                                                                    |       | (23,220                          | )          | (40,986 | ) | (20,010 | ) |
| Distributions  to Minority Interest Holders                                                                                              |       | (85,683                          | )          | — |   | — |   |
| Payments on  Notes and Advances Payable to Related Parties                                                                               |       | (1,740,299                       | )          | (4,773,927 | ) | (227,068 | ) |
| Borrowings  on Notes and Advances Payable to Related Parties                                                                             |       | 198,000                          |       | 1,507,750 |   | 668,826 |   |
| Payments on  Other Notes Payable                                                                                                         |       | (88,647                          | )          | (81,075 | ) | (65,484 | ) |
|                                                                                                                                     |       |                             |       |   |   |   |   |
| NET CASH  (USED IN) PROVIDED BY FINANCING ACTIVITIES                                                                                     |       | (8,614,360                       | )          | (10,371,810 | ) | 513,196 |   |
|                                                                                                                                     |       |                             |       |   |   |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                                    |       | 1,343                            |       | (88,519 | ) | 88,519 |   |
|                                                                                                                                     |       |                             |       |   |   |   |   |
| CASH AND  CASH EQUIVALENTS AT BEGINNING OF YEAR                                                                                          |       | —                           |       | 88,519 |   | — |   |
|                                                                                                                                     |       |                             |       |   |   |   |   |
| CASH AND  CASH EQUIVALENTS AT END OF YEAR                                                                                                |       | $                                | 1,343      |   | $ | — |   | $ | 88,519 |   |

 

See accompanying notes toconsolidated financial statements

 

27

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INNSUITESHOSPITALITY TRUST AND SUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL STATEMENTSAS OF AND FOR THE YEARS ENDED JANUARY 31, 2005, 2004 AND 2003

 

## 1.  NATURE OF OPERATIONS AND BASIS OFPRESENTATION

 

InnSuites Hospitality Trust (the “Trust”) owns, as of January 31,2005, directly and through a partnership interest, six hotels with an aggregateof 947 suites in Arizona, southern California and New Mexico (the “Hotels”).  The Hotels operate as InnSuites Hotels.

 

Prior to February 1, 2004, the Trust operated as a self-managedand self-administered “umbrella partnership real estate investment trust (“REIT”),”with operations through an operating partnership, RRF Limited Partnership, aDelaware limited partnership (the “Partnership”).  Effective February 1, 2004, the Trustterminated its election to be taxed as a REIT. The Trust is the sole general partner of the Partnership and owned64.75% and 51.54% of the Partnership as of January 31, 2005 and 2004,respectively.  The Trust’s weightedaverage ownership for the years ended January 31, 2005, 2004, and 2003 was57.00%, 51.12% and 49.80%, respectively. The Partnership owns five of the hotel properties and incurs the relatedexpenses.  The Trust owns and operatesthe Yuma, Arizona hotel property directly, which it acquired from thePartnership on January 31, 2005.  SeeNote 21 -“Execution of the Plan to Regain Compliance with the American StockExchange Continued Listing Standards.” Prior to May 1, 2004, the Hotels were leased to InnSuites Hotels, Inc. (“InnSuitesHotels”), a wholly-owned subsidiary of the Trust.  Subsequent to May 1, 2004, the Trust and thePartnership operate the Hotels owned by each of them.  Prior to June 8, 2004, InnSuites Hotelsheld the franchise agreement for each Hotel and contracted with SuiteHospitality Management, Inc. (the “Management Company”) for certain propertymanagement services and employment services. Until July 2, 2003, the Management Company was owned 9.8% by theJames F. Wirth (“Mr. Wirth”), Chairman, President and Chief Executive Officerof the Trust.  On June 8, 2004, theTrust purchased the “InnSuites” trademarks and tradenames and related licensingagreements and acquired the management agreements with the ManagementCompany.  See Note 20 – “Purchase ofManagement and Licensing Contracts.”

 

After June 8, 2004, InnSuites Hotels provides hotel managementservices to the Hotels, as well as three hotels featuring 440 suites owned byaffiliates of Mr. Wirth and one unrelated hotel property featuring 129suites.  Under the management agreements,InnSuites Hotels provides the personnel at the hotels, the expenses of whichare reimbursed at cost, and manages the hotels’ daily operations.  All such expenses and reimbursements betweenInnSuites Hotels and the Partnership have been eliminated inconsolidation.  InnSuites Hotels received2% of room revenue from the Hotels owned by the Partnership and the Trust inexchange for management services during fiscal year 2005.  Effective February 1, 2005, InnSuitesHotels receives 2.5% of total revenues from these Hotels.  These agreements expire on January 31,2008.  InnSuites Hotels received 1% (ormore depending on results) of room revenue from the Hotels owned by affiliatesof Mr. Wirth in exchange for management services during fiscal year 2005.  These agreements require that these hotels pay2% of room revenue, unless these hotels fail to reach 80% of their budgetedprofit, at which point the fees are reduced to 1% of room revenue.  These agreements expire on February 1, 2007and may be cancelled by either party with 90-days notice or 30-daysnotice in the event the property changes ownership.  InnSuites Hotels received 5% of total revenuefrom the unrelated hotel in San Diego, California in exchange for managementservices during fiscal year 2005.  Thisagreement expires on March 31, 2007, and may be cancelled by either partywith 90-days notice or 30-days notice in the event the property changesownership.

 

After June 8, 2004, InnSuites Hotels owns the “InnSuites”trademark and holds trademark agreements with the Hotels, as well as three hotelsfeaturing 440 suites owned by affiliates of Mr. Wirth and two unrelated hotelproperties featuring 305 suites. InnSuites Hotels received 1.0% (2.0% for the hotel which does not carrya third-party franchise) of room revenue from the Hotels owned by thePartnership and the Trust in exchange for use of the “InnSuites” trademarkduring fiscal year 2005.  The revenue andexpenses related to these contracts have been eliminated in consolidation.  Effective February 1, 2005, theInnSuites Hotels receives 1.25% (2.5% for the hotel which does not carry athird-party franchise) of total revenues from these Hotels.  These agreements expire on January 31,2008.  InnSuites Hotels received 1% (ormore depending on results) of room revenue from the Hotels owned by affiliatesof Mr. Wirth in exchange for use of the “InnSuites” trademark during fiscalyear 2005.  These agreements require thatthese hotels pay 2% of room revenue, unless these hotels fail to reach 80% oftheir budgeted profit, at which point the fees are reduced to 1% of roomrevenue.  These agreements have noexpiration date and may be cancelled by either party with 12-monthsnotice or 90-days notice in the event the property changes ownership.  InnSuites Hotels received 2% of total revenuefrom the unrelated hotel in San Diego, California in exchange for trademarklicensing services during fiscal year 2005. This agreement expires on March 31, 2005, and may be cancelled byeither party with 90-days notice.  InnSuites Hotels received 0.5% of roomrevenue from the unrelated hotel in Buena Park, California in exchange fortrademark licensing services during fiscal year 2005.  This agreement has no expiration date and maybe cancelled by either party with 30-days notice.

 

28

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As a REIT, through January 31, 2004, the Trust was prohibited fromoperating its properties other than through an independent management companyor a taxable REIT subsidiary.  Prior to February 1,2001, InnSuites Hotels operated and managed all of the Hotels, with theassistance of InnSuites Innternational Hotels, Inc. (“InnSuites Innternational”),an entity owned by Mr. Wirth. Pursuant to management contracts, InnSuites Hotels paid InnSuitesInnternational an annual management fee of 2.5% of gross revenues for propertymanagement services.  Following theacquisition of InnSuites Hotels by the Trust effective February 1, 2001,InnSuites Hotels operated and managed the Hotels with the assistance of theManagement Company, an entity in which Mr. Wirth previously had a 9.8%ownership interest, pursuant to substantially the same terms as the InnSuitesInnternational management agreements. There were no termination fees charged in connection with the cancellationof the old management agreements.  Inexchange for its assumption of the management agreements, the ManagementCompany agreed to pay $911,320 to InnSuites Innternational in order forInnSuites Innternational to satisfy its liabilities.  On June 8, 2004, the managementagreements of the Management Company were purchased by the Trust and the Trustbegan managing the Hotels, certain hotels owned by Mr. Wirth and an unrelatedhotel.  See Note 20 – “Purchase ofManagement and Licensing Contracts.”

 

PARTNERSHIPAGREEMENT

 

The Partnership Agreement of the Partnership provides for the issuanceof two classes of limited partnership units, Class A andClass B.  Class A and Class Blimited partnership units are identical in all respects, except that eachClass A limited partnership unit shall be convertible into onenewly-issued Share of Beneficial Interest of the Trust, at any time at theoption of the particular limited partner. The Class B limited partnership units may only become convertiblewith the approval of the Board of Trustees, in its sole discretion.  As of January 31, 2005, 1,189,386Class A limited partnership units were issued and outstanding representing9.0% of the total partnership units. Additionally, as of January 31, 2005, 3,467,938 Class Blimited partnership units were outstanding to Mr. Wirth and hisaffiliates, in lieu of the issuance of Class A limited partnership unitsrepresenting 26.2% of the total partnership units.  If all of the Class A and B limitedpartnership units were converted, the limited partners in the Partnership wouldreceive 4,657,324 Shares of Beneficial Interest of the Trust.  As of January 31, 2005, the Trust owns8,554,193 general partner units in the Partnership, representing 64.8% of thetotal partnership units.

 

BASIS OFPRESENTATION

 

As sole general partner of the Partnership, the Trust exercisesunilateral control over the Partnership, and the Trust owns all of the issuedand outstanding classes of shares of InnSuites Hotels. Therefore, the financialstatements of the Partnership and InnSuites Hotels are consolidated with theTrust, and all significant intercompany transactions and balances have beeneliminated.

 

## 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

##  

USE OF ESTIMATES

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.

 

The Trust’s operations are affected by numerous factors, including theeconomy, competition in the hotel industry and the effect of the economy on thetravel and hospitality industries.  TheTrust cannot predict if any of the above items will have a significant impactin the future, nor can it predict what impact, if any, the occurrence of theseor other events might have on the Trust’s operations and cash flows.  Significant estimates and assumptions made bymanagement are used for, but not limited to, the estimated useful lives of long-livedassets and estimates of future cash flows used to test a long-lived asset forrecoverability, the fair values of the long-lived assets and the realization ofnet operating losses.

 

HOTEL PROPERTIES

 

Hotel properties are stated at cost and are depreciated using thestraight-line method over estimated lives ranging from 5 to 40 years forbuildings and improvements and 3 to 15 years for furniture and equipment.

 

The Trust adopted SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” in accounting for its hotel propertieseffective the beginning of fiscal year 2003 and previously applied SFASNo. 121 in

 

29

----

 

accounting for its hotel properties in fiscal year 2002.  Properties held for sale at the beginning offiscal year 2003 continued to be accounted for under SFAS No. 121.  The adoption of SFAS No. 144 had nosignificant effect on the financial statements.

 

Management applies SFAS No. 144 to determine when it is required totest an asset for recoverability of its carrying value.  If the carrying amount of an asset exceedsthe estimated undiscounted future cash flows over its estimated remaining life,the Trust recognizes an impairment expense to reduce the asset’s carrying valueto its fair value.  The estimated futurecash flows are based upon, among other things, assumptions about expectedfuture operating performance, and may differ from actual cash flows.  Long-lived assets evaluated for impairmentare analyzed on a property-specific basis independent of the cash flows ofother groups of assets.  If the sum ofthe projected undiscounted cash flows (excluding interest) is less than thecarrying value of the assets, the assets will be written down to the estimatedfair value in the period in which the determination is made.  The Trust determines the estimated usefullives of its assets based on the expected future economic benefit of the assetand its ability to hold such assets. Fair value is determined by the most current third-party propertyappraisal, if available.  Evaluation offuture cash flows is based on historical experience and other factors,including certain economic conditions and committed future bookings.  Management has determined that no additionalimpairment of long-lived assets currently exists beyond the amounts recognized.

 

During fiscal year 2005, events and circumstances indicated that one ofthe Trust’s properties held in use should be evaluated for impairment.  However, the Trust obtained an updatedthird-party appraisal of the property, which indicated that the value of theproperty exceeded its carrying value.  However,it is possible that future changes in the economic climate or real estatemarkets may adversely impact the fair values of the hotel properties, resultingin the need for the Trust to recognize an impairment expense to adjust thecarrying value of those properties to their fair values.

 

Gains and losses on sales of properties are recognized at the time ofsale or deferred to the extent required by GAAP.

 

The Trust will classify a hotel property as “held for sale” in theperiod (generally not to exceed one year) in which (1) it has made the decisionto actively seek a buyer of the property and/or (2) a binding agreement topurchase the property has been signed under which the buyer has committed asignificant amount of refundable cash and no significant financingcontingencies exist which could cause the transaction not to be completed in atimely manner.  If these criteria aremet, the Trust will record an impairment loss if the fair value less the coststo sell is lower than the carrying amount of the hotel and will cease recordingdepreciation.

 

CASH AND CASHEQUIVALENTS

 

The Trust considers all highly liquid short-term investments withoriginal maturities of three months or less to be cash equivalents.

 

REVENUERECOGNITION

 

Room, food and beverage, telecommunications, management and licensingfees, and other revenue are recognized as earned as services are provided anditems are sold.  Payroll reimbursementsare recorded as personnel are provided and are not netted with thecorresponding payroll expense.

 

RECEIVABLES

 

Accounts receivable are carried at original amounts less an estimatemade for doubtful receivables based on a review of outstanding amounts on aquarterly basis.  Management records anallowance for doubtful accounts for 50% of the balances over 90 days and 100%of the balances over 120 days. Accounts receivables are written off when deemed uncollectible.  Recoveries, if any, of receivables previouslywritten off are recorded when received. The Trust does not charge interest on accounts receivable balances.

 

STOCK-BASEDCOMPENSATION

 

The Trust applies the provisions of Accounting Principles Board (“APB”)Opinion No. 25, Accounting for Stock Issued to Employees, and provides proforma net income (loss) disclosures for employee stock option grants as if thefair-value-based method defined in Statement of Financial Accounting Standards(“SFAS”) No. 123, Accounting for Stock-Based Compensation, had beenapplied.  In accordance with APB OpinionNo. 25, compensation expense is recorded over the vesting period only if thecurrent estimated market price on the underlying stock on the date an option isgranted exceeds the exercise price.

