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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2007

OR



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

For the transition period from  to
.

Commission file number 001-32379



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MHI
HOSPITALITY CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|MARYLAND                                                       |  | 20-1531029                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

4801 Courthouse Street, Suite 201, Williamsburg, Virginia 23188

Telephone Number (757) 229-5648



---

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934).

Large Accelerated Filer ̈Accelerated Filer ̈Non-accelerated Filer  x

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

As of November 8, 2007, there were 6,897,000
shares of the registrants common stock issued and outstanding.



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MHI HOSPITALITY CORPORATION

INDEX



|         |  |                                                                                       |  |     
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                       |  | Page
|         |  | PART I                                                                                |  |     
|Item 1.  |  | Financial Statements                                                                  |  | 3   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 27  
|Item 4.  |  | Controls and Procedures                                                               |  | 27  
|Item 4T  |  | Controls and Procedures                                                               |  | 28  
|         |  | PART II                                                                               |  |     
|Item 1.  |  | Legal Proceedings                                                                     |  | 29  
|Item 1A. |  | Risk Factors                                                                          |  | 29  
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 29  
|Item 3.  |  | Defaults Upon Senior Securities                                                       |  | 29  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 29  
|Item 5.  |  | Other Information                                                                     |  | 29  
|Item 6.  |  | Exhibits                                                                              |  | 30  



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##### Table of Contents

PART I



|Item 1. | Financial Statements
|------- | --------------------

MHI
HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                    |  |                    |             |   |                   |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                                                    |  | September 30, 2007 |             |   | December 31, 2006 |  
|                                                                                                                                                                                    |  | (unaudited)        |             |   |                   |  
|ASSETS                                                                                                                                                                              |  |                    |             |   |                   |   |             |  
|Investment in hotel properties, net                                                                                                                                                 |  | $                  | 120,343,099 |   |                   | $ | 111,416,404 |  
|Investment in joint venture                                                                                                                                                         |  |                    | 5,482,116   |   |                   |   |            |  
|Cash and cash equivalents                                                                                                                                                           |  |                    | 3,623,331   |   |                   |   | 1,445,491   |  
|Restricted cash                                                                                                                                                                     |  |                    | 2,755,209   |   |                   |   | 2,522,234   |  
|Accounts receivable                                                                                                                                                                 |  |                    | 1,995,085   |   |                   |   | 2,143,426   |  
|Accounts receivable-affiliate                                                                                                                                                       |  |                    | 39,051      |   |                   |   | 195,859     |  
|Prepaid expenses, inventory and other assets                                                                                                                                        |  |                    | 2,487,569   |   |                   |   | 1,979,371   |  
|Notes receivable                                                                                                                                                                    |  |                    | 400,000     |   |                   |   | 4,430,000   |  
|Shell Island lease purchase, net                                                                                                                                                    |  |                    | 2,367,647   |   |                   |   | 2,676,470   |  
|Deferred financing costs, net                                                                                                                                                       |  |                    | 1,086,778   |   |                   |   | 793,558     |  
|                                                                                                                                                                                    |  |                    |             |   |                   |   |             |  
|TOTAL ASSETS                                                                                                                                                                        |  | $                  | 140,579,885 |   |                   | $ | 127,602,813 |  
|                                                                                                                                                                                    |  |                    |             |   |                   |   |             |  
|LIABILITIES                                                                                                                                                                         |  |                    |             |   |                   |   |             |  
|Line of credit                                                                                                                                                                      |  | $                  | 16,207,858  |   |                   | $ | 15,228,232  |  
|Mortgage loans                                                                                                                                                                      |  |                    | 53,000,000  |   |                   |   | 41,607,099  |  
|Accounts payable and other accrued liabilities                                                                                                                                      |  |                    | 7,078,837   |   |                   |   | 5,429,990   |  
|Dividends and distributions payable                                                                                                                                                 |  |                    | 1,807,883   |   |                   |   | 1,805,333   |  
|Advance deposits                                                                                                                                                                    |  |                    | 830,317     |   |                   |   | 509,084     |  
|                                                                                                                                                                                    |  |                    |             |   |                   |   |             |  
|TOTAL LIABILITIES                                                                                                                                                                   |  |                    | 78,924,895  |   |                   |   | 64,579,738  |  
|Minority interest in operating partnership                                                                                                                                          |  |                    | 20,331,146  |   |                   |   | 21,001,287  |  
|                                                                                                                                                                                    |  |                   
|Commitments and contingencies (see Note 7)                                                                                                                                          |  |                    |             |   |                   |   |             |  
|                                                                                                                                                                                    |  |                   
|SHAREHOLDERS EQUITY                                                                                                                                                                |  |                    |             |   |                   |   |             |  
|Preferred stock, par value $0.01, 1,000,000 shares authorized, 0 shares issued and outstanding                                                                                      |  |                    |            |   |                   |   |            |  
|Common stock, par value $0.01, 49,000,000 shares authorized, 6,897,000 shares and 6,712,000 shares issued and outstanding at
September 30, 2007 and December 31, 2006, respectively |  |                    | 68,970      |   |                   |   | 67,120      |  
|Additional paid in capital                                                                                                                                                          |  |                    | 48,293,005  |   |                   |   | 47,947,267  |  
|Accumulated deficit                                                                                                                                                                 |  |                    | (7,038,131  | ) |                   |   | (5,992,599  | )
|                                                                                                                                                                                    |  |                    |             |   |                   |   |             |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                          |  |                    | 41,323,844  |   |                   |   | 42,021,788  |  
|                                                                                                                                                                                    |  |                    |             |   |                   |   |             |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                          |  | $                  | 140,579,885 |   |                   | $ | 127,602,813 |  
|                                                                                                                                                                                    |  |                    |             |   |                   |   |             |  

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



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##### Table of Contents

MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                          |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|------------------------------------------------------------------------- |  | ------------------------------------- | ---------- | - | ------------------------------------- | - | ---------- | ------------------------------------ |  | - | ------------------------------------ | - |  | - | ---------- | -
|                                                                          |  | Three months ended September 30, 2007 |            |   | Three months ended September 30, 2006 |   |            | Nine months ended September 30, 2007 |  |   | Nine months ended September 30, 2006 |  
|REVENUE                                                                   |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Rooms department                                                          |  | $                                     | 11,683,189 |   |                                       | $ | 10,670,222 |                                      |  | $ | 35,919,953                           |   |  | $ | 33,474,763 |  
|Food and beverage department                                              |  |                                       | 4,115,491  |   |                                       |   | 4,352,351  |                                      |  |   | 14,311,188                           |   |  |   | 13,937,662 |  
|Other operating departments                                               |  |                                       | 928,091    |   |                                       |   | 1,095,163  |                                      |  |   | 2,788,738                            |   |  |   | 2,833,972  |  
|                                                                          |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Total revenue                                                             |  |                                       | 16,726,771 |   |                                       |   | 16,117,736 |                                      |  |   | 53,019,879                           |   |  |   | 50,246,397 |  
|EXPENSES                                                                  |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Hotel operating expenses                                                  |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Rooms department                                                          |  |                                       | 3,042,175  |   |                                       |   | 2,956,682  |                                      |  |   | 9,356,688                            |   |  |   | 9,231,870  |  
|Food and beverage department                                              |  |                                       | 3,078,288  |   |                                       |   | 3,059,996  |                                      |  |   | 10,112,504                           |   |  |   | 9,634,172  |  
|Other operating departments                                               |  |                                       | 229,593    |   |                                       |   | 221,785    |                                      |  |   | 671,763                              |   |  |   | 657,545    |  
|Indirect                                                                  |  |                                       | 6,251,115  |   |                                       |   | 5,851,031  |                                      |  |   | 19,198,447                           |   |  |   | 18,462,536 |  
|                                                                          |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Total hotel operating expenses                                            |  |                                       | 12,601,171 |   |                                       |   | 12,089,494 |                                      |  |   | 39,339,402                           |   |  |   | 37,986,123 |  
|Depreciation and amortization                                             |  |                                       | 1,227,443  |   |                                       |   | 1,211,386  |                                      |  |   | 3,677,762                            |   |  |   | 3,599,640  |  
|Corporate general and administrative                                      |  |                                       | 599,904    |   |                                       |   | 552,648    |                                      |  |   | 2,362,878                            |   |  |   | 2,007,063  |  
|                                                                          |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Total operating expenses                                                  |  |                                       | 14,428,518 |   |                                       |   | 13,853,528 |                                      |  |   | 45,380,042                           |   |  |   | 43,592,826 |  
|                                                                          |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|OPERATING INCOME                                                          |  |                                       | 2,298,253  |   |                                       |   | 2,264,208  |                                      |  |   | 7,639,837                            |   |  |   | 6,653,571  |  
|Other income (expense)                                                    |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Interest expense                                                          |  |                                       | (1,047,256 | ) |                                       |   | (1,097,794 | )                                    |  |   | (3,117,296                           | ) |  |   | (3,167,740 | )
|Interest income                                                           |  |                                       | 32,570     |   |                                       |   | 74,256     |                                      |  |   | 99,404                               |   |  |   | 117,667    |  
|Equity loss in joint venture                                              |  |                                       | (624,039   | ) |                                       |   |           |                                      |  |   | (624,039                             | ) |  |   |           |  
|Unrealized loss on hedging activities                                     |  |                                       | (329,972   | ) |                                       |   | (231,870   | )                                    |  |   | (56,113                              | ) |  |   | (231,870   | )
|Gain (Loss) on disposal of assets                                         |  |                                       | 4,863      |   |                                       |   | 126,664    |                                      |  |   | (9,404                               | ) |  |   | 126,664    |  
|                                                                          |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Income before minority interest in operating partnership and income taxes |  |                                       | 334,419    |   |                                       |   | 1,135,464  |                                      |  |   | 3,932,389                            |   |  |   | 3,498,292  |  
|Minority interest in operating partnership                                |  |                                       | (219,056   | ) |                                       |   | (465,522   | )                                    |  |   | (1,369,267                           | ) |  |   | (1,244,726 | )
|Income tax benefit (provision)                                            |  |                                       | 293,756    |   |                                       |   | 129,591    |                                      |  |   | (108,694                             | ) |  |   | (117,012   | )
|                                                                          |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Income from continuing operations                                         |  |                                       | 409,119    |   |                                       |   | 799,533    |                                      |  |   | 2,454,428                            |   |  |   | 2,136,554  |  
|Loss from discontinued operations, net                                    |  |                                       |           |   |                                       |   | (190       | )                                    |  |   |                                     |   |  |   | (65,870    | )
|                                                                          |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|NET INCOME                                                                |  | $                                     | 409,119    |   |                                       | $ | 799,343    |                                      |  | $ | 2,454,428                            |   |  | $ | 2,070,684  |  
|                                                                          |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Continuing operations per share                                           |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Basic                                                                     |  | $                                     | 0.06       |   |                                       | $ | 0.12       |                                      |  | $ | 0.36                                 |   |  | $ | 0.32       |  
|Diluted                                                                   |  | $                                     | 0.06       |   |                                       | $ | 0.12       |                                      |  | $ | 0.36                                 |   |  | $ | 0.32       |  
|Discontinued operations per share                                         |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Basic                                                                     |  | $                                     | 0.00       |   |                                       | $ | (0.00      | )                                    |  | $ | 0.00                                 |   |  | $ | (0.01      | )
|Diluted                                                                   |  | $                                     | 0.00       |   |                                       | $ | (0.00      | )                                    |  | $ | 0.00                                 |   |  | $ | (0.01      | )
|Net income (loss) per share                                               |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Basic                                                                     |  | $                                     | 0.06       |   |                                       | $ | 0.12       |                                      |  | $ | 0.36                                 |   |  | $ | 0.31       |  
|Diluted                                                                   |  | $                                     | 0.06       |   |                                       | $ | 0.12       |                                      |  | $ | 0.36                                 |   |  | $ | 0.31       |  
|Weighted average number of shares outstanding                             |  |                                       |            |   |                                       |   |            |                                      |  |   |                                      |   |  |   |            |  
|Basic                                                                     |  |                                       | 6,864,935  |   |                                       |   | 6,712,000  |                                      |  |   | 6,825,786                            |   |  |   | 6,707,355  |  
|Diluted                                                                   |  |                                       | 6,924,935  |   |                                       |   | 6,781,000  |                                      |  |   | 6,885,786                            |   |  |   | 6,774,015  |  

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



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MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

(unaudited)



|                                                             |  |              |  |                          |        |                    |   |            |       |   |            |   |  |   |            |  
|------------------------------------------------------------ |  | ------------ |  | ------------------------ | ------ | ------------------ | - | ---------- | ----- | - | ---------- | - |  | - | ---------- | -
|                                                             |  | Common Stock |  | AdditionalPaid-InCapital |        | AccumulatedDeficit |   |            | Total |  
|                                                             |  | Shares       |  | Par Value                |        |                    |  
|Balances at December 31, 2006                                |  | 6,712,000    |  | $                        | 67,120 |                    | $ | 47,947,267 |       | $ | (5,992,599 | ) |  | $ | 42,021,788 |  
|Issuance of restricted common stock awards                   |  | 15,000       |  |                          | 150    |                    |   | 145,710    |       |   |           |   |  |   | 145,860    |  
|Conversion of units in operating partnership to common stock |  | 170,000      |  |                          | 1,700  |                    |   | 114,528    |       |   |           |   |  |   | 116,228    |  
|Amortization of deferred stock grants                        |  |             |  |                          |       |                    |   | 85,500     |       |   |           |   |  |   | 85,500     |  
|Net income                                                   |  |             |  |                          |       |                    |   |           |       |   | 2,454,428  |   |  |   | 2,454,428  |  
|Dividends declared                                           |  |             |  |                          |       |                    |   |           |       |   | (3,499,960 | ) |  |   | (3,499,960 | )
|                                                             |  |              |  |                          |        |                    |   |            |       |   |            |   |  |   |            |  
|Balances at September 30, 2007                               |  | 6,897,000    |  | $                        | 68,970 |                    | $ | 48,293,005 |       | $ | (7,038,131 | ) |  | $ | 41,323,844 |  
|                                                             |  |              |  |                          |        |                    |   |            |       |   |            |   |  |   |            |  

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



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MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                  |  |                                      |             |   |                                      |   |             |  
|--------------------------------------------------------------------------------- |  | ------------------------------------ | ----------- | - | ------------------------------------ | - | ----------- | -
|                                                                                  |  | Nine months Ended September 30, 2007 |             |   | Nine months ended September 30, 2006 |  
|Cash Flows from Operating Activities:                                             |  |                                      |             |   |                                      |   |             |  
|Net income                                                                        |  | $                                    | 2,454,428   |   |                                      | $ | 2,070,684   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                      |             |   |                                      |   |             |  
|Depreciation and amortization                                                     |  |                                      | 3,677,762   |   |                                      |   | 3,736,509   |  
|Equity in loss of joint venture                                                   |  |                                      | 624,039     |   |                                      |   |            |  
|(Gain) loss on disposal of assets                                                 |  |                                      | 9,404       |   |                                      |   | (126,664    | )
|Unrealized loss on hedging activities                                             |  |                                      | 56,113      |   |                                      |   | 231,870     |  
|Amortization of deferred financing costs                                          |  |                                      | 207,584     |   |                                      |   | 172,415     |  
|Charges related to equity-based compensation                                      |  |                                      | 128,811     |   |                                      |   | 158,500     |  
|Minority interest in operating partnership                                        |  |                                      | 1,369,267   |   |                                      |   | 1,206,350   |  
|Changes in assets and liabilities:                                                |  |                                      |             |   |                                      |   |             |  
|Restricted cash                                                                   |  |                                      | (201,636    | ) |                                      |   | (69,320     | )
|Accounts receivable                                                               |  |                                      | 148,341     |   |                                      |   | (506,192    | )
|Inventory, prepaid expenses and other assets                                      |  |                                      | (1,005,968  | ) |                                      |   | (615,700    | )
|Accounts payable and other accrued liabilities                                    |  |                                      | 1,678,235   |   |                                      |   | (69,384     | )
|Advance deposits                                                                  |  |                                      | 321,233     |   |                                      |   | 294,016     |  
|Due from affiliates                                                               |  |                                      | 156,808     |   |                                      |   | 231,465     |  
|                                                                                  |  |                                      |             |   |                                      |   |             |  
|Net cash provided by operating activities                                         |  |                                      | 9,624,421   |   |                                      |   | 6,714,549   |  
|                                                                                  |  |                                      |             |   |                                      |   |             |  
|Cash flows from investing activities:                                             |  |                                      |             |   |                                      |   |             |  
|Acquisitions of hotel properties                                                  |  |                                      |            |   |                                      |   | (7,696,353  | )
|Investment in joint venture                                                       |  |                                      | (6,106,155  | ) |                                      |   |            |  
|Improvements and additions to hotel properties                                    |  |                                      | (11,790,221 | ) |                                      |   | (4,355,225  | )
|Funding of restricted cash reserves                                               |  |                                      | (855,784    | ) |                                      |   | (821,730    | )
|Proceeds of restricted cash reserves                                              |  |                                      | 824,446     |   |                                      |   | 2,233,945   |  
|Proceeds of notes receivable                                                      |  |                                      | 4,030,000   |   |                                      |   |            |  
|Proceeds from sale of hotel properties                                            |  |                                      |            |   |                                      |   | 162,459     |  
|                                                                                  |  |                                      |             |   |                                      |   |             |  
|Net cash used in investing activities                                             |  |                                      | (13,897,714 | ) |                                      |   | (10,476,904 | )
|                                                                                  |  |                                      |             |   |                                      |   |             |  
|Cash flows from financing activities:                                             |  |                                      |             |   |                                      |   |             |  
|Dividends and distributions paid                                                  |  |                                      | (5,420,590  | ) |                                      |   | (5,412,600  | )
|Proceeds of mortgage refinancing                                                  |  |                                      | 11,851,780  |   |                                      |   |            |  
|Net proceeds of credit facility                                                   |  |                                      | 979,626     |   |                                      |   | 12,728,232  |  
|Payment of deferred financing costs                                               |  |                                      | (500,804    | ) |                                      |   | (622,750    | )
|Payment of loans                                                                  |  |                                      | (458,879    | ) |                                      |   | (801,872    | )
|                                                                                  |  |                                      |             |   |                                      |   |             |  
|Net cash provided by financing activities                                         |  |                                      | 6,451,133   |   |                                      |   | 5,891,010   |  
|                                                                                  |  |                                      |             |   |                                      |   |             |  
|Net increase in cash and cash equivalents                                         |  |                                      | 2,177,840   |   |                                      |   | 2,128,655   |  
|Cash and cash equivalents at the beginning of the period                          |  |                                      | 1,445,491   |   |                                      |   | 501,810     |  
|                                                                                  |  |                                      |             |   |                                      |   |             |  
|Cash and cash equivalents at the end of the period                                |  | $                                    | 3,623,331   |   |                                      | $ | 2,630,465   |  
|                                                                                  |  |                                      |             |   |                                      |   |             |  
|Supplemental disclosures:                                                         |  |                                      |             |   |                                      |   |             |  
|Cash paid during the period for interest                                          |  | $                                    | 3,370,292   |   |                                      | $ | 2,936,748   |  
|                                                                                  |  |                                      |             |   |                                      |   |             |  
|Cash paid during the period for income taxes                                      |  | $                                    | 310,568     |   |                                      | $ | 349,231     |  
|                                                                                  |  |                                      |             |   |                                      |   |             |  
|Sale of property for promissory notes                                             |  | $                                    |            |   |                                      | $ | 4,430,000   |  
|                                                                                  |  |                                      |             |   |                                      |   |             |  

The accompanying notes are an integral part of these financial statements



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##### Table of Contents

MHI HOSPITALITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

(unaudited)

1. Organization and Description of Business

MHI
Hospitality Corporation (the Company) is a self-advised real estate investment trust (REIT) that was incorporated in Maryland on August 20, 2004 to own full-service upper-upscale, upscale and mid-scale hotels located in
primary and secondary markets in the mid-Atlantic, Midwest and Southeastern regions of the United States. The hotels operate under well-known national hotel brands such as Hilton, Crowne Plaza and Holiday Inn.

The Company commenced operations on December 21, 2004 when it completed its initial public offering (IPO) and thereafter consummated the
acquisition of six hotel properties (initial properties). Substantially all of the Companys assets are held by, and all of its operations are conducted through, MHI Hospitality, L.P. (the Operating Partnership). For the
Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which is approximately 64.4% owned by the Company, leases its hotels to a subsidiary of MHI Hospitality TRS Holding Inc., MHI Hospitality TRS, LLC,
(collectively, MHI TRS), a wholly owned subsidiary of the Operating Partnership. MHI TRS then engages a hotel management company to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for
federal income tax purposes.

Significant transactions occurring during the current and prior fiscal year include the following:

On May 8, 2006, the Company closed on a senior secured revolving credit facility for up to $60.0 million, which was syndicated by
Branch Banking & Trust Company (BB&T). The facility replaced an existing $23.0 million facility with BB&T and is being used to fund acquisitions and working capital.

On August 10, 2006, the Company sold the Holiday Inn Downtown, in Williamsburg, Virginia for $4.75 million. The Company agreed to take back three
promissory notes that totaled $4.43 million from the purchaser and received the remainder of the purchase price in cash. Promissory notes in the amount of $2.63 million and $1.4 million were repaid during the first quarter of 2007. The third
promissory note in the amount of $0.4 million bears interest at a rate of 8.0% with interest-only payments due monthly for the first four years and payments under a 20-year amortization schedule thereafter and matures in August 2026. The promissory
note is secured by a security interest in the hotel and by personal guarantees of affiliates of the purchaser.

On September 20, 2006,
the Company purchased the 186-room Louisville Ramada Riverfront Inn, located in Jeffersonville, Indiana for approximately $7.7 million including transfer costs. The hotel is located directly on the Ohio River, with unimpeded views of the Louisville
skyline, and easy access to the center of downtown Louisville. The Company has closed the hotel for extensive renovations. The purchase was structured to meet the requirements of an Internal Revenue Code Section 1031 like-kind exchange,
enabling the Company to defer tax on capital gains relating to the sale in August 2006 of its Williamsburg property. To facilitate the closing of the acquisition, the Company accessed approximately $7.5 million from its line of credit, and
approximately $0.2 million in cash proceeds from the sale of its Williamsburg property. On February 23, 2007, the Company executed a license agreement with Starwood Hotels and Resorts to operate the hotel as a Sheraton. The term of the license
is 15 years.

On March 29, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Wilmington Riverside.
Approximately $13.8 million of the proceeds were used to satisfy the existing indebtedness. The remainder of the proceeds, approximately $9.2 million, is being used to fund renovations to the property. The new mortgage matures March 29, 2017
and bears interest at a rate of 6.21%, with payments of interest-only due for the first 24 months. Thereafter, payments of interest and principal are required under a 20-year amortization schedule.

On April 26, 2007, the Company entered into a program agreement and related operating agreements with CRP/MHI Holdings, LLC, an affiliate of Carlyle
Realty Partners V, L.P. and The Carlyle Group (Carlyle). The agreements provide for the formation of entities to be jointly owned by the Company and Carlyle, which will source, underwrite, acquire, develop and operate hotel assets and/or
hotel portfolios. Under the agreement, the Company will offer the joint venture the first right to acquire potential investment opportunities identified by the Company with total capitalization requirements in excess of $30.0 million. Carlyle has
agreed to commit $100.0 million of equity capital to the joint venture over the next three years. Carlyle will fund up to 90% of the equity of an acquisition, and the Company will provide between 10% and 25%.

The Company will receive an asset management fee of 1.5% of the gross revenues of the hotels owned by the venture. In addition, the Company will have a
first right of offer with respect to any investment disposed by the joint venture. It is expected that hotels acquired by the joint venture will be managed by MHI Hotels Services, LLC (MHI Hotels Services).



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On July 16, 2007, the Company entered into a definitive agreement to purchase a 250-room hotel in
Tampa, Florida, formerly known as the Tampa Clarion Hotel for the aggregate purchase price of $13.5 million. The hotel is located in Tampas Westshore corridor and is within two miles of the Tampa International Airport. The Company intends to
make extensive renovations and re-brand the hotel, as is consistent with the Companys repositioning strategy.

On August 1,
2007, the Company entered into an amendment to its credit agreement with BB&T, as administrative agent and lender, dated May 8, 2006. The amended credit agreement with BB&T and certain other lenders reduced the rate of interest on the
Companys revolving credit facility by 0.375%, so that it bears a rate equal to LIBOR plus additional interest ranging from 1.625% to 2.125%. The amendment also reduced the capitalization rate to 8.5% from 10.0% for purposes of determining the
asset value of the collateral for the credit facility. Finally, the amendment extended the maturity date of the Companys revolving credit facility from May 8, 2010 to May 8, 2011.