 

30

----

 

No compensation cost has been recognized for options granted toemployees for the years ended January 31, 2005, 2004 and 2003.  The following pro forma information presentspro forma net loss information as if compensation expense had been recognizedfor stock options as determined under the fair-value-based method prescribed bySFAS No. 123 using the Black-Scholes options pricing model:

 
| ** **                                 | ** ** | **Years ended January 31** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income  (loss):                        |       |                            |       |   |   |   |   |
| As reported                                |       | $                               | 240,442    |   | $ | (2,594,317 | ) | $ | (3,445,948 | ) |
|                                       |       |                            |       |   |   |   |   |
| Pro forma  stock compensation expense      |       | $                               | —     |   | $ | (175 | ) | $ | (14,024 | ) |
|                                       |       |                            |       |   |   |   |   |
| Pro forma                                  |       | $                               | 240,442    |   | $ | (2,594,492 | ) | $ | (3,459,972 | ) |
|                                       |       |                            |       |   |   |   |   |
| Net income  (loss) per share – basic: |       |                            |       |   |   |   |   |
| As reported                                |       | $                               | 0.10       |   | $ | (1.27 | ) | $ | (1.67 | ) |
|                                       |       |                            |       |   |   |   |   |
| Pro forma                                  |       | $                               | 0.10       |   | $ | (1.27 | ) | $ | (1.67 | ) |

 

No stock options were issued duringthe fiscal years ended January 31, 2005, 2004 and 2003.

 

INCOME TAXES

 

Prior to February 1, 2004, the Trust elected to be taxed as a REITunder Sections 856 through 860 of the U.S. Internal Revenue Code (the “Code”).  To qualify as a REIT, the Trust was requiredto meet a number of organizational and operational requirements, including arequirement that it currently distribute at least 90% of its adjusted taxableincome to its shareholders.  As a REIT,the Trust was not subject to federal corporate income tax on that portion ofits net income that was distributed to shareholders.

 

Prior to February 1, 2004, the Trust accounted for deferred taxesutilizing a liability method whereby deferred tax assets were recognized for deductibletemporary differences and deferred tax liabilities were recognized for taxabletemporary differences.  Temporarydifferences were the differences between the reported amounts of assets andliabilities and their tax bases. Deferred tax assets were reduced by a valuation allowance when it wasdetermined to be more likely than not that some portion or all of the deferredtax assets would not be realized. Deferred tax assets and liabilities were adjusted for the effects ofchanges in tax laws and rates on the date of enactment.

 

Effective February 1, 2004, the Trustrelinquished its REIT status. As of that date, any distributions to itsshareholders are not deductible for purposes of computing the Trust’s taxableincome and the Trust will be subject to income tax, including any applicablealternative minimum tax, on its taxable income at regular corporate rates,without offset for distributions of such income to its shareholders.

 

DIVIDENDS ANDDISTRIBUTIONS

 

The Trust expects to pay dividends. The Trust’s ability to pay dividends is largely dependent upon itsreceipt of distributions from the Partnership.

 

MINORITY INTEREST

 

The Trust accounts for minority interest in accordance with EITF IssueNo. 94-2 “Treatment of Minority Interests in Certain Real EstateInvestments” and EITF Issue No. 95-7 “Implementation Issues Related to theTreatment of Minority Interest in Certain Real Estate Investment Trusts.”

 

31

----

 

Minority interest in the Partnership represents the limited partners’proportionate share of the capital and earnings of the Partnership.  Income or loss is allocated to the minorityinterest based on its weighted average ownership percentage in the Partnershipthroughout the period, and capital is allocated based on its ownershippercentage at year-end.  Any differenceis recorded as a reallocation of minority interest as a component ofshareholders’ equity.

 

INCOME (LOSS) PERSHARE

 

Basic and diluted income (loss) per Share of Beneficial Interest havebeen computed based on the weighted-average number of Shares of BeneficialInterest and potentially dilutive securities outstanding during the periods.

 

For the twelve months ended January 31, 2005, 2004 and 2003, therewere Class A and Class B limited partnership units outstanding, whichare convertible into Shares of Beneficial Interest of the Trust.  Assuming conversion at the beginning of eachperiod, the aggregate weighted-average of these Shares of Beneficial Interestwould have been 5,680,962, 6,457,165 and 6,673,808 in addition to the basicshares outstanding for fiscal year 2005, 2004 and 2003, respectively.  These Shares of Beneficial Interest issuableupon conversion of the Class A and Class B limited partnership units are anti-dilutivedue to the fact that the conversion of these units would result in increasedearnings per share.  Therefore, they havenot been included in the number of issued and outstanding Shares of BeneficialInterest used in the calculation of diluted earnings per share.

 

For the twelve months ended January 31, 2005, 2004 and 2003,232,600, 246,000 and 253,200 stock options, respectively, are not includedin the computation of diluted earnings per share as their inclusion would havean antidilutive effect because of the fact that the option exercise prices aregreater than the average market price of the Trust’s Shares of BeneficialInterest.

 

FAIR VALUE OFFINANCIAL INSTRUMENTS

 

For disclosure purposes, fair value is determined by using availablemarket information and appropriate valuation methodologies.  Due to their short maturities, cash and cashequivalents are carried at cost, which reasonably approximates fair value.

 

The fair value of mortgage notes payable, notes payable to banks andnotes and advances payable to related parties is estimated by using the currentrates which would be available for similar loans having the same remainingmaturities.  The carrying value ofaccounts payable and accrued expenses and other notes payable approximates fairvalue, due to their short-term nature. See Note 14 – “Fair Value of Financial Instruments.”

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In December 2004,Statement of Financial Accounting Standards No. 123 (revised 2004) wasissued.  This Statement is a revision ofFASB Statement No. 123, Accounting for Stock Based Compensation, andsupercedes APB Opinion No. 25, Accounting for Stock Issued toEmployees.  This Statement establishesstandards for accounting for transactions in which an entity exchanges itsequity securities for goods and services. The Trust is required to adopt this Statement as of August 31,2005.  The Trust believes that theadoption of this Statement will not affect future financial results, as alloptions granted by the Trust are fully vested.

 

SEGMENT REPORTING

 

The Trust views its operations as one operating business segment, ahospitality company that owns six hotel properties with an aggregate of 947suites in Arizona, southern California and New Mexico.

 

ADVERTISING COSTS

 

Amounts incurred for advertising costs with third parties are expensedas incurred.  Advertising expense totaledapproximately $1,642,000, $2,110,000 and $2,216,000 for the years ended January 31,2005, 2004, and 2003, respectively.

 

## 3.  HOTEL PROPERTIES

##  

As of January 31 of the respective years, hotel properties, andhotel properties held for sale, consisted of the following:

 
| ** **                         | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| Land                               |       | $          | 2,824,520  |       | $          | 3,182,368 |   |
| Building and  improvements         |       | 32,958,443 |       | 34,274,136 |       |
| Furniture,  fixtures and equipment |       | 6,913,030  |       | 6,748,816  |       |
|                               |       |       |       |       |       |
| Total hotel  properties            |       | 42,695,993 |       | 44,205,320 |       |
| Less  accumulated depreciation     |       | 11,505,854 |       | 10,120,000 |       |
|                               |       |       |       |       |       |
| Hotel  properties, net             |       | $          | 31,190,139 |       | $          | 34,085,320 |   |
| Hotel  properties, held for sale   |       | $          | 3,121,235  |       | $          | 11,733,371 |   |

 

32

----

 

## 4.  ACQUISITIONS

##  

In December 2000, InnSuites Hotels and the Trust establishedindependent review groups to consider altering the current structure of themanagement and operations of the Hotels pursuant to the provisions of the REITModernization Act.  Effective February 1,2001, the Trust acquired all of the issued and outstanding common and preferredequity stock of InnSuites Hotels for $11,531 in cash consideration and theassumption of approximately $1.6 million of net liabilities.  Prior to the acquisition, InnSuites Hotelswas owned 23% by Marc E. Berg, Executive Vice President, Secretary, Treasurerand Trustee of the Trust, 9.8% by InnSuites Innternational Hotels, Inc., awholly-owned affiliate of Mr. Wirth and his spouse, and 67.2% by unrelatedparties.

 

Following the acquisition, the management contracts relating to theHotels between InnSuites Hotels and InnSuites Innternational Hotels, Inc. wereterminated effective January 31, 2001 and new management contracts wereentered into on substantially similar terms with the Management Company, 9.8%of which was owned by Mr. Wirth prior to July 1, 2003, when Mr. Wirthsold his interest to the majority stockholder. There were no termination fees charged in connection with thecancellation of the old management contracts. In exchange for its assumption of the management agreements, theManagement Company agreed to pay $911,320 to InnSuites Innternational in orderfor InnSuites Innternational to satisfy its liabilities.  The acquisition of InnSuites Hotels by theTrust resulted in the following benefits: (1) a more direct relationshipbetween the Hotels and the Trust, (2) the inclusion of InnSuites Hotels’revenues in excess of required rent payments in the Trust’s consolidatedfinancial reports, (3) the elimination of potential conflicts of interestand (4) the reduction of certain administrative costs relative to theoperation of the Hotels.

 

## 5.  MORTGAGE NOTES PAYABLE

##  

At January 31, 2005, the Trust had mortgage notes payableoutstanding with respect to each of the Hotels. The mortgage notes payable have various repayment terms and havescheduled maturity dates ranging from July 29, 2009 to May 1,2016.  Weighted average interest rates onthe mortgage notes payable for the years ended January 31, 2005, 2004 and2003 were 8.03%, 7.72% and 8.33%, respectively.

 

## Thefollowing table summarized the Trust’s mortgage notes payable as of January 31:

##  

| ** **                                                                                                                                                                                                                                                       | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Mortgage  note payable, due in variable monthly installments, including interest at  prime rate plus 1.0% per year, through July 29, 2009, secured by the  Tucson St. Mary’s property with a carrying value of $9.6 million at January 31,  2005. |       | $         | 4,285,505  |      | $          | 4,374,542 |   |
|                                                                                                                                                                                                                                                             |       |      |       |      |       |
| Mortgage  note payable, due in monthly installments of $48,738, including interest at  8% per year, through May 1, 2016, secured by the Tucson Oracle property with  a carrying value of $5.3 million at January 31, 2005.                                  |       | 4,349,266 |       | 4,576,229 |       |
|                                                                                                                                                                                                                                                             |       |      |       |      |       |
| Mortgage  note payable, due in monthly installments of $71,141, including interest at  8.28% per year, through May 11, 2011, secured by the Ontario property with a  carrying value of $7.3 million at January 31, 2005.                                    |       | 8,586,467 |       | 8,711,653 |       |
|                                                                                                                                                                                                                                                             |       |      |       |      |       |
| Mortgage  note payable, due in monthly installments of $15,858, including interest at  8.875% per year, through September 1, 2015, secured by the Albuquerque  property with a carrying value of $1.9 million at January 31, 2005.                     |       | 1,309,249 |       | 1,379,904 |       |
|                                                                                                                                                                                                                                                             |       |      |       |      |       |
| Mortgage  note payable, due in monthly installments of $42,886, including interest at  8.25% per year, through April 1, 2014, secured by the Northern Phoenix  property with a carrying value of $3.1 million at January 31, 2005.                     |       | 3,290,859 |       | 3,523,469 |       |
|                                                                                                                                                                                                                                                             |       |      |       |      |       |
| Mortgage  note payable, due in monthly installments of $41,168, including interest at  9.25% per year, through August 1, 2011, secured by the Yuma property  with a carrying value of $6.7 million at January 31, 2005.                                |       | 2,186,099 |       | 2,685,306 |       |
|                                                                                                                                                                                                                                                             |       |      |       |      |       |
| Mortgage  note payable, paid in full in fiscal year 2005 in connection with the sale of  the San Diego property.                                                                                                                                                 |       | —    |       | 4,813,525 |       |
|                                                                                                                                                                                                                                                             |       |      |       |      |       |
| Mortgage  note payable, paid in full in fiscal year 2005 in connection with the sale of  the Tempe property.                                                                                                                                                     |       | —    |       | 1,741,087 |       |
|                                                                                                                                                                                                                                                             |       |      |       |      |       |
| Totals                                                                                                                                                                                                                                                           |       | $         | 24,007,445 |      | $          | 31,805,715 |   |

 

33

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Mr. Wirth and certain of his affiliates have guaranteed $3,738,479and $5,845,475 of the mortgage notes payable as of January 31, 2005 and 2004,respectively.  The net book value of the propertiessecuring these mortgage notes payable at January 31, 2005 and 2004 was$19,441,000 and $45,747,000, respectively. See Note 9 – “Minimum Debt Payments” for scheduled minimum payments.

 

## 6.  NOTES PAYABLE TO BANKS

##  

On July 21, 2004, the Trust obtained a bankline of credit secured by a security agreement, business loan agreement andcommercial guaranty of the Partnership all dated July 21, 2004.  The line of credit is secured by the assetsof the Trust alone, which is comprised mainly of its investment in thesubsidiaries.  Under the terms of theline of credit, the Trust can draw up to $500,000, bearing interest at primeplus 1.0% (6.25% as of January 31, 2005) per annum, and is required tomake monthly interest-only payments.  Theline of credit matures on July 20, 2005. As of January 31, 2004, the Trust had drawn the entire $500,000available under the line of credit. 