On August 2, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Savannah DeSoto. Approximately $9.6 million of the
proceeds were used to satisfy the existing indebtedness and pay closing costs. At closing, approximately $2.4 million of the proceeds was issued to the Company. The remainder of the proceeds will be used to fund renovations to the property. The new
mortgage matures August 1, 2017 and bears interest at a rate of 6.06%, with payments of interest-only due for the first 36 months. Thereafter, payments of interest and principal are required under a 20-year amortization schedule.

On August 8, 2007, through a joint venture with Carlyle, the Company completed the acquisition of the Crowne Plaza Resort Hollywood Beach, a newly
renovated 311-room hotel in Hollywood, Florida for $74.0 million, with Carlyle retaining a 75% equity position. A portion of the purchase was financed with a two-year $57.6 million non-recourse loan from Société Générale.
The loan has three one-year extensions and is interest-only bearing a rate of LIBOR plus 1.94%. The hotel will be managed by MHI Hotels Services. The Company will receive an asset management fee of 1.5% of gross revenues of the hotel in addition to
its share of the operating profits and proceeds of sale pursuant to the joint venture agreement.

2. Summary of Significant Accounting Policies

Basis of Presentation The consolidated financial statements of the Company presented herein include all of the accounts of
MHI Hospitality Corporation as of and for and three months and nine months ended September 30, 2007 and 2006.

Principles of
Consolidation The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash
equivalents.

Restricted Cash Restricted cash includes real estate tax escrows and reserves for replacements of furniture,
fixtures and equipment pursuant to certain requirements in the Companys mortgage agreement with MONY Life Insurance Company (MONY). MONY holds mortgages on the Hilton Wilmington Riverside and the Hilton Savannah DeSoto. In
addition, restricted cash includes the unexpended balance of a capital improvement reserve account for the Crowne Plaza Jacksonville Hotel administered by Mercantile Safe Deposit and Trust Company (Mercantile), trustee for the mortgage
holder.

Investment in Hotel Properties Investments in hotel properties are recorded at acquisition cost and allocated to
land, property and equipment and identifiable intangible assets in accordance with Statement of Financial Accounting Standards No. 141.

Business Combinations. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed
from the Companys accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project, which constitute additions or improvements that extend the life of the property, are capitalized.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 15 to 39 years for
buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

The Company reviews its investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of
the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions



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and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the
estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an
adjustment to reduce the carrying amount to the related hotel propertys estimated fair market value is recorded and an impairment loss recognized.

Investment in Joint Venture  Investment in joint venture represents the Companys non-controlling indirect 25.0% equity interest in (i) the entity that owns the Crowne Plaza Resort Hollywood
Beach and (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract. Carlyle owns a 75.0% controlling interest in both the entities. The Company accounts for its investment in
joint venture under the equity method of accounting and is entitled to receive its pro rata share of annual cash flow. The Company also has the opportunity to earn an incentive participation in net sale proceeds based upon the achievement of certain
overall investment returns, in addition to its pro rata share of net sale proceeds.

Derivative Instruments  The Company
accounts for derivative instruments in accordance with the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (SFAS
133). Under SFAS 133, all derivative instruments are required to be reflected as assets or liabilities on the balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset,
liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders equity to the
extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged.
For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings. The Company does not enter into derivative instruments for speculative trading
purposes.

At September 30, 2007 and December 31, 2006, the Companys interest-rate swap agreement had an estimated fair
value of $(464,815) and $(408,702), respectively, and is included in accounts payable and other accrued liabilities.

Franchise License
Fees Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The un-amortized franchise fees as of September 30, 2007 and December 31, 2006 were $207,200 and $184,812,
respectively. Amortization expense totaled $6,238 and $18,713 for the three months and nine months ended September 30, 2007, respectively, and $6,229 and $21,021 for the three months and nine months ended September 30, 2006, respectively.

Minority Interest in Operating Partnership Certain hotel properties have been acquired, in part, by the Operating
Partnership through the issuance of limited partnership units of the Operating Partnership. The minority interest in the Operating Partnership is: (i) increased or decreased by the limited partners pro-rata share of the Operating
Partnerships net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Companys common stock and (iv) adjusted to equal the net equity of the
Operating Partnership multiplied by the limited partners ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Companys common stock through an adjustment to additional paid-in capital. Net
income or net loss is allocated to the minority interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.

On March 1, 2007, two holders of units in the Operating Partnership redeemed 120,000 units for an equivalent number of shares of the Companys common stock. On August 28, 2007, one holder redeemed
50,000 units for an equivalent number of shares as well.

Revenue Recognition Revenues from operations of the hotels are
recognized when the services are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as telephone, rooftop leases and gift shop sales and rentals.

Deferred Financing Costs  Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt.
Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the statements of operations.

Income Taxes The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. As a REIT, the
Company generally will not be subject to federal income tax on that portion of its net income that does not relate to MHI Hospitality TRS, LLC, the Companys wholly owned taxable REIT subsidiary. MHI Hospitality TRS, LLC, which leases the
Companys hotels from subsidiaries of the Operating Partnership, is subject to federal and state income taxes.



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The Company accounts for income taxes in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes(SFAS 109). Under SFAS 109, the Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Stock-based Compensation  The Companys 2004 Long Term Incentive Plan (Plan) permits the grant of stock options, restricted
(non-vested) stock and performance share compensation awards to its employees for up to 350,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its shareholders.

Under the Plan, the Company has made restricted stock and deferred stock awards totaling 85,500 shares including 60,000 shares granted under a deferred
stock award to its Chief Operating Officer, 13,000 restricted shares issued to certain executives and employees, and 12,500 restricted shares issued to its directors. The 60,000 shares granted under the deferred stock award vest over five years.
Regarding the restricted shares awarded to the Companys directors, the shares vest at the end of the year of service for which the shares are awarded. All restricted awards to employees have vested. The value of the awards is charged to
compensation expense on a straight-line basis over the vesting or service period based on the Companys stock price on the date of grant or issuance. Under the Plan, the Company may issue a variety of performance-based stock awards, including
nonqualified stock options. As of September 30, 2007, no performance-based stock awards have been granted. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method.
Total compensation cost recognized under the Plan was $45,549 and $128,811 for the three and nine months ended September 30, 2007, respectively and $28,500 and $85,500 for the three months and nine months ended September 30, 2006,
respectively.

Discontinued Operations  On August 10, 2006, the Company sold the Holiday Inn Downtown in Williamsburg,
Virginia. Accordingly, the results of operations for all prior periods are reflected as discontinued operations.

Comprehensive Income
(Loss)  Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss).

Segment Information Statement of Financial Accounting Standards No 131, Disclosures about Segments of an Enterprise and
Related Information(SFAS 131), requires public entities to report certain information about operating segments. Based on the guidance provided in SFAS 131, the Company has determined that its business is conducted in one reportable
segment, hotel ownership.

Use of Estimates The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications  Certain reclassifications have been made to the prior period balances to conform to the current period presentation.

3. Acquisition of Hotel Properties

There were no new acquisitions during the nine months ended
September 30, 2007.

4. Investment in Hotel Properties

Investment in hotel properties as of September 30, 2007 and December 31, 2006 consisted of the following (in thousands):



|                                  |  |                    |         |   |                   |   |         |  
|--------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                  |  | September 30, 2007 |         |   | December 31, 2006 |  
|                                  |  | (unaudited)        |         |   |                   |  
|Land and land improvements        |  | $                  | 13,368  |   |                   | $ | 13,363  |  
|Buildings and improvements        |  |                    | 105,191 |   |                   |   | 98,130  |  
|Furniture, fixtures and equipment |  |                    | 25,951  |   |                   |   | 20,751  |  
|                                  |  |                    |         |   |                   |   |         |  
|                                  |  |                    | 144,510 |   |                   |   | 132,244 |  
|Less: accumulated depreciation    |  |                    | (24,167 | ) |                   |   | (20,828 | )
|                                  |  |                    |         |   |                   |   |         |  
|                                  |  | $                  | 120,343 |   |                   | $ | 111,416 |  
|                                  |  |                    |         |   |                   |   |         |  



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5. Credit Facility

As of September 30, 2007, the Company had a secured, revolving credit facility with a syndicated bank group comprised of BB&T, Key Bank National Association and Manufacturers and Traders Trust Company that
enables the Company to borrow up to $60.0 million, subject to borrowing base and loan-to-value limitations. The credit facility was established during the second quarter of 2006 and replaced a $23.0 million secured, revolving credit facility with
BB&T. On August 1, 2007, the Company entered into an amendment to its credit agreement reducing the rate of interest on the credit facility by 0.375%, reducing the capitalization rate to 8.5% from 10.0% for purposes of determining the asset
value of the collateral for the credit facility and extending the maturity date by one year. The Company had borrowings of $16,207,858 and $15,228,232 at September 30, 2007 and December 31, 2006, respectively.

The facility matures during May 2011 and bears interest at a floating rate of LIBOR plus additional interest ranging from 1.625% to 2.125%. On
September 30, 2007, LIBOR was 5.12%. In some circumstances, the revolving line of credit facility may bear interest at BB&Ts prime rate. Any amounts drawn under the revolving line of credit facility mature at the expiration of the
facility. The revolving line of credit facility includes an uncommitted accordion facility, pursuant to which the Company may be able to increase the total commitment under the revolving line of credit facility up to $75.0 million. The Company is
required to pay a fee of 0.25% on the unused portion of the credit facility. Under the terms of the agreement, the Company was required to purchase an interest rate swap in order to hedge against interest rate risk.

The facility is secured by the Holiday Inn Brownstone in Raleigh, North Carolina, the Hilton Philadelphia Airport and the property under renovation in
Jeffersonville, Indiana, as well as a lien on all business assets of those properties including, but not limited to, equipment, accounts receivable, inventory, furniture, fixtures and proceeds thereof. At September 30, 2007, the three
properties had a net carrying value of approximately $47.3 million. Under the terms of the credit facility, the Company must satisfy certain financial and non-financial covenants. As of September 30, 2007 and December 31, 2006, the Company
was in compliance with all of the required covenants.

6. Mortgage Debt

Upon its formation, the Company assumed existing mortgage debt with MONY that was in place on two of the initial properties.

On August 2, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Savannah DeSoto. Approximately $9.6 million of the
proceeds were used to satisfy the existing indebtedness and pay closing costs. At closing, approximately $2.4 million of the proceeds was issued to the Company. The remaining $11.0 million of the proceeds will fund a product improvement plan for the
hotel in connection with the Hilton relicensing. The new mortgage matures August 1, 2017 and bears interest at a rate of 6.06%, with payments of interest-only due for the first 36 months. Thereafter, payments of interest and principal are
required under a 20-year amortization schedule. The outstanding balance due on the loan as of September 30, 2007 and December 31, 2006 was $12,000,000 and $9,685,090, respectively.

On March 29, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Wilmington Riverside. Approximately $13.8 million of
the proceeds were used to satisfy the existing indebtedness. The remainder of the proceeds, approximately $9.2 million, is being used to fund renovations to the property. The new mortgage matures March 29, 2017 and bears interest at a rate of
6.21% with payments of interest-only due for the first 24 months. Thereafter, payments of interest and principal are required under a 20-year amortization schedule. The outstanding balance due on the loan as of September 30, 2007 and
December 31, 2006 was $23,000,000 and $13,922,010, respectively.

On July 22, 2005, the Company purchased the Crowne Plaza
Jacksonville Hotel in Jacksonville, Florida from BIT Holdings Seventeen, Inc., an affiliate of the AFL-CIO Building Investment Trust (the Trust), for an aggregate price of $22.0 million. The Trust, for which Mercantile acts as trustee,
financed a portion of the purchase price by extending an $18.0 million mortgage loan (the Loan) to the purchaser. The Loan, which is secured by a lien against all the assets, rents and profits of the hotel as well as the real property,
bears interest at the rate of 8.0% payable monthly during the term and matures in July 2010. Pre-payment penalties apply toward any principal of the loan repaid before the fifth year of the term.