 

## 7.  NOTES AND ADVANCES PAYABLE TO RELATED PARTIES

##  

Notes and advances payable to related parties consist of funds providedby Mr. Wirth, certain of his affiliates and other related parties topermit the Trust to repurchase additional general partnership units in thePartnership and to fund working capital and capital improvement needs.  The aggregate amounts outstanding to relatedparties were approximately $94,000 and $6.9 million as of January 31, 2005and 2004, respectively.  The notes andadvances payable to related parties are as follows as of January 31 of therespective years:

 

 
| ** **                                                                                                                                                                                                                                                                                               | ** ** | **2005** | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|
| Note payable  to The Anderson Charitable Remainder Unitrust, an affiliate of Mason  Anderson, Trustee of the Trust, bearing interest at 7% per annum, and secured  by Shares of Beneficial Interest in the Trust. Due in monthly principal and  interest payments of $2,408 through September 2005. |       | $        | 18,771     |      | $          | — |   |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable  to Wayne Anderson, son of Mason Anderson, Trustee of the Trust, bearing  interest at 7% per annum, and secured by Shares of Beneficial Interest in the  Trust. Due in monthly principal and interest payments of $574 through June 2009.                                              |       | 26,114   |       |      |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable  to Karen Anderson, daughter of Mason Anderson, Trustee of the Trust, bearing  interest at 7% per annum, and secured by Shares of Beneficial Interest in the  Trust. Due in monthly principal and interest payments of $574 through June 2009.                                         |       | 26,115   |       |      |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable  to Kathy Anderson, daughter of Mason Anderson, Trustee of the Trust, bearing  interest at 7% per annum, and secured by Shares of Beneficial Interest in the  Trust. Due in monthly principal and interest payments of $495 through June 2009.                                         |       | 22,512   |       |      |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable  to Steve Robson, Trustee of the Trust, paid in full during fiscal year 2005  with Shares of Beneficial Interest in the Trust.                                                                                                                                                              |       | —   |       | 239,667   |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Unsecured  notes payable to Rare Earth Financial, L.L.C., an affiliate of  Mr. Wirth, paid in full during fiscal year 2005.                                                                                                                                                                         |       | —   |       | 514,500   |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Unsecured  note payable to Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth,  paid in full during fiscal year 2005 in connection with the sale of the Tempe  property.                                                                                                                       |       | —   |       | 2,000,000 |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable  to Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth, bearing  interest at 7% per annum, paid in full during fiscal year 2005 in connection  with the sale of the Tempe property.                                                                                               |       | —   |       | 2,072,893 |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable  to Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth, paid in full  during fiscal year 2005 in connection with the sale of the Tempe property                                                                                                                                   |       | —   |       | 1,379,646 |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable  to Hulsey Hotels Corporation, an affiliate of Mr. Wirth, paid in full  during fiscal year 2005.                                                                                                                                                                                       |       | —   |       | 356,550   |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable  to Mr. Wirth, bearing interest at 7% per annum, paid in full during fiscal  year 2005                                                                                                                                                                                                      |       | —   |       | 187,230   |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Unsecured  note payable to Mr. Wirth, paid in full during fiscal year 2005.                                                                                                                                                                                                                              |       | —   |       | 101,755   |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Totals                                                                                                                                                                                                                                                                                                   |       | $        | 93,512     |      | $          | 6,852,241 |   |

 

34

----

 

Duringthe second and third quarters of fiscal year 2004, the Trust issued fivepromissory notes in the amount of $208,000, $75,000, $200,000, $110,000 and$60,000 to Rare Earth Development Company, an affiliate of Mr. Wirth, all ofwhich were paid in full in the third quarter of fiscal year 2004 utilizing aportion of the cash proceeds from the sale of the Buena Park property.

 

Duringthe second quarter of fiscal year 2004, the Trust issued a promissory note inthe amount of $225,000 to Rare Earth Financial, L.L.C., an affiliate of Mr.Wirth, which was paid in full in the third quarter of fiscal year 2004utilizing a portion of the cash proceeds from the sale of the Buena Parkproperty.

 

During thefirst quarter of fiscal year 2005, the Trust repurchased 433,036 Class Blimited partnership units in the Partnership from affiliates of Mr. Wirth,issuing promissory notes in the aggregate amount of $974,331.  During the first quarter of fiscal year 2005,the Trust repaid $449,500 of these notes. During the fourth quarter of fiscal year 2005, the Trust repaid theremaining balance of these notes with Shares of Beneficial Interest with an aggregatevalue of $467,552.  Additionally, Mr. Wirthconverted 100,000 Class B limited partnership units in the Partnership into100,000 Shares of Beneficial Interest.

 

As of February 2, 2004, J. R. Chase, the solestockholder of the Management Company, agreed to transfer 32,363 Shares ofBeneficial Interest in the Trust to the Management Company in order tofacilitate the Management Company’s acquisition of Licensing Corp. from Mr.Wirth.  In consideration of the transferof those Shares, the Management Company agreed to pay Mr. Chase $72,817.  The Management Company fully satisfied thisobligation during June 2004.  SeeNote 20, “Purchase of Management and Licensing Contracts.” 

 

Duringthe second quarter of fiscal year 2005, the Trust issued promissory notestotaling $83,000 to affiliates of Mason Anderson, who subsequently became aTrustee of the Trust, in exchange for 47,084 Shares of Beneficial Interest inthe Trust.

 

During the second quarter of fiscal year2005, the Trust issued 55,423 Shares of Beneficial Interest to satisfy unpaidprincipal and interest totaling $95,882 to Mr. Robson, a Trustee of the Trust.

 

Duringthe fourth quarter of fiscal year 2005, the Partnership reclassified $700,000of advances payable to Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth,to a deposit for the purchase of the Phoenix, Arizona hotel property by anotheraffiliate of Mr. Wirth.

 

The Trust paid interest on related party notes to Mr. Wirth andhis affiliates in the amounts of $443,959, $205,101 and $28,373 for the twelvemonths ended January 31, 2005, 2004 and 2003, respectively.  The Trust incurred interest expense onrelated party notes to Mr. Wirth and his affiliates in the amounts of $122,314,$515,214 and $623,522 for the twelve months ended January 31, 2005, 2004and 2003, respectively.

 

## 8.  OTHER NOTES PAYABLE

##  

As of January 31, 2005, the Trust had $248,413 in securedpromissory notes outstanding to unrelated third parties arising from therepurchase of 188,261 Class A limited partnership units in the Partnershipand the repurchase of 18,233 Shares of Beneficial Interest in privatelynegotiated transactions.  The promissorynotes bear interest at 7% per year and are due in varying monthly paymentsthrough March 2011.  The repurchasedClass A limited partnership units and Shares of Beneficial Interest secure thenotes.  As of January 31, 2004, theTrust had outstanding $169,277 in secured promissory notes to unrelated thirdparties arising from the repurchase of certain limited partnership units andShares of Beneficial Interest.

 

35

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## 9.  MINIMUM DEBT PAYMENTS

##  

Scheduled minimum payments of debt as of January 31, 2005 are asfollows in the respective fiscal years indicated:

 
| **FISCAL YEAR ENDED** | ** ** | **AMOUNT** | ** ** |
|-----------------------|------------|------------|------------|
| 2006                  |       | $          | 1,673,537  |   |
| 2007                  |       | 1,232,615  |       |
| 2008                  |       | 1,332,085  |       |
| 2009                  |       | 1,397,031  |       |
| 2010                  |       | 5,246,271  |       |
| Thereafter            |       | 13,967,831 |       |
|                  |       |       |       |
|                  |       | $          | 24,849,370 |   |

 

## 10.  DESCRIPTION OF CAPITAL STOCK

##  

Holders of the Trust’s Shares of Beneficial Interest are entitled toreceive dividends when and if declared by the Board of Trustees of the Trustout of funds legally available therefor. The holders of Shares of Beneficial Interest, upon any liquidation,dissolution or winding-down of the Trust, are entitled to share ratably in anyassets remaining after payment in full of all liabilities of the Trust.  The Shares of Beneficial Interest possessordinary voting rights, each share entitling the holder thereof to one vote.  Holders of Shares of Beneficial Interest donot have cumulative voting rights in the election of Trustees and do not havepreemptive rights.

 

On January 2, 2001, the Board of Trustees approved a sharerepurchase program under Rule 10b-18 of the Securities Exchange Act of1934, as amended, for the purchase of up to 250,000 limited partnership unitsin the Partnership and/or Shares of Beneficial Interest in open market orprivately negotiated transactions. Additionally, on September 10, 2002,the Board of Trustees approved the purchase of up to 350,000 additional limitedpartnership units in the Partnership and/or Shares of Beneficial Interest inopen market or privately negotiated transactions.  Acquired Shares of Beneficial Interest areheld in treasury and are available for future acquisitions and financingsand/or for awards granted under the Trust’s 1997 Stock Incentive and OptionPlan.  During fiscal year 2005, the Trustacquired 130,717 Shares of Beneficial Interest in open market and privatelynegotiated transactions at an average price of $1.73 per share and 532,077limited partnership units in privately negotiated transactions at an averageprice of $2.17 per unit.  The Trustintends to continue repurchasing Shares of Beneficial Interest in compliancewith applicable legal and American Stock Exchange requirements.  The Trust is authorized to repurchase anadditional 40,133 limited partnership units and/or Shares of BeneficialInterest pursuant to the share repurchase program.

 

For the years ended January 31, 2005, 2004 and 2003, the Trustrepurchased 130,717, 22,500 and 191,343 Shares of Beneficial Interest at anaverage price of $1.73, $1.29 and $2.00 per share, respectively.  Repurchased Shares of Beneficial Interest areaccounted for as treasury stock in the Trust’s Consolidated Statements ofShareholders’ (Deficit) Equity.

 

## 11.  FEDERAL INCOME TAXES

##  

The Trust has an income tax net operatingloss carryforward of approximately $15.2 million at January 31,2005.  The quarterly allocation of cashdividends paid per Share of Beneficial Interest and the characterization ofdividends as either ordinary income or return of capital for an individualshareholder’s income tax purposes were as follows:

 
| ** **      | ** ** | **CALENDAR 2004**    | ** ** | **CALENDAR 2003**      | ** ** | **CALENDAR 2002** | ** ** |
|-----------------|------------|----------------------|------------|------------------------|------------|-------------------|------------|
| **Month  Paid** | ** ** | **Ordinary  Income** | ** ** | **Return of  Capital** | ** ** | **Total  Paid**   | ** ** | **Ordinary  Income** | ** ** | **Return of  Capital** | ** ** | **Total  Paid** | ** ** | **Ordinary  Income** | ** ** | **Return of  Capital** | ** ** | **Total  Paid** | ** ** |
| January         |       | —               |       | $                      | .02        |              | $          | .02 |   | — |   | $ | .01 |   | $ | .01 |   | — |   | $ | .01 |   | $ | .01 |   |
| May             |       | —               |       | —                 |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   |
| July            |       | —               |       | —                 |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   |
| October         |       | —               |       | —                 |       | —            |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total           |       | —               |       | $                      | .02        |              | $          | .02 |   | — |   | $ | .01 |   | $ | .01 |   | — |   | $ | .01 |   | $ | .01 |   |

 

The tax status of distributions to shareholders in calendar 2005 willbe dependent on the level of the Trust’s earnings in that year.  If certain changes in the Trust’s ownershipshould occur, there could be an annual limitation on the amount ofcarryforwards that can be utilized, which could potentially impair the abilityto utilize the full amount of the carryforwards.

 

36

----

 

The total dividends per Share of Beneficial Interest applicable tooperating results for the years ended January 31, 2005, 2004 and 2003,amounted to $0.01 per share, $0.02 per share and $0.01 per share, respectively.

 

The Trust has federal and state net operating loss carryforwards whichare estimated to expire as follows:

 
| ** ** | ** ** | **Amount**  | ** ** |
|------------|------------|-------------|------------|
| **Year**   | ** ** | **Federal** | ** ** | **State** | ** ** |
|       |       |        |       |   |   |
| 2008       |       | $           | —     |   | $ | 87,537 |   |
| 2009       |       | —      |       | 312,400 |   |
| 2012       |       | 4,272,964   |       | — |   |
| 2018       |       | 3,883,556   |       | — |   |
| 2019       |       | 1,163,799   |       | — |   |
| 2020       |       | 1,979,025   |       | — |   |
| 2021       |       | 250,847     |       | — |   |
| 2022       |       | 1,580,590   |       | — |   |
| 2023       |       | 1,671,294   |       | — |   |
| 2024       |       | 456,393     |       | — |   |
|       |       |        |       |   |   |
|       |       | $           | 15,258,468 |   | $ | 399,937 |   |

 

## The Trust has deferred tax assetsrelated to the net operating loss of approximately $5,185,000 and $7,425,000 as of January 31, 2005 and January 31,2004, respectively, which were offset by valuation allowances of $5,015,000 and$7,425,000, respectively.

 

Total and net deferred incometax assets at January 31, 2005 consist of:

 
| Net operating loss carryforwards                                                        |   | $          | 6,722,000 |   |
|-----------------------------------------------------------------------------------------|--------|------------|-----------|--------|
| Book/Tax differences in operating assets                                                |   | 94,000     |      |
| Total deferred income tax assets                                                        |   | 6,816,000  |      |
|                                                                                    |   |       |      |
| Deferred income tax liability associated with  book/tax differences in hotel properties |   | (3,425,000 | )         |
| Net deferred income tax asset                                                           |   | 3,391,000  |      |
| Valuation allowance                                                                     |   | (3,221,000 | )         |
| Net deferred income tax asset                                                           |   | $          | 170,000   |   |

 

Income taxes for the year endedJanuary 31, 2005 are:

 
| Current income tax provision |   | $        | 330,000 |   |
|------------------------------|--------|----------|---------|--------|
| Deferred income tax benefit  |   | (170,000 | )       |
| Net income tax provision     |   | $        | 160,000 |   |

 

## Thevaluation allowance decreased by approximately $2,410,000in the year ended January 31, 2005, primarily due to the utilization ofapproximately $6,060,000 of net operating loss carryforwards.

 

## InnSuites Hotels has net operating losscarryforwards of $2.1, $1.4 and $1.8 million, whichexpire in 2021, 2022, and 2024, respectively. For the years ended January 31,2005 and 2004, InnSuites Hotels did not record any income tax expense orliability provision since InnSuites Hotels incurred a net loss during each fiscalyear.  Deferred tax assets related to thenet operating loss of approximately $1.8 million and $640,000, as of January 31, 2005 and January 31,2004, respectively, were offset by 100% valuation allowances.

##  

## In addition to the net operating lossescarryforward, there are other deferred tax assets which are fully allowed forat January 31, 2004 and January 31, 2003.  Effective February 1,2004, the Trust relinquished its REIT status. As of that date, anydistributions to its shareholders are not deductible for purposes of computingthe Trust’s taxable income and the Trust will be subject to income tax,including any applicable alternative minimum tax, on its taxable income atregular corporate rates, without offset for distributions of such income to itsshareholders.

##  

## 12.  ADVISORY AGREEMENT/EMPLOYMENT AGREEMENTS

##  

Mr. Wirth has an employment agreement with the Trust that expiresin December 2007.  The employmentagreement provides that Mr. Wirth received no compensation from the Trustas long as a previously enforceable advisory agreement was in effect.  However, pursuant to the terms of theemployment agreement, since the Advisor (as defined in the advisory agreement)no longer provides services to the Partnership or the Trust, Mr. Wirth isto be compensated at an amount up to the same annual basis as the Advisor wouldhave been compensated under the terms of the advisory agreement had it remainedin effect.  Mr. Wirth is currentlybeing compensated, however, at a lesser rate of $130,000 a year.

 

## 13.  OTHER RELATED PARTY TRANSACTIONS

##  

The Partnership is responsible for all expenses incurred by the Trustin accordance with the Partnership Agreement.

 

The Initial Hotels were acquired by the Partnership from entities inwhich Mr. Wirth and his affiliates had substantial ownershipinterests.  Mr. Wirth and hisaffiliates received 4,017,361 Class B limited partnership units and647,231 Shares of Beneficial Interest in the Trust in exchange for theirinterests in the Initial Hotels.  As of January 31,2005 and 2004, Mr. Wirth and his affiliates held 3,467,938 and 5,000,974Class B limited partnership units, respectively, which represented 26.3%and 37.9% of the total outstanding partnership units.  As of January 31, 2005 and 2004,Mr. Wirth and his affiliates held 5,817,869 and 455,000 Shares ofBeneficial Interest in the Trust, respectively, which represented 66.8% and22.2% of the total issued and outstanding Shares of Beneficial Interest.

 

37

----

 

During the fourth quarter of fiscal year 2004, the Partnership forgave$3,134,130 of rent accrued but unpaid by InnSuites Hotels, which had a neteffect of increasing the Trust’s Shareholders’ Equity by $1,518,834.

 

At January 31, 2005 and 2004, the Trust owned a 64.75% interestand 51.54% interest, respectively, in the Hotels through its sole generalpartner’s interest in the Partnership.

 

## 14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

##  

The carrying amounts and fair values of the Trust’s significantfinancial instruments at January 31, 2005 and 2004 are as follows:

 

 
| ** **                                     | ** ** | **2005**             | ** ** | **2004**        | ** ** |
|------------------------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                                     | ** ** | **CARRYING  AMOUNT** | ** ** | **FAIR  VALUE** | ** ** | **CARRYING  AMOUNT** | ** ** | **FAIR  VALUE** | ** ** |
| Mortgage  notes payable                        |       | $                    | 24,007,445 |            | $          | 25,675,971 |   | $ | 31,805,715 |   | $ | 33,747,000 |   |
|                                           |       |                 |       |            |       |   |   |   |   |
| Notes  payable to banks                        |       | 500,000              |       | 500,000         |       | — |   | — |   |
|                                           |       |                 |       |            |       |   |   |   |   |
| Notes and  advances payable to related parties |       | 93,512               |       | 94,713          |       | 6,852,241 |   | 6,644,000 |   |
|                                           |       |                 |       |            |       |   |   |   |   |
| Other notes  payable                           |       | 248,413              |       | 252,911         |       | 169,277 |   | 170,000 |   |
|                                                |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

## 15.  SUPPLEMENTAL CASH FLOW DISCLOSURES

##  

| ** **                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**  | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Cash paid  for interest                                                             |       | $        | 2,514,975  |     | $          | 3,030,616 |       | $ | 3,069,003 |   |
|                                                                                |       |     |       |     |       |      |       |
| Promissory  notes issued by the Trust to acquire Class A limited partnership units  |       | 179,500  |       | 87,800   |       | 79,000    |       |
|                                                                                |       |     |       |     |       |      |       |
| Promissory  notes issued by the Trust to acquire Shares of Beneficial Interest      |       | 112,400  |       | —   |       | 433,000   |       |
|                                                                                |       |     |       |     |       |      |       |
| Promissory  notes issued by the Trust to acquire Class B limited partnership units  |       | 971,831  |       | —   |       | 438,000   |       |
|                                                                                |       |     |       |     |       |      |       |
| Shares  issued to Trustees and Officers in exchange for services                    |       | 49,280   |       | 43,680   |       | 80,858    |       |
|                                                                                |       |     |       |     |       |      |       |
| Shares  issued to affiliates to satisfy notes payable                               |       | 690,821  |       | —   |       | —    |       |
|                                                                                |       |     |       |     |       |      |       |
| Mortgage  notes payable refinanced                                                  |       | —   |       | —   |       | 7,263,156 |       |
|                                                                                |       |     |       |     |       |      |       |
| Accrued  interest forgiven by related party                                         |       | —   |       | —   |       | 670,629   |       |
|                                                                                |       |     |       |     |       |      |       |
| Accrued  interest reclassified to principal due on notes payable to related parties |       | —   |       | 417,264  |       | —    |       |
|                                                                                |       |     |       |     |       |      |       |
| Promissory  notes assigned to satisfy notes payable to related parties              |       | —   |       | 200,000  |       | —    |       |
|                                                                                     |            |          |            |          |            |           |            |  |  |  |

 

During thefirst quarter of fiscal year 2005, the Trust reduced the principal balance ofits note payable to Hulsey Hotels Corporation, an affiliate of Mr. Wirth, by$119,427 to offset receivables in the same amount that were owed to the Trustby other entities affiliated with Mr. Wirth.

 

During the firstquarter of fiscal year 2005, J. R. Chase, the sole stockholder of theManagement Company, agreed to transfer 32,363 Shares of Beneficial Interest inthe Trust to the Management Company in order to facilitate the ManagementCompany’s acquisition of Licensing Corp. from Mr. Wirth. In consideration of thetransfer of those Shares, the Management Company agreed to pay Mr. Chase$72,817. The Management Company fully satisfied this obligation during June 2004.

 

During thesecond quarter of fiscal year 2005, Rare Earth Financial, an affiliate ofMr.Wirth, assumed from the Management Company a note payable with a principalbalance of $23,303.

 

The Trust issued 113,048, 40,000 and 16,610 Shares of BeneficialInterest during the years ended January 31, 2005, 2004 and 2003,respectively, in exchange for Class A limited partnership units.  The issued Shares of Beneficial Interest werevalued at $205,747, $56,000 and $23,254, respectively.

 

## 16.  COMMITMENTS AND CONTINGENCIES

##  

Two of the Hotels are subject to non-cancelable ground leases expiringin 2050 and 2033.  Total expenseassociated with the non-cancelable ground leases for the fiscal years ended January 31,2005, 2004 and 2003 was $190,378, $188,290 and $186,850, respectively, plus avariable component based on gross revenues of each property that totaledapproximately $80,000, $74,000 and $82,000, respectively.

 

38

----

 

Future minimumlease payments under these non-cancelable ground leases are as follows:

 

| **Fiscal Year Ending** | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| 2005                   |       | $          | 196,186    |   |
| 2006                   |       | 196,186    |       |
| 2007                   |       | 196,186    |       |
| 2008                   |       | 196,186    |       |
| 2009                   |       | 196,186    |       |
| Thereafter             |       | 6,147,863  |       |
|                   |       |       |       |
| Total                  |       | $          | 7,128,793  |   |

 

The Trust isobligated under loan agreements relating to five of its hotels to deposit 4% ofthe individual hotel’s room revenue into an escrow account to be used forcapital expenditures.  The escrow fundsapplicable to the five hotel properties for which a mortgage lender escrowexists are reported on the Trust’s Consolidated Balance Sheet as “RestrictedCash.”

 

InnSuitesHotels has entered into franchise arrangements with certain third parties forfive of the hotel properties, with four Best Western hotels and one Holiday Innhotel.  These agreements provide for feesto be paid by the Hotels based on revenue and reservations received, andcontain no minimum payment provisions.

 

The nature ofthe operations of the Hotels exposes them to risks of claims and litigation inthe normal course of their business. Although the outcome of these matters cannot be determined, managementdoes not expect that the ultimate resolution of these matters will have amaterial adverse effect on the consolidated financial position, results ofoperations or liquidity of the Trust.

 

The Trust isinvolved from time to time in various other claims and legal actions arising inthe ordinary course of business.  In theopinion of management, the ultimate disposition of these matters will not havea material adverse effect on the Trust’s consolidated financial position,results of operations or liquidity.

 

## 17.  STOCK OPTION PLAN

##  

During fiscalyear 1999, the shareholders of the Trust adopted the 1997 Stock Incentive andOption Plan (the “Plan”).  Pursuant tothe Plan, the Compensation Committee may grant options to the Trustees,officers, other key employees, consultants, advisors and similar employees ofthe Trust and certain of its subsidiaries and affiliates.  The number of options that may be granted ina year is limited to 10% of the total Shares of Beneficial Interest and limitedpartnership units in the Partnership (Class A and Class B)outstanding as of the first day of such year.

 

Generally,granted options expire 10 years from the date of grant, are exercisable duringthe optionee’s lifetime only by the recipient and are non-transferable.  Unexercised options held by employees of theTrust generally terminate on the date the individual ceases to be an employeeof the Trust.

 

There were nooptions granted in fiscal year 2005, 2004 or 2003.  All outstanding options vested in July 2003.  The Plan currently has 506,800 optionsavailable to grant.

 

The Plan alsopermits the Trust to award stock appreciation rights, none of which, as of January 31,2005, have been issued.

 

39

----

 

The followingtable summarizes the stock option activity during fiscal years 2005, 2004 and2003, and provides information about the stock options outstanding at January 31,2005:

 

| ** **                         | ** ** | **Number of Options** | ** ** | **Weighted–  Average  Exercise Price** | ** ** |
|------------------------------------|------------|-----------------------|------------|---------------------------------------------|------------|
| Stock Option Activity              |       |                  |       |                                        |       |
|                               |       |                  |       |                                        |       |
| Outstanding, January 31, 2002 |       | 272,300               |       | $                                           | 2.50       |   |
| Granted                            |       | —                |       | —                                      |       |
| Forfeited                          |       | (19,100               | )          | 2.50                                        |       |
| Exercised                          |       | —                |       | —                                      |       |
| Outstanding, January 31, 2003 |       | 253,200               |       | $                                           | 2.50       |   |
| Granted                            |       | —                |       | —                                      |       |
| Forfeited                          |       | (7,200                | )          | 2.50                                        |       |
| Exercised                          |       | —                |       | —                                      |       |
|                               |       |                  |       |                                        |       |
| Outstanding, January 31, 2004 |       | 246,000               |       | $                                           | 2.50       |   |
| Granted                            |       | —                |       | —                                      |       |
| Forfeited                          |       | (13,400               | )          | 2.50                                        |       |
| Exercised                          |       | —                |       | —                                      |       |
|                               |       |                  |       |                                        |       |
| Outstanding, January 31, 2005 |       | 232,600               |       | $                                           | 2.50       |   |

 

| **Stock Option Information**                | ** ** | **January 31, 2005** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|
|                                        |       |                      |       |
| Options exercisable                         |       | 232,600                   |       |
| Weighted Average Exercise Price             |       | $                         | 2.50       |   |
| Weighted Average Remaining Contractual Life |       | 3.65                      |       |
|                                             |            |                           |            |  |

 

For stockoptions granted to non-employees of the Trust, compensation was recognized overthe respective vesting period based upon the fair value of the options ascalculated using the Black-Scholes pricing model.  During the year ended January 31, 2000,the Trust granted 28,200 stock options to non-employees.  The Trust did not grant any stock options tonon-employees during fiscal years 2005, 2004, 2003, 2002, or 2001.  There was no equity-related compensationexpense recorded during the years ended January 31, 2005, 2004 and 2003.

 

## 18.  QUARTERLY RESULTS (UNAUDITED)

##  

The followingis a summary of the results of operations, by quarter, for the fiscal yearsended January 31, 2005 and 2004. Management believes that all adjustments (consisting of normal recurringaccruals) necessary for a fair presentation of such interim results have beenincluded.  The results of operations forany interim period are not necessarily indicative of those for the entirefiscal year.

 
| **FISCAL 2005**                                                               | ** ** | **APRIL 30** | ** ** | **JULY 31** | ** ** | **OCTOBER 31** | ** ** | **JANUARY 31** | ** ** | **FISCAL 2005** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|---------------------|------------|---------------------|------------|-----------------|------------|
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Total revenue                                                                 |       | $                 | 7,358,640  |             | $          | 4,922,554           |       | $                   | 5,062,591  |            | $          | 5,531,402 |   | $ | 22,875,187 |   |
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Total revenue less interest expense on  mortgage loans and operating expenses |       | $                 | 421,304    |             | (1,230,942 | )                   | (780,262   | )                   | (721,455   | )               | $          | (2,311,355 | ) |
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Net income (loss)                                                             |       | $                 | 2,028,243  |             | (934,548   | )                   | (340,502   | )                   | (475,916   | )               | $          | 240,442 |   |
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Income (loss) per share – basic                                          |       | $                 | .94        |             | (.40       | )                   | (.14       | )                   | (0.17      | )               | $          | 0.10 |   |
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Income (loss) per share – diluted                                        |       | $                 | .56        |             | (.40       | )                   | (.14       | )                   | (0.17      | )               | $          | 0.10 |   |
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Dividends declared per share                                                  |       | $                 | —     |             | —     |                | —     |                | .01        |            | $          | .01 |   |
|                                                                               |            |                   |            |                  |            |                     |            |                     |            |                 |            |  |  |  |  |  |

 
| **FISCAL 2004**                                                               | ** ** | **APRIL 30** | ** ** | **JULY 31** | ** ** | **OCTOBER 31** | ** ** | **JANUARY 31** | ** ** | **FISCAL 2004** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|---------------------|------------|---------------------|------------|-----------------|------------|
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Total revenue                                                                 |       | $                 | 7,626,138  |             | $          | 5,763,954           |       | $                   | 5,412,679  |            | $          | 5,408,557 |   | $ | 24,211,328 |   |
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Total revenue less interest expense on  mortgage loans and operating expenses |       | $                 | 120,434    |             | (1,466,219 | )                   | (837,767   | )                   | (853,803   | )               | $          | (3,037,355 | ) |
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Net income (loss)                                                             |       | $                 | 147,099    |             | (1,004,921 | )                   | (950,622   | )                   | (782,470   | )               | $          | (2,594,317 | ) |
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Income (loss) per share – basic                                          |       | $                 | .07        |             | (.50       | )                   | (.46       | )                   | (.38       | )               | $          | (1.27 | ) |
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Income (loss) per share – diluted                                        |       | $                 | (.01       | )                | (.50       | )                   | (.46       | )                   | (.38       | )               | $          | (1.27 | ) |
|                                                                          |       |              |       |             |       |                |       |                |       |            |       |
| Dividends declared per share                                                  |       | $                 | —     |             | —     |                | —     |                | .02        |            | $          | .02 |   |
|                                                                               |            |                   |            |                  |            |                     |            |                     |            |                 |            |  |  |  |  |  |

 

40

----

 

## 19.  HOTEL PROPERTIES HELD FOR SALE AND SALE OFHOTEL PROPERTIES

##  

OnMarch 25, 2004, the Trust sold its Tempe, Arizona hotel to Tempe/PhoenixAirport Resort LLC (“Tempe Resort”), an affiliate of Wirth, for its appraisedvalue of $6.8 million, which was also its carrying value.  The purchase price was satisfied by TempeResort assuming the Trust’s mortgage note payable on the property of $1.7million and assuming notes payable to Mr. Wirth and affiliates of $5.1million. 