Total mortgage debt maturities as of September 30, 2007 for the following twelve-month periods were as follows ($000s):



|                                                                     |  |   |         |  
|-------------------------------------------------------------------- |  | - | ------- | -
|September 30, 2008                                                   |  | $ |        |  
|September 30, 2009                                                   |  |   | 245     |  
|September 30, 2010                                                   |  |   | 18,715  |  
|September 30, 2011                                                   |  |   | 1,270   |  
|September 30, 2012                                                   |  |   | 1,350   |  
|Thereafter                                                           |  |   | 42,420  |  
|                                                                     |  |   |         |  
|Total future maturities                                              |  | $ | 64,000  |  
|Less: Funds remaining to be drawn on Hilton Savannah DeSoto mortgage |  |   | (12,000 | )
|                                                                     |  |   |         |  
|Mortgage loan balance, September 30, 2007                            |  | $ | 53,000  |  
|                                                                     |  |   |         |  



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7. Commitments and Contingencies

Ground, Building and Submerged Land Leases  The Company leases 2,086 square feet of commercial space next to the Savannah hotel property for use as an office, retail or conference space, or for any
related or ancillary purposes for the hotel and/or atrium space. The space is leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the first of three optional five -year periods expiring
October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for this operating lease was $10,795 and $32,385 for the three months and nine months ended September 30, 2007, respectively and $10,795 and
$32,385 for the three months and nine months ended September 30, 2006.

The Company leases, as landlord, the entire fourteenth floor
of the Savannah hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the
property. No rental income is recognized under the terms of this lease as the original lump sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.

The Company leases a parking lot adjacent to the Holiday Inn Brownstone in Raleigh, North Carolina. The land is leased under a second amendment, dated
April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expires August 31, 2016. There is a renewal option for up to three additional ten-year periods expiring
August 31, 2026, August 31, 2036, and August 31, 2046, respectively. The Company holds an exclusive and irrevocable option to purchase the leased land at fair market value at the end of the original lease term, subject to the
payment of an annual fee of $9,000, and other conditions. For the three months and nine months ended September 30, 2007, rent expense was $23,871 and $71,612, respectively. For the three months and nine months ended September 30, 2006,
rent expense was $19,351 and $57,943, respectively.

In conjunction with the sublease arrangement for the property at Shell Island, the
Company incurs an annual lease expense for a leasehold interest other than the purchased leasehold interest. Lease expense was $49,289 and $147,853 for the three months and nine months ended September 30, 2007, respectively. Lease expense was
$47,819 and $128,032 for the three and nine months ended September 30, 2006, respectively.

The Company leases certain submerged land
in the Saint Johns River in front of the Crowne Plaza Jacksonville Hotel from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land is leased under a five-year operating lease, which expired
September 18, 2007. A new operating lease has been executed requiring annual payments of $4,961 and expires September 18, 2012. Rent expense for each of the three-month periods ended September 30, 2007 and 2006 was $1,160; for the
nine-month periods ended September 30, 2007 and 2006, $3,480.

The Company leases 1,890 square feet of commercial office space in
Williamsburg, Virginia under a two-year agreement that expires August 31, 2008. There is a one-year renewal option. For the three months and nine months ended September 30, 2007 rent expense was $10,499 and $31,289, respectively. Rent
expense for the three months and nine months ended September 30, 2006 was $3,465.

The Company has agreed to lease a parking lot in
close proximity to the property under renovation in Jeffersonville, Indiana. The land is leased under an agreement dated August 17, 2007 with the City of Jeffersonville, which in turn leases the property from the State of Indiana. The lease
term for the parking lot coincides with that of the lease with the State of Indiana which expires December 31, 2011. The Company has the right to renew or extend its lease with the City of Jeffersonville pursuant to the conditions of the
original lease provided that the City of Jeffersonville is able to renew or extend the underlying lease with the State of Indiana. Minimum annual rents of $33,600 will commence no later than March 31, 2008.



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Purchase Commitment  On July 16, 2007, the Company entered into a definitive agreement
to purchase a 250-room hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel for the aggregate purchase price of $13.5 million. On October 29, 2007, the Company completed the purchase and funded the acquisition with borrowings on
its credit facility.

Management Agreement  Each of the seven hotels that the Company owned at September 30, 2007
operates under a ten-year master management agreement with MHI Hotels Services which expires between December 2014 and July 2015 (see Note 9).

Franchise Agreements  As of September 30, 2007, the Companys six operating hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, the Company is required to pay a
franchise fee generally between 2.5% and 5.0% of room revenues, plus additional fees that amount to between 2.5% and 6.0% of room revenues from the hotels. The Company has also executed a franchise agreement with Starwood Hotels and Resorts to
operate the property in Jeffersonville, Indiana as a Sheraton. Under the agreement, the Company will be required to pay similar franchise fees once the hotel is re-opened.

Restricted Cash Reserves  Each month, the Company is required to escrow with its lender on the Wilmington Riverside Hilton and the Savannah
DeSoto Hilton an amount equal to 1/12 of the annual real estate taxes due for the properties. The Company is also required to establish a property improvement fund for each of these two hotels to cover the cost of replacing capital assets at the
properties. Each month, contributions to the property improvement fund equal to 4.0% of gross revenues for the Savannah DeSoto Hilton and the Wilmington Riverside Hilton.

Pursuant to the terms of the mortgage on the Crowne Plaza Jacksonville, the Company is required to contribute 4.0% of room revenues to a property improvement fund.

Litigation  The Company is not involved in any legal proceedings other than routine legal proceedings accruing in the ordinary course of
business. The Company believes that these routine legal proceedings, in the aggregate, are not material to the Companys financial condition or results of operation.

8. Capital Stock

Common Shares The Company is authorized to issue up to 49,000,000
shares of common stock, $.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Companys common stock are entitled to receive
distributions when authorized by the Companys board of directors out of assets legally available for the payment of distributions.

In June 2006, the Company issued 8,000 shares of restricted common stock to its independent directors and non-executive employees. In January 2007, the Company issued 13,500 shares of restricted stock to certain of its executives and
independent directors. In March 2007, two holders of units in the Operating Partnership redeemed 120,000 units for an equivalent number of shares of the Companys common stock. In April 2007, the Company issued 1,500 shares of restricted stock
to a new independent director. In August 2007, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Companys common stock. As of September 30, 2007, the Company had 6,897,000
shares of common stock outstanding.

Warrants The Company has granted no warrants representing the right to purchase common
stock.

Preferred Shares  The Company is authorized to issue 1,000,000 shares of preferred stock, $.01 par value per share. As
of September 30, 2007, there were no shares of preferred stock outstanding.

Operating Partnership Units  Holders of
Operating Partnership units have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the Companys common stock on a one-for-one basis or, at the option of the Company,
cash per unit equal to the market price of the Companys common stock at the time of redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations
or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company. As of September 30, 2007, the total number of Operating Partnership
units outstanding was 3,737,607.



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9. Related Party Transactions

The following is a summary of the transactions between the Company and MHI Hotels Services (a company that is majority-owned and controlled by our CEO, our CFO and two members of the Board of Directors):

Accounts Receivable At September 30, 2007 and December 31, 2006, the Company was due $39,051 and $195,859, respectively, from
MHI Hotels Services.

Shell Island Sublease  The Company has a sublease arrangement with MHI Hotels Services on its leasehold
interests in the property at Shell Island. For the three months and nine months ended September 30, 2007, the Company earned $160,000 and $480,000 in leasehold revenue, respectively. For the three months and nine months ended September 30,
2006, the Company earned $160,000 and $480,000 in leasehold revenue, respectively.

Sublease of Office Space The Company
subleases office space in Greenbelt, MD from MHI Hotels Services. Rent expense was $9,510 and $28,530 for the three months and nine months ended September 30, 2007, respectively. Rent expense was $10,030 and $28,750 for the three months and
nine months ended September 30, 2006, respectively.

Strategic Alliance Agreement On December 21, 2004, the Company
entered into a ten-year strategic alliance agreement with MHI Hotels Services that provides in part for the referral of acquisition opportunities to the Company and the management of its hotels by MHI Hotels Services.

Management Agreements Each of the seven hotels that the Company owned at September 30, 2007 are managed by MHI Hotels Services under a
master management agreement, which expires between December 2014 and July 2015. MHI Hotels Services receives a base management fee, and if the hotels meet and exceed certain thresholds, an additional incentive management fee. The base management fee
for the initial portfolio of six hotels was 2.0% in 2005, rising to 2.5% in 2006 and 3.0% thereafter of total gross revenues from the hotels. The base management fee for the Crowne Plaza Jacksonville Hotel is 2.0% through 2006, rising to 2.5% in
2007 and 3.0% thereafter. Pursuant to the sale of the Holiday Inn Downtown in Williamsburg, Virginia, one of the hotels initially contributed to the Company upon its formation, MHI Hotels Services has agreed to substitute the property in
Jeffersonville, Indiana for the Williamsburg property under the master management agreement. The incentive management fee, if any, will be due annually in arrears within 90 days of the end of the fiscal year and will be equal to 10% of the amount by
which the gross operating profit of the hotels, on an aggregate basis, for a given year exceeds the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive management fee may not exceed 0.25% of gross
revenue of the individual hotel that qualifies for incentive fee.

The Company paid MHI Hotels Services $482,605 and $1,530,362 for the
three months and nine months ended September 30, 2007, respectively, and $394,914 and $1,238,813 for the three months and nine months ended September 30, 2006, respectively, in management fees. In addition, estimated incentive management
fees of $131,003 and $0 were accrued, but not paid, as of September 30, 2007 and 2006, respectively.

Employee Medical Benefits
The Company purchases employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of MHI Hotels Services. The Company paid $23,877 and $71,607 for the three months and nine months ended September 30,
2007, respectively and $18,708 and $56,801 for the three months and nine months ended September 30, 2006, respectively, for benefits.

Construction Management Services  The Company engaged MHI Hotels Services to manage the renovation of the Crowne Plaza Jacksonville and the Hilton Wilmington Riverside as well as the newly acquired property in Jeffersonville,
Indiana. For the three months and nine months ended September 30, 2007, the Company paid $50,000 and $500,000, respectively in construction management fees. For the three months and nine months ended September 30, 2006, the Company paid $0
and $112,000 in construction management fees.

Charter Vessel Rental  The Company leases the Jacksonville
Princess, a charter vessel docked adjacent to the Crowne Plaza Jacksonville from MHI Hotels, Inc., an affiliate of MHI Hotels Services on an event-by-event basis for guests of the hotel. Charter rentals for the three months and nine months
ended September 30, 2007 were $0 and $66,145, respectively. Charter rentals for the three months and nine months ended September 30, 2006 were $25,495 and $95,403, respectively.

10. Retirement Plan

The Company began a 401(k) plan
for qualified employees on April 1, 2006. The plan is subject to safe harbor provisions which require that the Company match 100% of the first 3% of employee contributions and 50% of the next 2% of employee contributions. All
Company matching funds vest immediately in accordance with the safe harbor provision. Company contributions to the plan for the three months and nine months ended September 30, 2007 were $14,826 and $32,275, respectively. Company
contributions to the plan for the three months and nine months ended September 30, 2006 were $17,151 and $25,033, respectively.



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##### Table of Contents

11. Unconsolidated Joint Venture

The Company owns a 25% indirect interest in (i) the entity that owns the Crowne Plaza Resort Hollywood Beach and (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel
under a management contract. Carlyle owns a 75% controlling interest in both the entities. The joint venture purchased the property on August 8, 2007 and began operations on September 18, 2007. Summarized financial information for this
investment, which is accounted for under the equity method, is as follows:



|                                               |  |                                                    |            |  
|---------------------------------------------- |  | -------------------------------------------------- | ---------- | -
|                                               |  | September 30, 2007                                 |           
|                                               |  | (unaudited)                                        |           
|ASSETS                                         |  |                                                    |            |  
|Investment in hotel properties, net            |  | $                                                  | 77,548,172 |  
|Cash and cash equivalents                      |  |                                                    | 854,131    |  
|Restricted cash                                |  |                                                    | 1,612,346  |  
|Accounts receivable                            |  |                                                    | 4,266      |  
|Prepaid expenses, inventory and other assets   |  |                                                    | 860,268    |  
|                                               |  |                                                    |            |  
|TOTAL ASSETS                                   |  | $                                                  | 80,879,183 |  
|                                               |  |                                                    |            |  
|LIABILITIES                                    |  |                                                    |            |  
|Mortgage loans                                 |  |                                                    | 57,600,000 |  
|Accounts payable and other accrued liabilities |  |                                                    | 1,161,836  |  
|Advance deposits                               |  |                                                    | 188,445    |  
|                                               |  |                                                    |            |  
|TOTAL LIABILITIES                              |  |                                                    | 58,950,281 |  
|TOTAL SHAREHOLDERS EQUITY                     |  |                                                    | 21,928,902 |  
|                                               |  |                                                    |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY     |  | $                                                  | 80,879,183 |  
|                                               |  |                                                    |            |  
|                                               | 
|                                               |  | Period fromAugust 8, 2007throughSeptember 30, 2007 |           
|                                               |  | (unaudited)                                        |           
|Revenue                                        |  |                                                    |            |  
|Rooms department                               |  | $                                                  | 9,630      |  
|Food and beverage department                   |  |                                                    | 5,579      |  
|Other operating departments                    |  |                                                    | 493        |  
|                                               |  |                                                    |            |  
|Total revenue                                  |  |                                                    | 15,702     |  
|Expenses                                       |  |                                                    |            |  
|Hotel operating expenses                       |  |                                                    |            |  
|Rooms department                               |  |                                                    | 28,928     |  
|Food and beverage department                   |  |                                                    | 32,034     |  
|Other operating departments                    |  |                                                    | 531        |  
|Indirect                                       |  |                                                    | 152,127    |  
|                                               |  |                                                    |            |  
|Total hotel operating expenses                 |  |                                                    | 213,620    |  
|Depreciation and amortization                  |  |                                                    | 55,572     |  
|                                               |  |                                                    |            |  
|Total operating expenses                       |  |                                                    | 269,192    |  
|                                               |  |                                                    |            |  
|Operating loss                                 |  |                                                    | (253,490   | )
|Start-up expenses                              |  |                                                    | (1,599,720 | )
|Interest expense                               |  |                                                    | (645,515   | )
|Interest income                                |  |                                                    | 2,570      |  
|                                               |  |                                                    |            |  
|Net loss                                       |  | $                                                  | (2,496,155 | )
|                                               |  |                                                    |            |  



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The property was purchased with (i) the proceeds of a mortgage loan, secured by the property, and
(ii) cash contributions from the Company and Carlyle. The two-year $57.6 million non-recourse loan from Société Générale has three one-year extensions and is interest-only bearing a rate of LIBOR plus 1.94%.

12. Income Taxes

The components of
the income tax provision (benefit) for the three months and nine months ended September 30, 2007 and 2006 are as follows (in thousands):



|          |  |                                       |      |   |                                       |   |      |                                      |  |                                      |     |  |   |      |  
|--------- |  | ------------------------------------- | ---- | - | ------------------------------------- | - | ---- | ------------------------------------ |  | ------------------------------------ | --- |  | - | ---- | -
|          |  | Three Months Ended September 30, 2007 |      |   | Three Months Ended September 30, 2006 |   |      | Nine Months Ended September 30, 2007 |  | Nine Months Ended September 30, 2006 |    
|          |  | (unaudited)                           |      |   | (unaudited)                           |   |      | (unaudited)                          |  | (unaudited)                          |    
|Current:  |  |                                       |      |   |                                       |   |      |                                      |  |                                      |     |  |   |      |  
|Federal   |  | $                                     |     |   |                                       | $ |     |                                      |  | $                                    |    |  | $ |     |  
|State     |  |                                       | 31   |   |                                       |   | 76   |                                      |  |                                      | 57  |  |   | 363  |  
|          |  |                                       |      |   |                                       |   |      |                                      |  |                                      |     |  |   |      |  
|          |  |                                       | 31   |   |                                       |   | 76   |                                      |  |                                      | 57  |  |   | 363  |  
|          |  |                                       |      |   |                                       |   |      |                                      |  |                                      |     |  |   |      |  
|Deferred: |  |                                       |      |   |                                       |   |      |                                      |  |                                      |     |  |   |      |  
|Federal   |  |                                       | (272 | ) |                                       |   | (215 | )                                    |  |                                      | 27  |  |   | (318 | )
|State     |  |                                       | (53  | ) |                                       |   | (52  | )                                    |  |                                      | 25  |  |   | (82  | )
|          |  |                                       |      |   |                                       |   |      |                                      |  |                                      |     |  |   |      |  
|          |  |                                       | (325 | ) |                                       |   | (267 | )                                    |  |                                      | 52  |  |   | (400 | )
|          |  |                                       |      |   |                                       |   |      |                                      |  |                                      |     |  |   |      |  
|          |  | $                                     | (294 | ) |                                       | $ | (191 | )                                    |  | $                                    | 109 |  | $ | (37  | )
|          |  |                                       |      |   |                                       |   |      |                                      |  |                                      |     |  |   |      |  

A reconciliation of the statutory federal income tax expense to the Companys income tax
provision is as follows (in thousands):



|                                     |  |                                       |      |   |                                       |   |      |                                      |  |   |                                      |   |  |   |        |  
|------------------------------------ |  | ------------------------------------- | ---- | - | ------------------------------------- | - | ---- | ------------------------------------ |  | - | ------------------------------------ | - |  | - | ------ | -
|                                     |  | Three Months Ended September 30, 2007 |      |   | Three Months Ended September 30, 2006 |   |      | Nine Months Ended September 30, 2007 |  |   | Nine Months Ended September 30, 2006 |  
|                                     |  | (unaudited)                           |      |   | (unaudited)                           |   |      | (unaudited)                          |  |   | (unaudited)                          |  
|Statutory federal income tax expense |  | $                                     | 114  |   |                                       | $ | 365  |                                      |  | $ | 1,337                                |   |  | $ | 1,167  |  
|Effect of non-taxable REIT income    |  |                                       | (386 | ) |                                       |   | (580 | )                                    |  |   | (1,310                               | ) |  |   | (1,485 | )
|State income tax expense             |  |                                       | (22  | ) |                                       |   | 24   |                                      |  |   | 82                                   |   |  |   | 281    |  
|                                     |  |                                       |      |   |                                       |   |      |                                      |  |   |                                      |   |  |   |        |  
|                                     |  | $                                     | (294 | ) |                                       | $ | (191 | )                                    |  | $ | 109                                  |   |  | $ | (37    | )
|                                     |  |                                       |      |   |                                       |   |      |                                      |  |   |                                      |   |  |   |        |  

As of September 30, 2007, the Company had a net deferred tax asset of approximately $1.0
million; primarily due to current and past years net operating losses. These loss carryforwards will begin to expire in 2024 if not utilized by then. The Company believes that is more likely than not that the deferred tax asset will be
realized and that no valuation allowance is required.

13. Discontinued Operations

The provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, require that hotels sold or held for sale be
treated as discontinued operations.

On June 20, 2006, the Company announced it had entered into a definitive agreement to sell the
Holiday Inn Downtown, in Williamsburg, Virginia. The transaction closed on August 10, 2006. The results of operations of the property for the three months and nine months ended September 30, 2006 have been reclassified as discontinued
operations.

The results of operations for the property for the three months and nine months ended September 30, 2006 were as follows:



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##### Table of Contents

|                                           |  |                                       |         |   |                                      |   |           |  
|------------------------------------------ |  | ------------------------------------- | ------- | - | ------------------------------------ | - | --------- | -
|                                           |  | Three months ended September 30, 2006 |         |   | Nine months ended September 30, 2006 |  
|                                           |  | (unaudited)                           |         |   | (unaudited)                          |  
|Revenue                                    |  |                                       |         |   |                                      |   |           |  
|Rooms department                           |  | $                                     | 435,001 |   |                                      | $ | 1,304,020 |  
|Food and beverage department               |  |                                       | 96,465  |   |                                      |   | 456,148   |  
|Other operating departments                |  |                                       | 16,020  |   |                                      |   | 34,132    |  
|Total revenue                              |  |                                       | 547,486 |   |                                      |   | 1,794,300 |  
|Expenses                                   |  |                                       |         |   |                                      |   |           |  
|Hotel operating expenses                   |  |                                       |         |   |                                      |   |           |  
|Rooms department                           |  |                                       | 154,234 |   |                                      |   | 516,887   |  
|Food and beverage department               |  |                                       | 124,360 |   |                                      |   | 473,018   |  
|Other operating departments                |  |                                       | 6,108   |   |                                      |   | 25,296    |  
|Indirect                                   |  |                                       | 321,590 |   |                                      |   | 900,844   |  
|                                           |  |                                       |         |   |                                      |   |           |  
|Total hotel operating expenses             |  |                                       | 606,292 |   |                                      |   | 1,916,045 |  
|Depreciation and amortization              |  |                                       | 2,028   |   |                                      |   | 136,869   |  
|                                           |  |                                       |         |   |                                      |   |           |  
|Total operating expenses                   |  |                                       | 608,320 |   |                                      |   | 2,052,914 |  
|                                           |  |                                       |         |   |                                      |   |           |  
|Operating loss                             |  |                                       | (60,834 | ) |                                      |   | (258,614  | )
|Minority interest in operating partnership |  |                                       | 97      |   |                                      |   | 38,375    |  
|Income tax benefit                         |  |                                       | 60,547  |   |                                      |   | 154,369   |  
|                                           |  |                                       |         |   |                                      |   |           |  
|Net loss from discontinued operations      |  | $                                     | (190    | ) |                                      | $ | (65,870   | )
|                                           |  |                                       |         |   |                                      |   |           |  

14. Earnings per Share

The limited partners outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partners and following the Companys election to
redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners share of income would also be added back to net income. The
computation of basic and diluted earnings per share is presented below.



|                                                          |  |                                       |           |                                       |   |                                      |  |                                      |           |  |   |          
|--------------------------------------------------------- |  | ------------------------------------- | --------- | ------------------------------------- | - | ------------------------------------ |  | ------------------------------------ | --------- |  | - | ---------
|                                                          |  | Three months ended September 30, 2007 |           | Three months ended September 30, 2006 |   | Nine months ended September 30, 2007 |  | Nine months ended September 30, 2006
|                                                          |  | (unaudited)                           |           | (unaudited)                           |   | (unaudited)                          |  | (unaudited)                         
|Net income                                                |  | $                                     | 409,119   |                                       | $ | 799,343                              |  | $                                    | 2,454,428 |  | $ | 2,070,684
|Basic:                                                    |  |                                       |           |                                       |   |                                      |  |                                      |           |  |   |          
|Weighted average number of common shares outstanding      |  |                                       | 6,864,935 |                                       |   | 6,712,000                            |  |                                      | 6,825,786 |  |   | 6,707,355
|Net income per sharebasic                                |  | $                                     | 0.06      |                                       | $ | 0.12                                 |  | $                                    | 0.36      |  | $ | 0.31     
|Diluted:                                                  |  |                                       |           |                                       |   |                                      |  |                                      |           |  |   |          
|Dilutive awards                                           |  |                                       | 60,000    |                                       |   | 69,000                               |  |                                      | 60,000    |  |   | 69,000   
|Diluted weighted average number common shares outstanding |  |                                       | 6,924,935 |                                       |   | 6,781,000                            |  |                                      | 6,885,786 |  |   | 6,774,015
|Net income per sharediluted                              |  | $                                     | 0.06      |                                       | $ | 0.12                                 |  | $                                    | 0.36      |  | $ | 0.31     

Diluted net income per share takes into consideration the pro forma dilution of certain unvested
stock awards.

15. Subsequent Events

On October 11, 2007, the Company paid the dividend for the third quarter of 2007 that was authorized on July 16, 2007 to those stockholders and unitholders of MHI Hospitality, L.P. of record on September 14, 2007. The
dividend was $0.17 per share (unit).

On October 15, 2007, the Company authorized the payment of a quarterly dividend of $0.17 per
share (unit) to the stockholders and unitholders of record as of December 14, 2007. The dividend is to be paid on January 11, 2008.

On October 29, 2007, the Company completed the purchase of a 250-room hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel, for the aggregate purchase price of $13.5 million. The Company financed the acquisition with
funds drawn on its credit facility.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Overview

We are a self-advised REIT incorporated in
Maryland in August 2004 to pursue opportunities in the full-service, upper upscale, upscale and mid-scale segments of the hotel industry. We commenced operations in December 2004 when we completed our initial public offering (IPO) and
thereafter consummated the acquisition of six hotel properties (initial properties).

Our current portfolio of operating hotels
consists of six full-service, upper up-scale and mid-scale hotels with 1,537 rooms, which operate under well-known brands such as Hilton, Crowne Plaza and Holiday Inn. On September 20, 2006, we purchased a property in Jeffersonville, Indiana,
that is currently being renovated and which is expected to re-open as the Sheraton Louisville Riverside in the first quarter 2008. We also have a 25% indirect non-controlling interest in the Crowne Plaza Resort Hollywood Beach through a joint
venture with The Carlyle Group (Carlyle). And we have a leasehold interest in a resort condominium facility.