 

OnApril 1, 2004, the Trust sold its San Diego, California hotel to anunrelated third party for $9.7 million, which the Trust received in cash.  The Trust used $4.8 million of the proceedsto satisfy its mortgage note payable on the property, $1.4 million to satisfynotes and interest payable to related parties, and retained the remainingproceeds to reduce trade payables and to fund future operations and capitalimprovements. The net gain realized on both sales was $5,113,540, of whichapproximately $2,217,000 was applicable to the minority interest. 

 

On January 4, 2005, the Board of Trustees approved the sale of thePhoenix, Arizona hotel to Phoenix Northern Resort LLC, an affiliate of Mr. Wirth,for its appraised value of $5.1 million. The property’s carrying value is $3.1 million. On January 15, 2005,Rare Earth Financial, another affiliate of Mr. Wirth, converted its$700,000 loan receivable into a non-interest bearing deposit for the purchaseof the hotel.  The Trust expects tocomplete the sale during the second quarter of fiscal year 2006.  Any gain or loss recognized on thetransaction will be recorded as a contribution or distribution because thepurchaser is a related party.  The Trustdoes not expect to incur a loss on the sale of the property.

 

## 20.  PURCHASE OF MANAGEMENT AND LICENSINGCONTRACTS

 

In February 2004, the Trust adopted FIN 46R,which amended FIN 46, “Consolidation of Variable Interest Entities,” aninterpretation of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements.”  FIN 46R requiresan existing unconsolidated variable interest entity to be consolidated by itsprimary beneficiary if the entity does not effectively disperse risk among allparties involved or if other parties do not have significant capital to financeactivities without subordinated financial support from the primarybeneficiary.  The primary beneficiary isthe party that absorbs a majority of the entity’s expected losses, receives amajority of its expected residual returns, or both, as a result of holdingvariable interests, which are the ownership, contractual or other pecuniaryinterests in an entity. 

 

As of February 1, 2004, the Trust recorded acharge for the cumulative effect of a change in accounting principle resultingfrom its recognition of the $854,000 net stockholder’s deficit of theManagement Company, which was the Trust’s variable interest entity under FIN46R.  The $854,000 charge represented thenet effect of the Trust reporting $160,000 in net assets (consisting primarilyof receivables) and $1,014,000 in net liabilities (consisting primarily ofdebt) upon consolidating the financial results of the Management Company. 

 

The effect of consolidating the financial results ofthe Management Company and Licensing Corp. was accounted for as a cumulativeeffect of a change in accounting principle. As a result of consolidating the financial results of the ManagementCompany with its results, as of February 1, 2004, the Trust’s financialresults include a $854,402 charge for the cumulative effect of a change inaccounting principle on the Statements of Operations resulting in a reductionin its Stockholders’ Equity which represents the aggregate stockholders’deficit reported by the Management Company as of February 1, 2004. 

 

Inconnection with the Trust’s relinquishment of its REIT status, the Trust nolonger required the services of a separate management company. The Trustdetermined it was in its best interest to buy out the management contracts andlicensing agreements and directly manage the Hotels through the Trust’s whollyowned subsidiary, InnSuites Hotels. The Trust believes the management processof the Hotels will be simplified and that it will benefit from increasedrevenues by offering additional management and licensing services.  As a result of this buy out, the ManagementCompany (which was the Trust’s variable interest entity under FIN 46R) was nolonger consolidated in the second quarter. As of June 8, 2004, all of theTrust’s obligations were satisfied, and the Management Company is in theprocess of being liquidated. 

 

EffectiveJune 8, 2004, InnSuites Hotels acquired the management agreements underwhich the Management Company provided management services to the Hotels. Inconsideration of the acquisition, the stockholder of the Management Companyreceived $20,000 and 90,000 Shares of Beneficial Interest of the Trust,reflecting a transaction value of approximately $159,500 in the aggregate.Following the acquisition, InnSuites Hotels will self-manage the Hotels. TheTrust also manages one unrelated hotel in San Diego, California and threehotels owned by Mr. Wirth. 

 

EffectiveJune 8, 2004, InnSuites Hotels acquired the license agreements under whichLicensing Corp. provided licensing services to the Hotels, and the relatedregistered and unregistered InnSuites trademarks and tradenames.  In consideration of the acquisitions, theManagement Company (as the sole stockholder of Licensing Corp.) received $60,000and 10,000 Shares of Beneficial Interest of the Trust and InnSuites Hotelssatisfied Licensing Corp.’s line of credit in the amount of $459,000,reflecting a transaction value of approximately $534,500 in the aggregate.  Following the acquisition, InnSuites Hotelswill self-manage the Hotels. The Trust also provides licensing services to twounrelated hotels in San Diego and Buena Park, California and three hotels ownedby Mr. Wirth.  The Trust paid$459,000 in cash to satisfy the Management Company’s line of credit.  The additional $80,000 was paid to theManagement Company to satisfy the Trust’s obligation for the net liabilities ofapproximately the same amount.  TheShares of Beneficial Interest issued by the Trust for both the managementcontracts and licensing agreements were valued at $155,000, which amount wasrecorded as an expense.

 

21.  EXECUTIONOF THE PLAN TO REGAIN COMPLIANCE WITH THE AMERICAN STOCK EXCHANGE   CONTINUED LISTING STANDARDS

 

OnDecember 10, 2004, the shareholders of the Trust approved severalproposals relating to the Trust’s plan to return to compliance with theAmerican Stock Exchange (“AMEX”) continued listing standards.  On January 4, 2005, the Board ofTrustees approved the implementation of the proposals.  The proposals were consummated on January 31,2005, and resulted in:

 

41

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A)The Trust issuing 6,577,732 Shares of Beneficial Interest in the Trust to thePartnership to satisfy advances and interest payable to the Partnershiptotaling approximately $8.6 million.  ThePartnership concurrently distributed the shares to its unit holders.  Of the 6,577,732 Shares of BeneficialInterest distributed by the Partnership, 3,761,071 were returned to the Trustand became treasury stock.  The remaining2,816,661 Shares of Beneficial Interest remain outstanding.

 

B)The Trust issuing 4,969,712 Shares of Beneficial Interest in the Trust, with afair value of approximately $6.5 million, to the Partnership to acquireits ownership interest in Yuma Hospitality Properties, Ltd., which owns andoperates the Yuma, Arizona hotel property.  The Partnership concurrently distributed the shares to its unitholders.  Of the 4,969,712 Shares ofBeneficial Interest distributed by the Partnership, 2,841,624 were returned tothe Trust and became treasury stock.  Theremaining 2,128,088 Shares of Beneficial Interest remain outstanding.  The fair value was determined using thecarrying values of assets and liabilities, except for fixed assets, which werevalued using appraised value.  Theportion of the excess of fair value over book value that relates to theminority interest partnership totals $1.2 million, and has been recorded as anincrease in the basis of those fixed assets.

 

C)The Trust issuing 457,645 Shares of Beneficial Interest in the Trust to satisfy$594,938 of notes and interest payable to affiliates of Mr. Wirth.  The entire balance of shares issued remainsoutstanding.

 

D)The Trust issuing 1,000,000 Shares of Beneficial Interest in the Trust to Mr. Wirthand his affiliates in exchange for 1,000,000 Class B limited partnershipunits in the Partnership, which increased the Trust’s ownership interest in thePartnership 7.6%.  The entire balance ofshares issued remains outstanding.

 

Intotal, the Trust issued 13,005,089 Shares of Beneficial Interest in the Trust,of which 6,602,695 returned to the Trust as treasury stock and 6,402,394 remainoutstanding.  The transactions werevalued at the closing price of a Trust Share of Beneficial Interest on January24, 2005, which was $1.30.  The Trust didnot record a gain or loss, and did not increase the basis of consolidatedassets as a result of the transactions, except for the acquisition of theminority interest ownership in Yuma Hospitality Properties. Mr. Wirth andhis affiliates, through these transactions, received 5,182,186 Shares ofBeneficial Interest in the Trust.

 

Asof January 31, 2005, the Trust has total shareholders’ equity of $6.3million, which exceeds the minimum amount of $6.0 million required to regaincompliance with AMEX continued listing standards.

 

42

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SCHEDULE III

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARYREAL ESTATE AND ACCUMULATED DEPRECIATIONAS OF JANUARY 31, 2005

 

 
| ** **                               | ** ** | ** **       | ** ** | **Initial  Cost  to Tenant** | ** ** | **Cost  Capitalized  Subsequent to Acquisition** | ** ** | **Gross  Amounts at  Which Carried at  Close of Period** | ** ** |
|------------------------------------------|------------|------------------|------------|------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                               | ** ** | **Encumbrances** | ** ** | **Land**                     | ** ** | **Building  and  Improvements**                  | ** ** | **Land**                                                 | ** ** | **Building  and  Improvements** | ** ** | **Land** | ** ** | **Building  and  Improvements** | ** ** |
|                                     |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| InnSuites Hotel  and Suites              |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Phoenix Best  Western                    |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Phoenix, Arizona                         |       | $                | 3,290,859  |                         | $          | 418,219                                          |       | $                                                        | 2,922,884  |   | $ | — |   | $ | 71,430 |   | $ | 418,219 |   | $ | 2,994,314 |   |
| InnSuites Hotel  and Suites              |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Tucson, Catalina  Foothills Best Western |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Tucson, Arizona                          |       | 4,349,266        |       | —                       |       | 4,220,820                                        |       | —                                                   |       | 2,126,397 |   | — |   | 6,347,217 |   |
| InnSuites Hotels  and Suites             |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Yuma                                     |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Yuma, Arizona                            |       | 2,186,099        |       | 251,649                      |       | 4,983,292                                        |       | 53,366                                                   |       | 2,335,094 |   | 305,015 |   | 7,318,386 |   |
| Holiday Inn                              |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Airport Ontario  Hotel and Suites        |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Ontario,  California                     |       | 8,586,467        |       | 1,633,064                    |       | 5,450,872                                        |       | —                                                   |       | 1,599,785 |   | 1,633,064 |   | 7,050,657 |   |
| InnSuites Hotels  and Suites             |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Tucson St. Mary’s                   |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Tucson, Arizona                          |       | 4,285,505        |       | 900,000                      |       | 9,166,549                                        |       | (20,564                                                  | )          | 803,009 |   | 879,436 |   | 9,969,558 |   |
| InnSuites Hotels  and Suites             |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Albuquerque  Airport Best Western        |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Albuquerque, New  Mexico                 |       | 1,309,249        |       | —                       |       | 1,903,970                                        |       | —                                                   |       | 292,993 |   | — |   | 2,196,963 |   |
| InnSuites  Hospitality Trust             |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
| Phoenix, Arizona                         |       | —           |       | 7,005                        |       | 75,662                                           |       | —                                                   |       | — |   | 7,005 |   | 75,662 |   |
|                                     |       |             |       |                         |       |                                             |       |                                                     |       |   |   |   |   |   |   |
|                                     |       | $                | 24,007,445 |                         | $          | 3,209,937                                        |       | $                                                        | 28,724,049 |   | $ | 32,802 |   | $ | 7,228,708 |   | $ | 3,242,739 |   | $ | 35,952,757 |   |

 

43

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| ** **                              | ** ** | **Gross Land  and Building** | ** ** | **Accumulated  Depreciation** | ** ** | **Net  Book Value  Land and  Buildings  and Improvements** | ** ** | **Date of  Construction** | ** ** | **Date of  Acquisition** | ** ** | **Depreciation  in Income  Statement is  Computed** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-------------------------------|------------|------------------------------------------------------------|------------|---------------------------|------------|--------------------------|------------|-----------------------------------------------------|------------|
|                                    |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| InnSuites Hotel and Suites              |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Phoenix Best Western                    |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Phoenix, Arizona                        |       | $                            | 3,412,533  |                          | $          | 638,074                                                    |       | $                         | 2,774,459  |                     | 1980       |                                                | 1998       |   | 5-40 years |   |
|                                    |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| InnSuites Hotel and Suites              |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Tucson, Catalina Foothills Best Western |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Tucson, Arizona                         |       | 6,347,217                    |       | 1,226,620                     |       | 5,120,597                                                  |       | 1981                      |       | 1998                     |       | 5-40 years                                          |       |
|                                    |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| InnSuites Hotels and Suites             |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Yuma                                    |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Yuma, Arizona                           |       | 7,623,401                    |       | 1,281,642                     |       | 6,341,759                                                  |       | 1982                      |       | 1998                     |       | 5-40 years                                          |       |
|                                    |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Holiday Inn                             |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Airport Ontario Hotel and Suites        |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Ontario, California                     |       | 8,683,721                    |       | 1,742,115                     |       | 6,941,606                                                  |       | 1990                      |       | 1998                     |       | 5-40 years                                          |       |
|                                    |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| InnSuites Hotels and Suites             |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Tucson St. Mary’s                  |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Tucson, Arizona                         |       | 10,848,994                   |       | 1,801,351                     |       | 9,047,643                                                  |       | 1960                      |       | 1998                     |       | 5-40 years                                          |       |
|                                    |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| InnSuites Hotels and Suites             |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Albuquerque Airport Best Western        |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Albuquerque, New Mexico                 |       | 2,196,963                    |       | 486,386                       |       | 1,710,577                                                  |       | 1975                      |       | 2000                     |       | 5-40 years                                          |       |
|                                    |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| InnSuites Hospitality Trust             |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
| Phoenix, Arizona                        |       | 82,667                       |       | —                        |       | 82,667                                                     |       | 2004                      |       | 2004                     |       |                                                |       |
|                                    |       |                         |       |                          |       |                                                       |       |                      |       |                     |       |                                                |       |
|                                    |       | $                            | 39,195,496 |                          | $          | 7,176,188                                                  |       | $                         | 32,019,308 |                     |       |                                                |       |   |   |   |

 

(See accompanyingindependent auditors report.)