As of
September 30, 2007, we owned the following hotel properties:



|                                  |  |                 |  |                    |  |                    
|--------------------------------- |  | --------------- |  | ------------------ |  | -------------------
|Property                          |  | Number of Rooms |  | Location           |  | Date of Acquisition
|Operating properties              |  |                 |  |                    |  |                    
|Hilton Philadelphia Airport       |  | 331             |  | Philadelphia, PA   |  | December 21, 2004  
|Holiday Inn Laurel West           |  | 207             |  | Laurel, MD         |  | December 21, 2004  
|Holiday Inn Brownstone            |  | 187             |  | Raleigh, NC        |  | December 21, 2004  
|Hilton Wilmington Riverside       |  | 274             |  | Wilmington, NC     |  | December 21, 2004  
|Hilton Savannah DeSoto            |  | 246             |  | Savannah, GA       |  | December 21, 2004  
|Crowne Plaza Jacksonville         |  | 292             |  | Jacksonville, FL   |  | July 22, 2005      
|Properties under development      |  |                 |  |                    |  |                    
|Sheraton Louisville Riverside (1) |  | 186             |  | Jeffersonville, IN |  | September 20, 2006 
|                                  |  |                 |  |                    |  |                    
|Total                             |  | 1,723           |  |                    |  |                    
|                                  |  |                 |  |                    |  |                    

---

|(1) | The property previously operated as the Louisville Ramada Riverfront Inn is currently undergoing extensive renovations and is expected to re-open in early 2008 as the Sheraton
Louisville Riverside.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We conduct substantially all our business through our operating partnership, MHI Hospitality, L.P. We
are the sole general partner of our operating partnership, and we own an approximate 64.4% interest in our operating partnership, with the remaining interest being held by the contributors of our initial properties as limited partners.

To qualify as a REIT, we cannot operate hotels. Therefore, our operating partnership leases our hotel properties to MHI Hospitality TRS, LLC, our TRS
Lessee. Our TRS Lessee has engaged MHI Hotels Services to manage our hotels. Our TRS Lessee, and its parent, MHI Hospitality TRS Holding, Inc., are consolidated into our financial statements for accounting purposes. The earnings of MHI Hospitality
TRS Holding, Inc. are subject to taxation similar to other C corporations.

Recent Portfolio Changes

On August 10, 2006, we sold the Holiday Inn Downtown in Williamsburg, Virginia for $4.75 million. We took back three promissory notes totaling $4.43
million from the purchaser and received the remainder of the purchase price in cash. Promissory notes in the amount of $2.63 million and $1.4 million were repaid during the first quarter 2007. The remaining note for $0.4 million bears interest at a
rate of 8.0% with interest-only payments due monthly for the first four years and payments under a 20-year amortization schedule. The note matures August 10, 2026 and is secured by a security interest in the hotel and by personal guarantees of
affiliates of the purchaser.

On April 26, 2007, we entered into a program agreement and related operating agreements with CRP/MHI
Holdings, LLC, an affiliate of Carlyle Realty Partners V, L.P. and The Carlyle Group (Carlyle). The agreements provide for the formation of entities to be jointly owned by us and Carlyle, which will source, underwrite, acquire, develop
and operate hotel assets and/or hotel portfolios. Under the agreement, we will offer the joint venture the first right to acquire potential investment opportunities identified by us with total capitalization requirements in excess of $30.0 million.
Carlyle has agreed to commit $100.0 million of equity capital to the joint venture over the next three years. Carlyle will fund up to 90% of the equity of an acquisition, and we will provide between 10% and 25%.



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We will receive an asset management fee of 1.5% of the gross revenues of the hotels owned by the venture.
In addition, we will have a first right of offer with respect to any investment disposed by the joint venture. It is expected that hotels acquired by the joint venture will be managed by MHI Hotels Services.

On August 8, 2007, through our joint venture with Carlyle, we completed the acquisition of the Crowne Plaza Resort Hollywood Beach, a newly
renovated 311-room hotel in Hollywood, Florida for $74.0 million, with Carlyle retaining a 75% equity position. A portion of the purchase was financed with a two-year $57,600,000 non-recourse loan from Société Générale.
The loan has three one-year extensions and is interest-only bearing a rate of LIBOR plus 1.94%. The hotel will be managed by MHI Hotels Services. We also will receive an asset management fee of 1.5% of gross revenues of the hotel in addition to our
share of the operating profits and proceeds of sale pursuant to the joint venture agreement.

On October 29, 2007, we purchased a
250-room hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel, for the aggregate purchase price of $13.5 million. We intend to make extensive renovations and re-brand the hotel as a Crowne Plaza, as is consistent with our repositioning
strategy. Renovation costs are estimated at $25.0 million. The cost to acquire and renovate the hotel will be funded by additional borrowings on the credit facility.

Key Operating Metrics

In the hotel industry, most categories of operating costs, with the exception
of franchise, management, credit card fees and the costs of the food and beverage served, do not vary directly with revenues. This aspect of our operating costs creates operating leverage, whereby changes in sales volume disproportionately impact
operating results. Room revenue is the most important category of revenue and drives other revenue categories such as food, beverage and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:



| |  |  | Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Average daily rate or ADR, which is total room revenue divided by the number of rooms sold; and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Revenue per available room or RevPAR, which is the room revenue, divided by the total number of available rooms.
| | - |  | ----------------------------------------------------------------------------------------------------------------

Results of Operations

The following table
illustrates the key operating metrics for the three months and nine months ended September 30, 2007 and 2006 for the properties we owned during the respective reporting periods and reflected in net income from continuing operations.



|                      |  |                                       |         |   |                                       |   |         |                                      |  |   |                                      |   |  |   |         |  
|--------------------- |  | ------------------------------------- | ------- | - | ------------------------------------- | - | ------- | ------------------------------------ |  | - | ------------------------------------ | - |  | - | ------- | -
|                      |  | Three months ended September 30, 2007 |         |   | Three months ended September 30, 2006 |   |         | Nine months ended September 30, 2007 |  |   | Nine months ended September 30, 2006 |  
|Occupancy %           |  |                                       | 69.3    | % |                                       |   | 67.9    | %                                    |  |   | 71.9                                 | % |  |   | 71.1    | %
|ADR                   |  | $                                     | 119.24  |   |                                       | $ | 111.08  |                                      |  | $ | 119.06                               |   |  | $ | 112.20  |  
|RevPAR                |  | $                                     | 82.62   |   |                                       | $ | 75.46   |                                      |  | $ | 85.61                                |   |  | $ | 79.78   |  
|Available Room Nights |  |                                       | 141,404 |   |                                       |   | 141,404 |                                      |  |   | 419,601                              |   |  |   | 419,601 |  

Comparison of the Three Months Ended September 30, 2007 to the Three Months Ended September 30,
2006

Revenue. Total revenue for the three months ended September 30, 2007 was approximately $16.7 million, an increase
of approximately $0.6 million or 3.8% from the three months ended September 30, 2006. The largest increase in revenue was from room revenues, which, for the three months ended September 30, 2007 rose to approximately $11.7 million, an
increase of approximately $1.0 million or 9.5% compared to room revenues for the three months ended September 30, 2006. The six properties whose operating results are reflected in income from continuing operations were able to achieve a 9.5%
increase in room revenue through a 7.3% increase in ADR combined with a 2.0% increase in occupancy. As the Crowne Plaza Jacksonville was able to re-establish its position in the market following the brand change last year from Hilton, it experienced
a 23.8% increase in room revenue. Additionally, our property in Philadelphia continues to experience high demand resulting in a 15.0% increase in room revenue. Combined increases in occupancy and ADR helped our properties in Savannah and Laurel
increase their room revenues over 9.0%. We expect that our properties in Laurel and Jacksonville will continue to experience improvements in room revenue. During the renovations over the next three quarters at our properties in Wilmington and
Savannah, we expect to see occupancy moderate. However, upon completion of the renovations, we expect to see increased demand at both properties.



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Food and beverage revenues for the three months ended September 30, 2007 decreased approximately
$0.2 million or 5.4% to approximately $4.1 million compared to food and beverage revenues for the three months ended September 30, 2006. While room sales from group business have remained strong, there has been less demand for banqueting
services resulting in a decrease in food and beverage revenue.

Revenue from other operating departments for the three months ended
September 30, 2007 decreased approximately $0.2 million or 15.3% to approximately $1.0 million compared to other operating revenue for the three months ended September 30, 2006. Most of the decrease was attributable to non-recurring
consulting revenue during the three months ended September 30, 2006 from the developer of the hotel in Hollywood, Florida.

Hotel
Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, and management fees, were approximately $12.6 million, an increase of approximately $0.5 million or 4.2% for the
three months ended September 30, 2007 compared to approximately $12.1 million for the three months ended September 30, 2006.

Rooms expense for the three months ended September 30, 2007 increased approximately $0.1 million or 2.9%, remaining at the same level of rooms expense for the three months ended September 30, 2006, or approximately $3.0 million.
As a percent of room revenue, rooms expense fell from 27.7% to 26.0%. The decrease was due to one-time costs realized in the three months ended September 30, 2006 to replace room amenities at our Hilton brand properties.

Food and beverage expenses for the three months ended September 30, 2007 remained at the same level of food and beverage expense for the three
months ended September 30, 2006, or approximately $3.1 million. Higher food costs and increased costs related to the renovation of the kitchen at the Wilmington Hilton Riverside helped food and beverage expense remain at the same level as the
three months ended September 30, 2006 despite a decrease in food and beverage revenue. Indirect expenses at our properties for the three months ended September 30, 2007 increased approximately $0.4 million or 6.8% to approximately $6.3
million compared to the three months ended September 30, 2006.

Depreciation and Amortization. Depreciation and amortization
expense for the three months ended September 30, 2007 remained at the same level of expense for the three months ended September 30, 2006 totaling approximately $1.2 million.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended September 30, 2007 remained at
the same level of expense for the three months ended September 30, 2006 totaling approximately $0.6 million.

Interest Expense.
Interest expense for the three months ended September 30, 2007 decreased approximately $0.1 million or 4.6% to approximately $1.0 million compared to interest expense for the three months ended September 30, 2006, primarily due to
decreased borrowings on the credit facility for working capital purposes. As a result of increased borrowings on our credit facility to acquire our joint venture interest in the Crowne Plaza Resort Hollywood Beach, we expect to see increases in
interest expense.

Equity Loss in Joint Venture. Equity loss in joint venture for the three months ended September 30, 2007
represents our share of the start-up costs for the Crowne Plaza Resort Hollywood Beach, as well as operating losses incurred during the first 13 days of operations.

Income Taxes. The income tax benefit for the three months ended September 30, 2007 increased to approximately $0.3 million. The income tax benefit is primarily derived from the operations of our TRS
lessee. The net operating loss of our TRS lessee for the three months ended September 30, 2007 was greater than the net operating loss attributable to continuing operations for the three months ended September 30, 2006 primarily due to our
share of the start-up costs and initial operating losses generated from our joint venture investment with Carlyle in the Crowne Plaza Resort Hollywood Beach.

Net Income. The net income for the three months ended September 30, 2007 decreased approximately $0.4 million to approximately $0.4 million compared to the three months ended September 30, 2006 as a
result of the operating results discussed above.

Comparison of the Nine Months Ended September 30, 2007 to the Nine Months Ended
September 30, 2006

Revenue. Total revenue for the nine months ended September 30, 2007 was approximately $53.0
million, an increase of approximately $2.8 million or 5.5% from the nine months ended September 30, 2006. The largest increase in revenue was from room revenues, which, for the nine months ended September 30, 2007 rose to approximately
$35.9 million, an increase of approximately



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$2.4 million or 7.3% compared to room revenues for the nine months ended September 30, 2006. The six properties whose operating results are reflected in
income from continuing operations were able to achieve a 7.3% increase in room revenue through a 6.1% increase in ADR in addition to a 1.1% increase in occupancy. Our property in Philadelphia accounted for the largest share of the increase achieving
a 14.4% increase in room revenue. Each of our properties was able to increase ADR with increases ranging from 3.7% to 9.2%. Occupancy performance ranged between 60.6% and 81.1%.

Food and beverage revenues for the nine months ended September 30, 2007 increased approximately $0.4 million or 2.7% to approximately $14.3 million
compared to food and beverage revenues of approximately $13.9 million for the nine months ended September 30, 2006. Stronger sales in the first quarter of this year have been offset by slow sales in the most recent quarter due to weaker demand
for banqueting services at many of our properties.

Revenue from other operating departments for the nine months ended September 30,
2007 remained at the same level as the nine months ended September 30, 2007, or approximately $2.8 million. Higher no-show revenue and cancellation fees in the first part of the year has been offset by the non-recurring consulting revenue in
the third quarter of last year associated with the developer of the Crowne Plaza Resort Hollywood Beach.

Hotel Operating Expenses.
Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, and management fees, were approximately $39.3 million, an increase of approximately $1.4 million or 3.6% for the nine months ended
September 30, 2007 compared to approximately $38.0 million for the nine months ended September 30, 2006.

Rooms expense for the
nine months ended September 30, 2007 increased approximately $0.1 million or 1.4% to approximately $9.35 million compared to rooms expense of approximately $9.25 million for the nine months ended September 30, 2006. A higher increase in
rooms expense would have been realized if not for one-time costs realized in the nine months ended September 30, 2006 to replace room amenities at our Hilton brand properties.

Food and beverage expenses for the nine months ended September 30, 2007 increased approximately $0.5 million or 5.0% to approximately $10.1 million
compared to food and beverage expense for the nine months ended September 30, 2006. Higher food costs, a decrease in banquet sales at several properties, and increased costs related to the renovation of the kitchen at the Wilmington Hilton
Riverside contributed to the increase in food and beverage expense. Indirect expenses at our properties for the nine months ended September 30, 2007 increased approximately $0.7 million or 4.0% to approximately $19.2 million compared to the
nine months ended September 30, 2006.

Depreciation and Amortization. Depreciation and amortization expense for the nine months
ended September 30, 2007 increased approximately $0.1 million or 2.2% to approximately $3.7 million compared to depreciation and amortization expense for the nine months ended September 30, 2006.

Corporate General and Administrative. Corporate general and administrative expenses for the nine months ended September 30, 2007 increased
approximately $0.4 million or 17.7% to approximately $2.4 million compared to approximately $2.0 million for the nine months ended September 30, 2006. A substantial portion of the increase is attributable to the pro-rata accrual of bonuses in
accordance with the current years cash bonus plan for executive officers. We also incurred additional legal fees in structuring the program and operating agreements that will allow us to jointly acquire, develop and operate hotel assets and/or
hotel portfolios with Carlyle.

Interest Expense. Interest expense for the nine months ended September 30, 2007 decreased
approximately $0.05 million or 1.6% to approximately $3.1 million compared to interest expense for the nine months ended September 30, 2006. Lower interest expense for the nine months ended September 30, 2007 related to borrowings on the
credit facility for working capital purposes was partially offset by higher interest expense on the mortgage on the Wilmington Hilton Riverside. Interest expense in future periods should increase due to increased borrowings to fund our investment in
the joint venture with Carlyle that purchased the Crowne Plaza Resort Hollywood Beach as well as renovations to the Hilton Savannah DeSoto.

Equity Loss in Joint Venture. Equity loss in joint venture for the three months ended September 30, 2007 represents our share of the start-up costs for the Crowne Plaza Resort Hollywood Beach as well as operating losses incurred
during the first 13 days of operations.

Income Taxes. The provision for income taxes for the nine months ended September 30,
2007 remained at the same level as the provision for income tax for the nine months ended September 30, 2006, or approximately $0.1 million. The income tax provision is primarily derived from the operations of our TRS lessee. Stronger
performance by our six operating hotels during the nine months ended September 30, 2007 was offset by our share of the start-up costs and initial operating losses generated from our joint venture investment with Carlyle in the Crowne Plaza
Resort Hollywood Beach.



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Net Income. The net income for the nine months ended September 30, 2007 increased
approximately $0.4 million to approximately $2.5 million compared to the nine months ended September 30, 2006 as a result of the operating results discussed above.

Funds From Operations

Funds from Operations (FFO) is used by industry analysts
and investors as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, NAREIT.
FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain
non-cash items such as real estate asset depreciation and amortization, and after adjustment for any minority interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP
implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of
operating results for real estate companies that use historical cost accounting to be insufficient by itself. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other
items, from GAAP net income.

Management believes that the use of FFO, combined with the required GAAP presentations, has improved the
understanding of the operating results of REITs among the investing public and made comparisons of REIT operating results more meaningful. Management considers FFO to be a useful measure of adjusted net income for reviewing comparative operating and
financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate
assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a companys real estate between periods or as compared to different companies. Although FFO is intended to be a REIT
industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.

The following table reconciles net income to FFO for the three months and nine months ended September 30, 2007 and 2006 (unaudited):



|                                               |  |                                       |            |   |                                       |   |            |                                      |  |                                      |            |  |   |            |  
|---------------------------------------------- |  | ------------------------------------- | ---------- | - | ------------------------------------- | - | ---------- | ------------------------------------ |  | ------------------------------------ | ---------- |  | - | ---------- | -
|                                               |  | Three months ended September 30, 2007 |            |   | Three months ended September 30, 2006 |   |            | Nine months ended September 30, 2007 |  | Nine months ended September 30, 2006 |           
|Net income                                     |  | $                                     | 409,119    |   |                                       | $ | 799,343    |                                      |  | $                                    | 2,454,428  |  | $ | 2,070,684  |  
|Add minority interest                          |  |                                       | 219,056    |   |                                       |   | 465,425    |                                      |  |                                      | 1,369,267  |  |   | 1,206,350  |  
|Add depreciation and amortization              |  |                                       | 1,227,443  |   |                                       |   | 1,213,413  |                                      |  |                                      | 3,677,762  |  |   | 3,736,509  |  
|Add equity in depreciation of joint venture    |  |                                       | 13,893     |   |                                       |   |           |                                      |  |                                      | 13,893     |  |   |           |  
|Add loss/subtract (gain) on disposal of assets |  |                                       | (4,863     | ) |                                       |   | (126,664   | )                                    |  |                                      | 9,404      |  |   | (126,664   | )
|                                               |  |                                       |            |   |                                       |   |            |                                      |  |                                      |            |  |   |            |  
|FFO                                            |  | $                                     | 1,864,648  |   |                                       | $ | 2,351,517  |                                      |  | $                                    | 7,524,754  |  | $ | 6,886,879  |  
|                                               |  |                                       |            |   |                                       |   |            |                                      |  |                                      |            |  |   |            |  
|Weighted average shares outstanding            |  |                                       | 6,864,935  |   |                                       |   | 6,712,000  |                                      |  |                                      | 6,825,786  |  |   | 6.707,355  |  
|Weighted average units outstanding             |  |                                       | 3,769,672  |   |                                       |   | 3,907,607  |                                      |  |                                      | 3,807,936  |  |   | 3,907,607  |  
|                                               |  |                                       |            |   |                                       |   |            |                                      |  |                                      |            |  |   |            |  
|Weighted average shares and units              |  |                                       | 10,634,607 |   |                                       |   | 10,619,607 |                                      |  |                                      | 10,633,722 |  |   | 10,614,962 |  
|                                               |  |                                       |            |   |                                       |   |            |                                      |  |                                      |            |  |   |            |  
|FFO per share and unit                         |  | $                                     | 0.18       |   |                                       | $ | 0.22       |                                      |  | $                                    | 0.71       |  | $ | 0.65       |  
|                                               |  |                                       |            |   |                                       |   |            |                                      |  |                                      |            |  |   |            |  

Sources and Uses of Cash

Operating Activities.Our principal source of cash to meet our operating requirements, including distributions to unitholders and stockholders as well as repayments of indebtedness, is the operations of our
hotels. Cash flow provided by operating activities for the nine months ended September 30, 2007 was approximately $9.6 million. We currently expect that the net cash provided by operations will be adequate to fund our continuing operations,
debt service and the payment of dividends in accordance with federal income tax laws which require us to make annual distributions to our stockholders of at least 90% of our REIT taxable income, excluding net capital gains. We paid dividends of
$0.17 per share (unit) on October 11, 2007, which we funded out of working capital.

Investing Activities. We substantially
completed renovations at the Crowne Plaza Jacksonville Hotel in the fourth quarter of 2006 and are currently renovating the Hilton Wilmington Riverside and the property in Jeffersonville, Indiana. During the nine months ended June 30, 2007,
approximately $11.8 million was spent on renovations and capital improvements. We also contributed



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approximately $6.1 million for a 25% equity position in the joint venture which owns and operates the Crowne Plaza Resort Hollywood Beach which opened on
September 18, 2007. Additionally, we were repaid the principal balance on two promissory notes, arising from the last years sale of and secured by the Holiday Inn Downtown in Williamsburg, Virginia, totaling $4.03 million. These
activities represent our net cash flow used in investing activities for the nine months ended September 30, 2007 of approximately $13.9 million.

Financing Activities. For the nine months ended September 30, 2007, net cash used in financing activities was approximately $6.5 million. We refinanced the mortgage on the Hilton Wilmington Riverside
generating approximately $9.2 million in proceeds, which are being used to fund the renovations to the property. We also refinanced the mortgage on the Hilton Savannah DeSoto generating approximately $2.6 million in proceeds, which was used for
working capital purposes. We incurred costs of approximately $0.5 million associated with both refinancings and made principal payments of approximately $0.4 million as required under those two mortgage loan agreements. We accessed approximately
$1.0 million from our credit facility and used approximately $5.4 million to make distributions to our unitholders and dividends to holders of our common stock.

Liquidity and Capital Resources

As of September 30, 2007, we had cash and cash equivalents of approximately $6.4
million, of which approximately $2.4 million was in restricted reserve accounts and approximately $0.3 million was in real estate tax escrows. Coincident with the purchase of the Crowne Plaza Jacksonville Hotel, we placed $3.0 million into a capital
improvement reserve with Mercantile Safe Deposit and Trust Company, the mortgagors trustee. As of September 30, 2007, we had approximately $0.7 million remaining in the account, which has since been released to us by the trustee.

On August 1, 2007, we entered into an amendment to our credit agreement with BB&T, as administrative agent and lender, dated
May 8, 2006. The amended credit agreement reduces the rate of interest on our revolving credit facility by 0.375%, to a rate equal to LIBOR plus additional interest ranging from 1.625% to 2.125%. The amendment also reduces the capitalization
rate from 10.0% to 8.5% for purposes of determining the asset value of the collateral for the credit facility. Finally, the amendment extends the maturity date from May 8, 2010 to May 8, 2011.

Under our joint venture agreement with Carlyle, we will offer the joint venture the first right to acquire potential investment opportunities we identify
with total capitalization requirements in excess of $30.0 million. Carlyle has agreed to commit $100.0 million of equity capital to the joint venture over the next three years and will fund up to 90% of the equity of an acquisition. To date we have
invested approximately $6.1 million toward the purchase of the Crowne Plaza Resort Hollywood Beach as well as a working capital reserve which we expect to be sufficient to sustain the anticipated initial operating losses associated with opening a
new hotel. Provided additional suitable investment opportunities are found, and subject to the consent of our joint venture partner to pursue such opportunities, we expect that we will invest between $9.1 million and $27.2 million over the next
three years in connection with the acquisition of properties by the joint venture.

Our direct investment in hotels will initially be
funded from borrowings on our credit facility, the issuance of shares of common or preferred stock or the issuance of additional units in the operating partnership, or a combination thereof. We may replace borrowings under our credit facility with
mortgage indebtedness relating to one or more acquired hotels. We expect to fund our joint venture investments from borrowings on our credit facility.

Our long-term liquidity needs will generally include the funding of future acquisitions, development and investment activity, the retirement of mortgage debt and amounts outstanding under our secured line of credit,
and obligations under our tax indemnity agreements, if any. We remain committed to maintaining a flexible capital structure. Accordingly, in addition to the sources described above with respect to our short-term liquidity, we expect to meet our
long-term liquidity needs through a combination of some or all of the following:



| |  |  | The issuance by the Company, the operating partnership of the Company, and/or their subsidiary entities of secured and unsecured debt securities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the incurrence by the subsidiaries of the operating partnership of mortgage indebtedness in connection with the acquisition or refinancing of hotel properties;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the issuance of additional shares of our common stock or preferred stock;
| | - |  | -------------------------------------------------------------------------



| |  |  | the issuance of additional units in the operating partnership;
| | - |  | --------------------------------------------------------------



| |  |  | the selective disposition of non-core assets; and
| | - |  | -------------------------------------------------



| |  |  | the sale or contribution of some of our wholly owned properties, development projects and development land to strategic joint ventures to be formed with unrelated
investors, which would have the net effect of generating additional capital through such sale or contributions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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We anticipate that our available cash and cash equivalents and cash flows from operating activities, with
cash available from borrowings and other sources, will be adequate to meet our capital and liquidity needs in both the short and long term. However, if these sources of funds are insufficient or unavailable, our ability to satisfy cash payment
obligations and make stockholder distributions may be adversely affected.