 

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(A)          Aggregate cost for federal income taxpurposes at January 31, 2005 and 2004 are as follows:

 
| ** **                 | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------|------------|------------|------------|------------|------------|
| Land                       |       | $          | 2,275,007  |       | 3,542,733  |   |
| Buildings and improvements |       | 21,750,426 |       | 25,999,097 |       |
|                       |       | $          | 24,025,433 |       | 29,541,830 |   |

 

Reconciliation of Real Estate:

 
| Balance at January 31, 2003 |   | $           | 61,750,782 |   |
|----------------------------------|--------|-------------|------------|--------|
| Impairment of Hotel Property     |   | (2,827,457  | )          |
| Sale of Hotel Properties         |   | (10,986,348 | )          |
| Improvement to Hotel Properties  |   | 888,032     |       |
|                             |   |        |       |
| Balance at January 31, 2004 |   | $           | 48,825,009 |   |
| Sale of Hotel Properties         |   | (11,368,505 | )          |
| Write-up of Assets               |   | 1,192,230   |       |
| Improvement to Hotel Properties  |   | 546,762     |       |
|                             |   |        |       |
| Balance at January 31, 2005 |   | $           | 39,195,496 |   |

 

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SCHEDULE IV

 

MORTGAGES LOANS ON REAL ESTATE

 
| **Description**                                               | ** ** | **Interest  Rate**                       | ** ** | **Maturity  Date** | ** ** | **Periodic  Payment Term**                                                    | ** ** | **Face  Amount of Mortgages** | ** ** | **1/31/05  Carrying Amount** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------|------------|--------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|
|                                                          |       |                                     |       |               |       |                                                                          |       |                          |       |                         |       |
| Mortgage Note  Secured by Albuquerque, NM property            |       | 8.875                                    | %          | 9/1/2015           |       | 180 monthly installments                                                      |       | $                             | 1,575,000  |                         | $          | 1,309,248 |   |
| Mortgage Note  Secured by Phoenix, AZ property                |       | 8.250                                    | %          | 4/1/2014           |       | 180 monthly installments                                                      |       | $                             | 4,850,000  |                         | $          | 3,290,859 |   |
| Mortgage Note  Secured by Ontario, CA property                |       | 8.280                                    | %          | 5/11/2011          |       | 120 monthly installments, with balloon payment of  $7,498,458 due at maturity |       | $                             | 9,000,000  |                         | $          | 8,586,468 |   |
| Mortgage Note  Secured by Yuma, AZ property                   |       | 9.250                                    | %          | 8/1/2011           |       | 180 monthly installments                                                      |       | $                             | 4,000,000  |                         | $          | 2,186,099 |   |
| Mortgage Note  Secured by Tucson St. Mary’s, AZ property |       | Prime rate plus 1% (6.5%  as of 1/31/05) |       | 7/29/2009          |       | 83 monthly installments, with balloon payment of  $3,819,007 due at maturity  |       | $                             | 4,500,000  |                         | $          | 4,285,505 |   |
| Mortgage Note  Secured by Tucson Oracle, AZ property          |       | 8.000                                    | %          | 5/1/2016           |       | 180 monthly installments                                                      |       | $                             | 5,100,000  |                         | $          | 4,349,266 |   |
|                                                          |       |                                     |       |               |       |                                                                          |       |                          |       |                         |       |
|                                                          |       |                                     |       |               |       |                                                                          |       | $                             | 29,025,000 |                         | $          | 24,007,445 |   |

 

**Mortgage Note Reconciliation**

 
| Balance at January 31, 2003 |                                | $          | 36,112,605 |   |
|----------------------------------|-------------------------------------|------------|------------|--------|
|                             |                                |       |       |
| Deductions during period:        |                                |       |       |
|                             | Principal payments                  |       | (4,306,890 | )      |
|                             |                                |       |       |
| Balance at January 31, 2004 |                                | 31,805,715 |       |
|                             |                                |       |       |
| Deductions during period:        |                                |       |       |
|                             | Assumed by buyer of Tempe, AZ hotel |       | (1,710,499 | )      |
|                             | Principal payments                  |       | (6,087,771 | )      |
|                             |                                |       |       |
| Balance at January 31, 2005 |                                | $          | 24,007,445 |   |

 

46

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.

 

On January 20, 2005, the Trust received written notice, dated January 17,2005, from McGladrey & Pullen, LLP (“McGladrey”) that McGladrey hadresigned as the Trust’s principal independent accountant to audit the Trust’sfinancial statements.  Anthony Waters,the Trust’s Chief Financial Officer, spoke with representatives of McGladrey onJanuary 17, 2005 regarding the Trust’s relationship with McGladrey,however, Mr. Waters did not believe that McGladrey had resigned on thatdate.

 

The reports of McGladrey on the Trust’s financial statements for thefiscal years ended January 31, 2004 and 2003 did not contain an adverseopinion or a disclaimer of opinion and were not qualified or modified as touncertainty, audit scope or accounting principles.  In connection with the audits of the Trust’sfinancial statements for the fiscal years ended January 31, 2004 and 2003,and in the subsequent interim periods through January 20, 2005, there wereno disagreements with McGladrey on any matter of accounting principles orpractices, financial statement disclosure or auditing scope and procedurewhich, if not resolved to the satisfaction of McGladrey, would have causedMcGladrey to make reference to the matter in its report.  

 

In connection with the audits of the Trust’s financial statements forthe fiscal years ended January 31, 2004 and 2003, and in the subsequentinterim periods through January 20, 2005, there were no “reportable events”as that term is described in Item 304(a)(l)(v) ofRegulation S-K, except that, on January 7, 2005, McGladrey provided aletter to the Audit Committee and management of the Trust noting two reportableconditions under standards established by the American Institute of CertifiedPublic Accountants that McGladrey believed to be material weaknesses.  McGladrey has advised the Trust that itbelieves that these two reportable conditions constitute “reportable events.”

 

The first reportable condition involves the lack of sufficientsegregation of duties and responsibilities with respect to the recording andapproval of financial information that occurred due to the departure of theTrust’s Controller.  Effective January 31,2005, the Trust rehired its former Controller who will oversee the recording offinancial information while the Trust’s Chief Financial Officer will continuein his prior role of approving financial information.  The second reportable condition involves theneed for “numerous adjusting journal entries” and “significant financialstatement presentation changes,” which resulted in McGladrey concluding thatthe Trust’s “monthly internal financial statements may not be reliable.”  The Trust has hired additional accountingstaff and is considering additional measures that will better ensure thereliability of the Trust’s internal financial statements.

 

On December 10, 2004, the Audit Committee discussed the conditionsdescribed above with McGladrey, but did not receive the letter identifyingthose conditions as reportable conditions and material weaknesses until January 7,2005.  Management of the Trustsubsequently discussed the letter received on January 7, 2005 withMcGladrey.  The Trust has authorizedMcGladrey to respond fully to the inquiries of any successor accountantconcerning the subject matter of the reportable conditions described above.

 

On April 4, 2005, the Trust engaged Epstein, Weber &Conover, P.L.C. (“EWC”) to act as the Trust’s principal independent accountantto audit the Trust’s financial statements. The decision to engage the new accountants was recommended and approvedby the Audit Committee of the Board of Trustees of the Trust.

 

During the fiscal years ended January 31, 2005 and 2004, andduring all subsequent interim periods through April 4, 2005, the Trust didnot consult with EWC regarding the application of accounting principles to aspecified transaction, either completed or proposed, the type of audit opinionthat might be rendered on the Trust’s financial statements or any of thematters described in the preceding paragraphs of this Item 9.

 

47

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Item9A.  CONTROLS AND PROCEDURES

 

Asof the end of the period covered by this report, the Trust conducted anevaluation, under the supervision and with the participation of the principalexecutive officer and principal financial officer, of the Trust’s disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934). Based on this evaluation, the principalexecutive officer and principal financial officer concluded, except asdescribed below, that the Trust’s disclosure controls and procedures areeffective to ensure that information required to be disclosed by the Trust inreports that it files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the Commission’s rules and forms. Except as described below, there was no change in the Trust’s internalcontrol over financial reporting during the Trust’s most recently completedfiscal year that has materially affected, or is reasonably likely to materiallyaffect, the Trust’s internal control over financial reporting.

 

The Trust didnot timely file this Annual Report on Form 10–K due to the resignation ofMcGladrey as the Trust's principal independent accountants on January 20, 2005 andthe subsequent engagement of EWC on April 4, 2005, less than a month prior tothe due date of this Form 10-K, and the need to resolve certain accountingissues and prepare and file its amended Form 10-K for the fiscal year endedJanuary 31, 2004, which filing was made on May 4, 2005.  The Trust believes that these events arenon-recurring and believes that it has sufficient staff and resources to timelyfile its reports with the Commission in the future.

 

OnJanuary 7, 2005, McGladrey, the Trust’s former independent accountants,provided a letter to the Audit Committee and management of the Trust noting tworeportable conditions under standards established by the American Institute of CertifiedPublic Accountants that McGladrey believed to be material weaknesses.

 

The first reportable condition involved the lack of sufficientsegregation of duties and responsibilities with respect to the recording andapproval of financial information that occurred due to the departure of theTrust’s Controller.  Effective January 31,2005, the Trust rehired its former Controller who will oversee the recording offinancial information while the Trust’s Chief Financial Officer will continuein his prior role of approving financial information.  The second reportable condition involved theneed for “numerous adjusting journal entries” and “significant financialstatement presentation changes,” which resulted in McGladrey concluding thatthe Trust’s “monthly internal financial statements may not be reliable.”  The Trust has hired additional accountingstaff and is considering additional measures that will better ensure thereliability of the Trust’s internal financial statements.

 

On May 4,2005, the Trust filed its Annual Report on Form 10-K/A for the fiscal yearended January 31, 2004 in order to properly apply SFAS No. 144,"Accounting for the Impairment or Disposal of Long-Lived Assets" andreclassify as continuing operations the results for the Hotels previouslyreported in discontinued operations for the fiscal years ended January 31,2004, 2003 and 2002 due to significant continuing involvement by the Trust inthe operations of those Hotels and since the Trust continues to receive cashflows from those Hotels.  In connectionwith that restatement, the Trust re-evaluated its disclosure controls andprocedures and internal control over financial reporting with respect to theproper application of financial accounting standards.

 

PART III

 

ITEM10.  TRUSTEES AND EXECUTIVE OFFICERSOF THE TRUST

 

**Nominees,Trustees and Executive Officers**

** **

The informationconcerning the Trustees and executive officers of the Trust set forth in thefollowing table is based in part on information received from the respectiveTrustees and executive officers and in part on the Trust’s records.  The following table sets forth the name, age,term of office and principal business experience for each Trustee, nominee forTrustee and executive officer of the Trust, as applicable.

 

48

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| **Name**                                 | ** ** | **Principal  Occupations  During Past Five Years,  Age as of April 22, 2005  And Directorships Held**                                                                                                                                                                                                                                  | ** ** | **Trustee  Since**    |
|------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| **Nominees For Terms  Expiring in 2008** |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |
| ** **                               |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |
| Mason E. Anderson(1),(2),(3),(4)         |       | Self-employed  as a private investor, including as an investor in real estate in the  southwestern United States. Age  75.                                                                                                                                                                                                                  |       | January 4, 2005  |
|                                     |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |
| Steven S. Robson(2),(3),(4)              |       | President of Robson Communities, Inc. and Scott Homes and Scott  Multifamily, Inc., residential real estate developers, since 1979. Age:  49.                                                                                                                                                                                     |       | June 16, 1998    |
|                                     |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |
| **Trustee Whose Term  Expires in 2006**  |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |
| ** **                               |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |
| Marc E. Berg(1)                          |       | Executive Vice President, Secretary and Treasurer of the Trust since  February 10, 1999. Vice President – Acquisitions of the Trust from  December 16, 1998 to February 10, 1999. Consultant to InnSuites  Hotels since 1989. Self-employed as a Registered Investment Advisor since  1985. Age: 52.                    |       | January 30, 1998 |
|                                     |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |
| **Trustees Whose Terms  Expire in 2007** |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |
| ** **                               |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |
| James F. Wirth(1)                        |       | Chairman, President and Chief Executive Officer of the Trust since  January 30, 1998. President and owner of Suite Hotels LLC and  affiliated entities, owners and operators of hotels, since 1980. President of  Rare Earth Development Company, a real estate investment company owned by  Mr. Wirth, since 1973. Age: 59. |       | January 30, 1998 |
|                                     |       |                                                                                                                                                                                                                                                                                                                                        |       |                  |
| Peter A. Thoma(2),(3),(4)                |       | Owner and operator of A&T Verleih, Hamburg, Germany, a  hospitality service and rental company, since 1997. Owner and operator of  Thoma Zeltsysteme, Hamburg, Germany, an import and sales company, since 1997.  Age: 38.                                                                                                              |       | April 13, 1999   |

 

----

 

(1)  Member of the Executive Committee.

(2)  Member of the Audit Committee.

(3)  Member of the Compensation Committee.

(4)  Member of the Governance and Nominating Committee.

 

**Other Executive Officers**

 
| Anthony B. Waters |   | Chief Financial Officer of the Trust since February 29, 2000.  Controller of the Trust from June 17, 1999 to February 29, 2000.  Accountant and auditor with Michael Maastricht, CPA from June 16, 1998  to June 15, 1999, performing audits for InnSuites Hotels, Inc.  Self-employed, concentrating in computerized accounting and information  systems, from 1990 to June 1998. Age: 58. |
|-------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The Board of Trustees of theTrust has determined that Mr. Robson, a member of the Trust’s AuditCommittee, qualifies as a “financial expert” under applicable Commission rules,and that Messrs. Thoma, Robson and Anderson are “independent,” as suchterm is defined by Commission rules and Amex listing standards.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Based on Trust records and information, and upon representations fromthe reporting persons, the Trust believes that all Commission filingrequirements applicable to Trustees, executive officers and beneficial ownersof more than 10% of a registered class of equity securities of the Trust under Section 16(a) ofthe Securities Exchange Act of 1934, as amended, for the fiscal year ended January 31,2005, were complied with.

 

**Code of Ethics for Senior Financial Officers**

 

The Trust has adopted a Code of Ethics that applies to its ChiefExecutive Officer, Chief Financial Officer and principal accounting officer andpersons performing similar functions. The Trust has posted its Code of Ethics on its website atwww.innsuitestrust.com.  The Trustintends to satisfy all Commission and Amex disclosure requirements regardingany amendment to, or waiver of, the Code of Ethics relating to its ChiefExecutive Officer, Chief Financial Officer and principal accounting officer,and persons performing similar functions, by posting such information on itswebsite and making any necessary filings with the Commission.  In addition, the Trust has adopted a Code ofConduct and Ethics that applies to all of its employees, officers andTrustees.  It is also available on theTrust’s website at www.innsuitestrust.com.

 

49

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ITEM 11.  EXECUTIVECOMPENSATION

 

During fiscalyear 2005, the Trust issued 9,600 Shares to each Trustee, other than Messrs. Wirthand Berg, as compensation for services rendered as a Trustee of the Trustduring fiscal year 2004.  During fiscalyear 2006, the Trust issued 9,600 Shares to Trustees Robson and Thoma,3,200 Shares to Trustee Anderson and 5,600 Shares to former TrusteeMcConnell, as compensation for services rendered during fiscal year 2005; noShares were issued to Messrs. Wirth and Berg.  During fiscal year 2007, the Trust intends toissue 9,600 Shares to each Trustee, other than Messrs. Wirth and Berg, ascompensation for services rendered during fiscal year 2006.

 

**Summary Compensation Table**

** **

The tablebelow shows individual compensation information for the Trust’s Chief ExecutiveOfficer and any other executive officer whose total annual salary and bonus forthe fiscal year ended January 31, 2005 exceeded $100,000.

 
| **Name and Principal Position** | ** ** | **Fiscal Year** | ** ** | **Annual Salary** | ** ** | **Restricted  Stock Awards** | ** ** |
|---------------------------------|------------|-----------------|------------|-------------------|------------|------------------------------|------------|
|                            |       |            |       |              |       |                         |       |
| James F. Wirth                  |       | 2005            |       | $                 | 130,000    |                         |       | — |   |   |
| President and Chief             |       | 2004            |       | $                 | 95,231     | (2)                          |       | — |   |   |
| Executive Officer (1)           |       | 2003            |       | $                 | 95,936     | (3)                          |       | — |   |   |
|                            |       |            |       |              |       |                         |       |
| Anthony B. Waters               |       | 2005            |       | $                 | 126,400    |                         |       | $ | 3,200 | (4) |   |
| Chief Financial Officer         |       | 2004            |       | $                 | 126,000    |                         |       | $ | 6,240 | (5) |   |
|                            |       | 2003            |       | $                 | 129,392    |                         |       | — |   |   |

 

----

| (1) |   | The terms of  Mr. Wirth’s Employment Agreement are summarized below. See “Item 13 -  Certain Relationships and Related Transactions - Employment Agreement with  Mr. Wirth.”    |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Although  Mr. Wirth’s annual salary for fiscal year 2004 was set at $130,000,  Mr. Wirth agreed to a salary reduction that resulted in an annual salary  of $95,231 for fiscal year 2004. |
| (3) |   | Although  Mr. Wirth’s annual salary for fiscal year 2003 was set at $126,000,  Mr. Wirth agreed to a salary reduction that resulted in an annual salary  of $95,936 for fiscal year 2003. |
| (4) |   | Represents the fair  market value on the date of grant of 2,000 Shares issued to Mr. Waters  as a bonus on March 26, 2004.                                                                     |
| (5) |   | Represents the fair market value on the date of grant of 4,800 Shares  issued to Mr. Waters as a bonus on June 30, 2003.                                                                       |

 

 

**Aggregated Option Exercises In Fiscal Year 2005 and Fiscal Year-EndOption Values**

 
| **Name**          | ** ** | **Shares  Acquired On  Exercise (#)** | ** ** | **Value  Realized ($)** | ** ** | **Number of Securities  Underlying  Unexercised Options  At Fiscal Year-End (#)  Exercisable/  Unexercisable** | ** ** | **Value of Unexercised  In-The-Money  Options At Fiscal  Year-End ($)  Exercisable/  Unexercisable** | ** ** |
|-------------------|------------|---------------------------------------|------------|-------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
|              |       |                                  |       |                    |       |                                                                                                           |       |                                                                                                 |       |
| James F. Wirth    |       | N/A                                   |       | N/A                     |       | 50,000/0                                                                                                       |       | N/A                                                                                                  | *     |
|              |       |                                  |       |                    |       |                                                                                                           |       |                                                                                                 |       |
| Anthony B. Waters |       | N/A                                   |       | N/A                     |       | 20,000/0                                                                                                       |       | N/A                                                                                                  | *     |

 

----

*As of April 22,2005, none of the options held by such individuals were in-the-money.

 

50

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ITEM 12.  SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The followingtable provides information about the Trust’s equity compensation plans (otherthan qualified employee benefits plans and plans available to shareholders on apro rata basis) as of January 31, 2005:

 

**Equity Compensation Plan Information**

 
| **Plan Category**                                           | ** ** | **Number of Securities to  be Issued Upon Exercise  of Outstanding Options,  Warrants and Rights** | ** ** | **Weighted – Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining  Available for Future  Issuance Under Equity  Compensation Plans  (Excluding Securities  Reflected in Column (a))** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                               |       |                                                                                      |       |                                                                                                                                                       |       |
| Equity compensation plans approved by  security holders     |       | 232,600                                                                                            |       | $                                                                                         | 2.50       |                                                                                                                                                       | 506,800    |   |
|                                                        |       |                                                                                               |       |                                                                                      |       |                                                                                                                                                       |       |
| Equity compensation plans not approved by  security holders |       | None                                                                                               |       | None                                                                                      |       | None                                                                                                                                                       |       |
|                                                             |            |                                                                                                    |            |                                                                                           |            |                                                                                                                                                            |            |  |

 

The followingtable sets forth information as of April 22, 2005 in respect of anypersons known to the Trust to be the beneficial owner of more than 5% of theShares (of which there were none, other than Mr. Wirth) and the number ofShares owned beneficially by each Trustee, nominee and executive officer, andthe Trustees, nominees and executive officers as a group.

 

**Five Percent Beneficial Owners andBeneficial Ownership of Trustees, Nominees and Executive Officers**

 
| **Name**                                                             | ** ** | **Shares  Beneficially Owned** | ** ** | **Percentage of Outstanding Shares** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
|                                                                 |       |                           |       |                                 |       |
| **Trustees, Nominees and Executive Officers**                        |       |                           |       |                                 |       |
|                                                                 |       |                           |       |                                 |       |
| James F. Wirth (1)                                                   |       | 5,867,869                      |       | 65.52                                | %          |
| Marc E. Berg  (2)                                                    |       | 86,225                         |       |                                 | *     |
| Mason E. Anderson (3)                                                |       | 221,806                        |       | 2.49                                 | %          |
| Steven S. Robson (4)                                                 |       | 213,523                        |       | 2.39                                 | %          |
| Peter A. Thoma (5)                                                   |       | 58,700                         |       |                                 | *     |
| Anthony B. Waters (6)                                                |       | 31,400                         |       |                                 | *     |
|                                                                 |       |                           |       |                                 |       |
| Trustees, Nominees and Executive Officers  as a group (six  persons) |       | 6,479,523                      |       | 71.63                                | %          |

 

----

(1)          Consists of 50,000Shares that may be acquired within 60 days of June 21, 2005 pursuantto the exercise of stock options and 5,817,869 Shares.  These Shares are owned jointly by Mr. Wirthand his spouse.  Mr. Wirth and hisspouse also own all 3,467,938 issued and outstanding Class B limitedpartnership units in the Partnership, the conversion of which is restricted andpermitted only at the discretion of the Board of Trustees of the Trust.  Mr. Wirth’s address is 1615 E.Northern Avenue, Suite 102, Phoenix, Arizona 85020.

 

(2)          Consists of 30,000Shares that may be acquired within 60 days of June 21, 2005 pursuantto the exercise of stock options and 56,225 Shares.

 

(3)          Consists of 170,000Shares held by the Anderson Trust dated August 27, 1980 and 48,606 Sharesheld by the Anderson Charitable Remainder UniTrust.  Mr. Anderson and his spouse areco-trustees and income beneficiaries of both Trusts.  Mr. Anderson also holds 3,200 Sharesdirectly.  Mr. Anderson’s address is3024 West Sahuaro Drive, Phoenix, Arizona 85029.

 

51

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(4)          Consists of 20,000Shares that may be acquired within 60 days of June 21, 2005 pursuantto the exercise of stock options and 193,523 Shares.

 

(5)          Consists of 20,000Shares that may be acquired within 60 days of June 21, 2005 pursuant tothe exercise of stock options and 38,700 Shares.

 

(6)          Consists of 20,000Shares that may be acquired within 60 days of June 21, 2005 pursuant tothe exercise of stock options and 11,400 Shares.

 

*              Less than onepercent (1.0%).

 

ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

**Employment Agreement with Mr. Wirth**

 

James F.Wirth, Chairman, President and Chief Executive Officer of the Trust, has anEmployment Agreement with the Trust expiring in December 2007.  Pursuant to the terms of the EmploymentAgreement, upon the termination of the Advisory Agreement with Mid-AmericaReaFund Advisors, Inc. (“MARA”), a company owned by Mr. Wirth and hisspouse, which termination occurred effective January 1, 1999, Mr. Wirthis to receive, each year through 2007, up to the amount MARA would havereceived for advisory and management services under the Advisory Agreement, butin no event will his compensation exceed $160,000 per year.  Based upon a review of the performance of theTrust and upon the recommendation of the Compensation Committee, during fiscalyear 2005, Mr. Wirth was paid an annual salary equal to $130,000, which isless than he is entitled to receive under the terms of his EmploymentAgreement.  Mr. Wirth’s annualsalary for fiscal year 2006 has been set at $130,000.  The Compensation Committee does not rely onany particular set of financial or non-financial factors, measures or criteriawhen determining the compensation offered to Mr. Wirth.

 

**Purchase of Class B Limited PartnershipUnits from Mr. Wirth**

 

On February 2, 2004, the Trust purchased 433,036 Class Blimited partnership units in the Partnership from Mr. Wirth and hisaffiliates for the closing price of the Trust’s Shares of Beneficial Intereston that day, which was $2.25 per Share. The Trust made a down-payment totaling $2,500 and issued five promissorynotes totaling $971,831, which will be paid in monthly installments ofprincipal and interest over 84 months. The Trust repurchased these Class B limited partnership units toincrease its sole general partner interest in the Partnership, and therebyreceive a larger allocation of the Partnership’s equity.

 

**Acquisition of InnSuites Licensing Corp. by Suite HospitalityManagement, Inc.**

 

Effective February 2, 2004, the Management Company acquired all ofthe issued and outstanding capital stock of Licensing Corp., an entity thenowned by Mr. Wirth and his spouse. In exchange for the stock of the Licensing Corp., Mr. Wirth and hisspouse received 55,563 Shares of Beneficial Interest that were held by theManagement Company.  The Licensing Corp.became a wholly-owned subsidiary of the Management Company.  Agreements for the provision of trademark andlicense services by Licensing Corp. to InnSuites Hotels continued after thistransfer, as described below in “Item 13 - Certain Relationships and RelatedTransactions - Management of Hotel Properties and Licensing Agreements.”

 

Effectiveon June 8, 2004, the Trust acquired the management agreements of theManagement Company and the license agreements and related registered andunregistered InnSuites trademarks and tradenames of the Licensing Corp.  See “Item 1 – Business – Management andLicensing Contracts.”

 

**Management of Hotel Properties and LicensingAgreements**

 

Mr. Wirthhas derived benefits from the license agreements with the Licensing Corp., anentity formerly owned by Mr. Wirth and his spouse during fiscalyear 2005.  See “Item 13 - CertainRelationships and Related Transactions - Acquisition of InnSuites LicensingCorp. by Suite Hospitality Management, Inc.” above.

 

See “Item 1 – Business –Management and Licensing Contracts,” for a discussion of the former and currentterms of the management and licensing agreements and a discussion of Mr. Wirth’sinterest in those agreements.

 

52

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**Sale of Tempe, Arizona Property**

 

## OnMarch 25, 2004, the Trust sold its Tempe, Arizona property toTempe/Phoenix Airport Resort LLC, an affiliate of Mr. Wirth, for itsappraised value of $6.8 million, which was also its carrying value.  Tempe/Phoenix Airport Resort LLC satisfiedthe purchase price by assuming $5.1 million of the Trust’s notes payable to Mr. Wirthand his affiliates and assuming the $1.7 million mortgage note secured by theproperty.

##  

**Related Party Loans and Advances to the Trust**

** **

Notes andadvances payable to related parties consist of funds provided by Mr. Wirth,certain of his affiliates and other related parties to permit the Trust torepurchase additional general partnership units in the Partnership and to fundworking capital and capital improvement needs. The aggregate amountsoutstanding to related parties were approximately $94,000 and $6.9 millionas of January 31, 2005 and 2004, respectively.

 

The notes andadvances payable to related parties are as follows as of January 31 of therespective years:

 
| ** **                                                                                                                                                                                                                                                                                               | ** ** | **2005** | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|
| Note payable to the Anderson Charitable  Remainder Unitrust, an affiliate of Mason Anderson, Trustee of the Trust,  bearing interest at 7% per annum, and secured by Shares of Beneficial  Interest in the Trust. Due in monthly principal and interest payments of  $2,408 through September 2005. |       | $        | 18,771     |      | $          | — |   |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable to Wayne Anderson, son of  Mason Anderson, Trustee of the Trust, bearing interest at 7% per annum, and  secured by Shares of Beneficial Interest in the Trust. Due in monthly  principal and interest payments of $574 through June 2009.                                              |       | 26,114   |       |      |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable to Karen Anderson, daughter of  Mason Anderson, Trustee of the Trust, bearing interest at 7% per annum, and  secured by Shares of Beneficial Interest in the Trust. Due in monthly  principal and interest payments of $574 through June 2009.                                         |       | 26,115   |       |      |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable to The Kathy Anderson,  daughter of Mason Anderson, Trustee of the Trust, bearing interest at 7% per  annum, and secured by Shares of Beneficial Interest in the Trust. Due in  monthly principal and interest payments of $495 through June 2009.                                     |       | 22,512   |       |      |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable to Steve Robson, Trustee of  the Trust, paid in full during fiscal year 2005 with Shares of Beneficial  Interest in the Trust.                                                                                                                                                              |       | —   |       | 239,667   |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Unsecured notes payable to Rare Earth  Financial, L.L.C., an affiliate of Mr. Wirth, paid in full during fiscal  year 2005.                                                                                                                                                                         |       | —   |       | 514,500   |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Unsecured note payable to Rare Earth  Financial, L.L.C., an affiliate of Mr. Wirth, paid in full during fiscal  year 2005 in connection with the sale of the Tempe property.                                                                                                                        |       | —   |       | 2,000,000 |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable to Rare Earth Financial,  L.L.C., an affiliate of Mr. Wirth, bearing interest at 7% per annum,  paid in full during fiscal year 2005 in connection with the sale of the Tempe  property.                                                                                               |       | —   |       | 2,072,893 |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable to Rare Earth Financial,  L.L.C., an affiliate of Mr. Wirth, paid in full during fiscal year 2005  in connection with the sale of the Tempe property                                                                                                                                   |       | —   |       | 1,379,646 |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable to Hulsey Hotels Corporation,  an affiliate of Mr. Wirth, paid in full during fiscal year 2005.                                                                                                                                                                                        |       | —   |       | 356,550   |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Note payable to Mr. Wirth, bearing  interest at 7% per annum, paid in full during fiscal year 2005                                                                                                                                                                                                  |       | —   |       | 187,230   |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Unsecured note payable to Mr. Wirth,  paid in full during fiscal year 2005.                                                                                                                                                                                                                         |       | —   |       | 101,755   |       |
|                                                                                                                                                                                                                                                                                                     |       |     |       |      |       |
| Totals                                                                                                                                                                                                                                                                                                   |       | $        | 93,512     |      | $          | 6,852,241 |   |

 

53

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During the second and thirdquarters of fiscal year 2004, the Trust issued five promissory notes in theamount of $208,000, $75,000, $200,000, $110,000 and $60,000 to Rare EarthDevelopment Company, an affiliate of Mr. Wirth, all of which were paid infull in the third quarter of fiscal year 2004 utilizing a portion of the cashproceeds from the sale of the Buena Park property.

 

During the second quarter offiscal year 2004, the Trust issued a promissory note in the amount of $225,000to Rare Earth Financial, L.L.C., an affiliate of Mr. Wirth, which was paidin full in the third quarter of fiscal year 2004 utilizing a portion of thecash proceeds from the sale of the Buena Park property.

 

During thefirst quarter of fiscal year 2005, the Trust repurchased 433,036 Class Blimited partnership units in the Partnership from affiliates of Mr. Wirth,issuing promissory notes in the aggregate amount of $974,331.  During the first quarter of fiscal year 2005,the Trust repaid $449,500 of these notes. During the fourth quarter of fiscal year 2005, the Trust repaid theremaining balance of these notes with Shares of Beneficial Interest with anaggregate value of $467,552.  Additionally,Mr. Wirth converted 100,000 Class B limited partnership units in thePartnership into 100,000 Shares of Beneficial Interest.

 

Asof February 2, 2004, J. R. Chase, the sole stockholder of the ManagementCompany, agreed to transfer 32,363 Shares of Beneficial Interest in the Trustto the Management Company in order to facilitate the Management Company’sacquisition of Licensing Corp. from Mr. Wirth.  In consideration of the transfer of thoseShares, the Management Company agreed to pay Mr. Chase $72,817.  The Management Company fully satisfied thisobligation during June 2004.  SeeNote 20, “Purchase of Management and Licensing Contracts.” 

 

During the second quarter offiscal year 2005, the Trust issued promissory notes totaling $83,000 toaffiliates of Mason Anderson, who subsequently became a Trustee of the Trust,in exchange for 47,084 Shares of Beneficial Interest in the Trust.

 

During the second quarter of fiscal year 2005, the Trust issued 55,423Shares of Beneficial Interest to satisfy unpaid principal and interest totaling$95,882 to Mr. Robson, a Trustee of the Trust.

 

During the fourth quarter offiscal year 2005, the Partnership reclassified $700,000 of advances payable toRare Earth Financial, L.L.C., an affiliate of Mr. Wirth, to a deposit forthe purchase of the Phoenix, Arizona hotel property by another affiliate of Mr. Wirth.

 

The Trust paidinterest on related party notes to Mr. Wirth and his affiliates in theamounts of $439,294, $205,101 and $28,373 for the twelve months ended January 31,2005, 2004 and 2003, respectively.  TheTrust incurred interest expense on related party notes to Mr. Wirth andhis affiliates in the amounts of $117,500, $515,214 and $623,522 for the twelvemonths ended January 31, 2005, 2004 and 2003, respectively.

 

**Continued Listing with the American Stock Exchange**

** **

See“Item 7 – Management’s Discussion and Analysis of Financial Condition andResults of Operations – Continued Listing with the American Stock Exchange,”for a discussion of the interests of Mr. Wirth and his affiliates in thetransactions that implemented the Trust’s plan to regain compliance with Amex’scontinued listing standards.  All ofthese transactions were approved by the shareholders and the independentTrustees of the Trust.

 

All related party transactions are subject to appropriate review andoversight by the Audit Committee of the Board of Trustees.

 

ITEM 14.  PRINCIPAL ACCOUNTANTFEES AND SERVICES

 

**Audit Fees**

 

The aggregate fees for professional services rendered by EWC for theaudit of the Trust’s annual financial statements for the fiscal year ended January 31,2005 were $61,000.  The aggregate feesfor professional services rendered by McGladrey for the audit of the Trust’sannual financial statements for the fiscal years ended January 31, 2005 and January 31,2004 were $78,130 and $134,463, respectively. The aggregate fees for professional services rendered by McGladrey forreviewing the interim financial statements included in the Trust’s quarterlyreports on Form 10-Q filed during the fiscal years ended January 31,2005 and January 31, 2004 were $60,220 and $27,000, respectively.

 

54

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**Audit-Related Fees**

 

The aggregatefees for EWC audit-related services, such as consents and assistance with andreview of documents filed with the Commission, were $0 for the fiscal yearended January 31, 2005.  Theaggregate fees for McGladrey audit-related services, such as comfort letters,consents and assistance with and review of documents filed with the Commission,were $0 and $7,081 for the fiscal years ended January 31, 2005 and January 31,2004, respectively.  The Audit Committeepre-approved all audit-related fees billed for the fiscal year ended January 31,2005.

 

**Tax Fees**

 

The aggregatefees for EWC tax compliance, tax advice and tax planning for the fiscal yearended January 31, 2005 were $25,000. The aggregate fees for McGladrey tax compliance, tax advice and taxplanning for the fiscal years ended January 31, 2005 and January 31,2004 were $2,935 and $78,640, respectively. The Audit Committee pre-approved all tax fees billed for the fiscal yearended January 31, 2005.

 

**All Other Fees**

 

The aggregatefees for all other services rendered by EWC during the fiscal year ended January 31,2005 were $0.  The aggregate fees for allother services rendered by McGladrey during the fiscal years ended January 31,2005 and January 31, 2004 were $0 and $750, respectively.  These fees represent amounts paid for theissuance of consents.  The AuditCommittee pre-approved all other fees billed for the fiscal year ended January 31,2005.

 

The AuditCommittee of the Trust has considered whether the provision of these services,other than the audit of the Trust’s annual financial statements, is compatiblewith EWC and McGladrey maintaining their respective independence from theTrust.

 

The AuditCommittee pre-approves all fees for services performed by EWC, including auditand non-audit services.  Unless a type ofservice EWC provided received general pre-approval, it will require specificpre-approval by the Audit Committee.  Anyproposed services exceeding pre-approved cost levels will require specificpre-approval by the Audit Committee.  Theterm of any pre-approval is 12 months from the date of pre-approval, unless theAudit Committee specifically provides for a different period.

 

Since May 6, 2003, the effective date of Commission rules requiringAudit Committee pre-approval of audit and non-audit services performed by theTrust’s independent auditors, all of the services provided by EWC and McGladreywere approved in accordance with the policies and procedures described above.

 

55

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PART IV

 

ITEM15.  EXHIBITS AND FINANCIAL STATEMENTSCHEDULES

 

(a)(1) and (2)        FinancialStatements and Schedules

 
|   | Financial  Statements/Schedules of InnSuites Hospitality Trust |                                                                                                                      |
|--------|---------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
|   |                                                                |                                                                                                                      |
|   |                                                                |                                                                                                                      |   |
|   | 1.                                                                  | Reports  of Independent Certified Public Accountants                                                                      |   |
|   | 2.                                                                  | Consolidated Balance Sheets  at January 31, 2005 and 2004                                                            |   |
|   | 3.                                                                  | Consolidated  Statements of Operations for the years ended January 31, 2005, 2004 and  2003                          |   |
|   | 4.                                                                  | Consolidated  Statements of Shareholders’ (Deficit) Equity for the years ended  January 31, 2005, 2004 and 2003 |   |
|   | 5.                                                                  | Consolidated  Statements of Cash Flows for the years ended January 31, 2005, 2004 and  2003                          |   |
|   | 6.                                                                  | Notes to  Consolidated Financial Statements for the years ended January 31, 2005,  2004 and 2003                     |   |
|   | 7.                                                                  | Schedule III  – Real Estate and Accumulated Depreciation                                                        |   |
|   | 8.                                                                  | Schedule IV  – Mortgage Loans on Real Estate                                                                    |   |

 
| (a)(3) |   | Exhibit List |
|--------|--------|-------------------|

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Second  Amended and Restated Declaration of Trust of InnSuites Hospitality Trust dated  June 16, 1998, as further amended on July 12, 1999.                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1                 |       | First  Amended and Restated Agreement of Limited Partnership of RRF Limited  Partnership dated January 31, 1998 (incorporated by reference to  Exhibit 10.1 of the Registrant’s Registration Statement on Form S-2,  filed with the Securities and Exchange Commission on September 8, 1998).                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2*                |       | Employment  Agreement dated as of January 31, 1998, between InnSuites Hospitality  Trust and James F. Wirth.                                                                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3*                |       | Indemnity  Agreement dated February 3, 2004 between InnSuites Hospitality Trust and each  of James F. Wirth, Marc E. Berg, Steven S. Robson, Peter A. Thoma, and  Anthony B. Waters (incorporated by reference to Exhibit 10.3 of the  Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31,  2004 filed with the Securities and Exchange Commission on April 30, 2004). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4*                |       | Indemnification  Agreement dated January 4, 2005 between InnSuites Hospitality Trust and Mason  E. Anderson (incorporated by reference to Exhibit 10.1 of the Registrant’s  Current Report on Form 8-K, filed with the Securities and Exchange Commission  on January 7, 2005).                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.5                 |       | Debt  Exchange Agreement effective January 31, 2005 between InnSuites  Hospitality Trust and RRF Limited Partnership (incorporated by reference to  Exhibit 10.1 of the Registrant’s Current Report on Form 8-K,  filed with the Securities and Exchange Commission on February 4, 2005).                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6                 |       | Yuma  Acquisition Agreement effective January 31, 2005 between InnSuites  Hospitality Trust and RRF Limited Partnership (incorporated by reference to  Exhibit 10.2 of the Registrant’s Current Report on Form 8-K,  filed with the Securities and Exchange Commission on February 4, 2005).                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7                 |       | Note  Exchange Agreement effective January 31, 2005 between InnSuites  Hospitality Trust and Hulsey Hotels Corporation (incorporated by reference to  Exhibit 10.3 of the Registrant’s Current Report on Form 8-K,  filed with the Securities and Exchange Commission on February 4, 2005).                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.8                 |       | Note  Exchange Agreement effective January 31, 2005 between InnSuites  Hospitality Trust and the note holders named therein (incorporated by  reference to Exhibit 10.4 of the Registrant’s Current Report on  Form 8-K, filed with the Securities and Exchange Commission on  February 4, 2005).                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.9                 |       | Class B  Units Conversion Agreement effective January 31, 2005 between InnSuites  Hospitality Trust and the Class B Unit holders named therein  (incorporated by reference to Exhibit 10.5 of the Registrant’s Current  Report on Form 8-K, filed with the Securities and Exchange  Commission on February 4, 2005).                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.10                |       | Promissory  Note dated July 26, 2002 by InnSuites Hospitality Trust in favor of The Anderson  Charitable Remainder Unitrust.                                                                                                                                                                                                                                                                     |

 

56

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| 14     |   | Code  of Ethics for Senior Financial Officers (incorporated by reference to  Exhibit 14 of the Registrant’s Annual Report on Form 10-K for  the fiscal year ended January 31, 2004, filed with the Securities and  Exchange Commission on April 30, 2004). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                |
| 21     |   | Subsidiaries  of the Registrant.                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                |
| 23.1   |   | Consent  of Epstein, Weber & Conover, P.L.C., Independent Registered Public  Accounting Firm.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                |
| 23.2   |   | Consent  of McGladrey & Pullen, LLP, Independent Registered Public Accounting  Firm.                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                |
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                |
| 32.1   |   | Certification  of Chief Executive Officer required by Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                |
| 32.2   |   | Certification  of Chief Financial Officer required by Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                          |

 

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*              Management contract orcompensatory plan or arrangement.

 

57

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SIGNATURES

 

Pursuant tothe requirements of Section 13 or 15(d) of Securities Exchange Act of1934, the Trust has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                           | INNSUITES HOSPITALITY TRUST |
|--------------------------------|-----------------------------|
|                           |                        |
|                           |                        |
| Dated:  May 16, 2005 | By:                         | /s/  James F. Wirth |
|                           |                        | James F. Wirth, Chairman,  President and Chief Executive Officer  (Principal Executive Officer) |
|                           |                        |   |
|                           |                        |   |
| Dated:  May 16, 2005 | By:                         | /s/  Anthony B. Waters |
|                           |                        | Anthony B. Waters, Chief Financial Officer  (Principal Financial Officer) |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theTrust and in the capacities and on the dates indicated.

 
| Dated:  May 16, 2005 | By:    | /s/  James F. Wirth                                                                       |
|--------------------------------|--------|------------------------------------------------------------------------------------------------|
|                           |   | James F. Wirth, Chairman  President and Chief Executive Officer  (Principal Executive Officer) |
|                           |   |                                                                                           |
|                           |   |                                                                                           |
| Dated:  May 16, 2005 | By:    | /s/  Anthony B. Waters                                                                    |
|                           |   | Anthony B. Waters, Chief Financial Officer  (Principal Financial Officer)                      |
|                           |   |                                                                                           |
|                           |   |                                                                                           |
| Dated:  May 16, 2005 | By:    | /s/  Marc E. Berg                                                                         |
|                           |   | Marc E. Berg, Trustee                                                                          |
|                           |   |                                                                                           |
|                           |   |                                                                                           |
| Dated:  May 16, 2005 | By:    | /s/  Steven S. Robson                                                                     |
|                           |   | Steven S. Robson, Trustee                                                                      |
|                           |   |                                                                                           |
|                           |   |                                                                                           |
| Dated:  May 16, 2005 | By:    | /s/  Peter A. Thoma                                                                       |
|                           |   | Peter A. Thoma, Trustee                                                                        |
|                           |   |                                                                                           |
|                           |   |                                                                                           |
| Dated:  May 16, 2005 | By:    | /s/  Mason E. Anderson                                                                    |
|                           |   | Mason E. Anderson, Trustee                                                                     |

 

58

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