Capital Expenditures

Our most significant short-term liquidity requirements relate to the renovations at our Wilmington and Savannah properties and the extensive renovations
at the property in Jeffersonville, Indiana, as well as our recently purchased property in Tampa, Florida.

On September 20, 2006, we
purchased the Louisville Ramada Riverfront Inn in Jeffersonville, Indiana with the intention of renovating and re-branding the hotel. On February 23, 2007, we obtained a 15-year franchise license agreement with Starwood Hotels and Resorts to
brand the property as a Sheraton hotel. Renovation costs are estimated at approximately $13.5 million, and the property is expected to re-open in the first quarter 2008. Such costs are being funded by additional borrowings on the credit facility.

On February 23, 2007, we entered into an agreement to relicense the Hilton Wilmington Riverside with Hilton Inns, Inc. extending the
franchise agreement to March 31, 2018. To comply with the Hilton relicensing agreement, we have begun extensive renovation of the hotel under a property improvement plan (PIP), which we expect to complete in the first quarter 2008.
We estimate that the cost of improvements to be approximately $10.4 million. On March 29, 2007, we refinanced the mortgage on the hotel generating approximately $9.2 million, which is being used to fund the renovations. The remainder of the
cost will be funded by additional borrowings on the credit facility. Additionally, the funds in the restricted reserve account, approximately $0.3 million at September 30, 2007, are available to fund a portion of the renovations.

On July 18, 2007, we entered into a license agreement relating to the Hilton Savannah DeSoto Hotel with Hilton Inns, Inc. extending the franchise
agreement to July 31, 2017. To comply with the Hilton licensing extension, we are required to complete a PIP. We estimate the cost of improvements to be approximately $12.5 million. On August 2, 2007, we refinanced the mortgage on the
hotel, which will generate approximately $13.4 million over the renovation period and will be sufficient to fund the renovation. We expect that the funds in the restricted reserve account, approximately $1.4 million at September 30, 2007, will
be available to fund a portion of the renovations. The combined use of the restricted reserve account and refinancing should generate approximately $2.5 million available for working capital as well as other capital projects.

On October 29, 2007, we purchased a 250-room hotel in Tampa, Florida formerly known as the Tampa Clarion Hotel for the aggregate purchase price of
$13.5 million. We intend to make extensive renovations and re-brand the hotel as a Crowne Plaza, as is consistent with our repositioning strategy. Renovation costs are estimated at $25.0 million. The cost to acquire and renovate the hotel will be
funded by additional borrowings on the credit facility.

Aside from acquisitions and renovations subject to a PIP, recurring capital
expenditures for the replacement and refurbishment of furniture, fixtures and equipment, as well as debt service, are our most significant short-term liquidity requirements. During the next 12 months, we expect that capital expenditures at
properties not undergoing a PIP will be funded by our replacement reserves. With respect to two of our hotels, the reserves are placed in escrow accounts with funds deposited monthly, and reserved for capital improvements. The Hilton Savannah DeSoto
and Hilton Wilmington Riverside have these reserve accounts and contribute 4% of gross sales. We are also required to make monthly deposits equal to 4% of the room revenues of the Crowne Plaza Jacksonville in order to fund future capital
improvements. Our intent is that overall expenditures for the replacement and refurbishment of furniture, fixtures and equipment approximate 4% of gross revenue.

Off-Balance Sheet Arrangements

Through a joint venture with Carlyle, we own a 25% indirect non-controlling interest in an
entity (the JV Owner) that acquired the 311-room Crowne Plaza Resort Hollywood Beach in Hollywood, Florida. We have the right to receive a pro rata share of operating surpluses as well as an obligation to fund our pro rata share of
operating shortfalls. We also have the opportunity to earn an incentive participation in the net proceeds realized from the sale of the hotel based upon the achievement of certain overall investment returns, in addition to our pro rata share of net
sale proceeds. The Crowne Plaza Resort Hollywood Beach is leased to another entity (the Joint Venture Lessee) in which we also own a 25% indirect non-controlling equity interest. Carlyle owns a 75% controlling interest in both the Joint
Venture and the Joint Venture Lessee. Carlyle may elect to dispose of the Crowne Plaza Resort Hollywood Beach without our consent. We account for our non-controlling 25% interest in both the JV Owner and the Joint Venture Lessee under the equity
method of accounting.



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The acquisition of the Crowne Plaza was funded in part by a mortgage loan in the amount of $57.6 million.
The mortgage has a two-year term maturing on August 1, 2009 and bears interest at a rate of LIBOR plus additional interest of 1.94%. The loan can be extended for three one-year periods. The JV Owner executed an interest rate cap agreement
capping LIBOR at 6.25%, effectively limiting the rate on the mortgage to 8.19%. Monthly interest-only payments are due throughout the term. The Crowne Plaza Resort Hollywood Beach secures the mortgage. We have provided the lender limited guarantees
with respect to this mortgage.

Contractual Obligations

The following table sets forth our contractual obligations as of September 30, 2007, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).



|                                              |  |                        |         |                   |   |                   |  |                    |        |                     |   |        |  |   |       
|--------------------------------------------- |  | ---------------------- | ------- | ----------------- | - | ----------------- |  | ------------------ | ------ | ------------------- | - | ------ |  | - | ------
|                                              |  | Payments due by period
|Contractual Obligations                       |  | Total                  |         | Less ThanOne Year |   | One toThree Years |  | Three toFive Years |        | More ThanFive Years
|Ground and building leases                    |  | $                      | 1,853   |                   | $ | 342               |  | $                  | 606    |                     | $ | 566    |  | $ | 339   
|Mortgage loans                                |  |                        | 92,512  |                   |   | 3,941             |  |                    | 26,822 |                     |   | 7,999  |  |   | 53,750
|Revolving credit facility, including interest |  |                        | 20,352  |                   |   | 1,149             |  |                    | 2,302  |                     |   | 16,901 |  |   |      
|                                              |  |                        |         |                   |   |                   |  |                    |        |                     |   |        |  |   |       
|                                              |  | $                      | 114,717 |                   | $ | 5,432             |  | $                  | 29,730 |                     | $ | 25,466 |  | $ | 54,089
|                                              |  |                        |         |                   |   |                   |  |                    |        |                     |   |        |  |   |       

In connection with the acquisition of our six initial hotel properties, we entered into tax
indemnity agreements that require us to indemnify the contributors of our initial properties against certain tax liabilities in the event we sell those properties in a taxable transaction during a 10-year period. Such indemnification obligations
could result in aggregate payments of approximately $46.0 million. In 2006, we structured the purchase of the property in Jeffersonville, Indiana and the sale of the Holiday Inn Downtown Williamsburg to meet the requirements of an Internal Revenue
Code Section 1031 like-kind exchange, enabling us to defer tax on capital gains as well as any obligation under the tax indemnity agreement. Our obligations under the tax indemnity agreements may effectively preclude us from selling or
disposing of certain of the initial hotels or other properties into which those tax liabilities have been transferred in taxable transactions or reducing our consolidated indebtedness below approximately $11.0 million.

Inflation

We generate revenues primarily from lease
payments from our TRS Lessee and net income from the operations of our TRS Lessee. Therefore, we rely primarily on the performance of the individual properties and the ability of our management company to increase revenues and to keep pace with
inflation. Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of our management company to raise room rates.

Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are
subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to
increase at rates higher than inflation.

Seasonality

The operations of the properties have historically been seasonal. The periods from mid-November through mid-February are traditionally slow with the exception of the Crowne Plaza Jacksonville Hotel. The months of
March and April are traditionally strong, as is October. The remaining months are generally good, but are subject to the weather and can vary significantly.

Geographic Concentration

Our hotels are located in Florida, Georgia, North Carolina, Indiana, Maryland and Pennsylvania.

Critical Accounting Policies

The
critical accounting policies are described below. We consider these policies critical because they involve difficult management judgments and assumptions, are subject to material change from external factors or are pervasive, and are significant to
fully understand and evaluate our reported financial results.



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Investment in Hotel Properties.Hotel properties are stated at cost, net of any impairment
charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and 3-10 years for furniture and equipment. In accordance with generally accepted accounting principles, the majority interests in
hotels comprising our accounting predecessor, MHI Hotels Services Group, and minority interests held by the controlling holders of our accounting predecessor in hotels acquired from third parties are recorded at historical cost basis. Minority
interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at time of
acquisition.

We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the
hotel properties may not be recoverable. Events or circumstances that may cause us to perform our review include, but are not limited to adverse changes in the demand for lodging at our properties due to declining national or local economic
conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operating activities and the proceeds
from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying value to the related hotel
propertys estimated fair market value is recorded and an impairment loss is recognized.

There were no charges for impairment
recorded for the three months or nine months ended September 30, 2007 or 2006.

We estimate the fair market values of our properties
through cash flow analysis taking into account each propertys expected cash flow generated from operations, holding period and expected proceeds from ultimate disposition. These cash flow analyses are based upon significant management
judgments and assumptions including revenues and operating costs, growth rates and economic conditions at the time of ultimate disposition. In projecting the expected cash flows from operations of the asset, we base our estimates on future projected
net operating income before depreciation and eliminating non-recurring operating expenses, which is a non-GAAP operational measure, and deduct expected capital expenditure requirements. We then apply growth assumptions based on estimated changes in
room rates and expenses and the demand for lodging at our properties, as impacted by local and national economic conditions and estimated or known future new hotel supply. The estimated proceeds from disposition are determined as a matter of
managements business judgment based on a combination of anticipated cash flow in the year of disposition, terminal capitalization rate, ratio of selling price to gross hotel revenues and selling price per room.

If actual conditions differ from those in our assumptions, the actual results of each assets operations and fair market value could be
significantly different from the estimated results and value used in our analysis.

Revenue Recognition.Hotel revenues, including
room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If we determine that
amounts are uncollectible, which would generally be the result of a customers bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made.

Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized.
Because of expected future taxable income of our TRS lessee, we have not recorded a valuation allowance to reduce our net deferred tax asset as of September 30, 2007. Should our estimate of future taxable income be less than expected, we would
record an adjustment to the net deferred tax asset in the period such determination was made.

Forward Looking Statements

Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are
generally identified by our use of words, such as intend, plan, may, should, will, project, estimate, anticipate, believe,
expect, continue, potential, opportunity, and similar expressions, whether in the negative or affirmative. All statements regarding our expected financial position, business and financing plans are
forward-looking statements. Factors, which could have a material adverse effect on our operations and future prospects, include, but are not limited to:



| |  |  | United States economic conditions generally and the real estate market specifically;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | management and performance of our hotels;
| | - |  | -----------------------------------------



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| |  |  | our plans for renovation of our hotels;
| | - |  | ---------------------------------------



| |  |  | our financing plans;
| | - |  | --------------------



| |  |  | supply and demand for hotel rooms in our current and proposed market areas;
| | - |  | ---------------------------------------------------------------------------



| |  |  | our ability to acquire additional properties and the risk that potential acquisitions may not perform in accordance with expectations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | legislative/regulatory changes, including changes to laws governing taxation of real estate investment trusts; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | our competition.
| | - |  | ----------------

Additional factors
that could cause actual results to vary from our forward-looking statements are set forth under the Section titled Risk Factors in our Annual Report on Form 10-K and subsequent reports filed with the Securities and Exchange Commission.

These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this report or incorporated by
reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable
to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in
expectations after the date of this report.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

The effects of potential changes in interest rates prices are discussed below. Our market risk discussion includes forward-looking statements and represents an estimate of possible changes in fair value or
future earnings that would occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results
may differ materially from those presented. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our interest rate risk
management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. Our credit facility required us to hedge at least one-half of the maximum borrowing amount with an
interest-rate swap, which we purchased on August 8, 2006 on a notional amount of $30.0 million. As of September 30, 2007, derivatives with a fair value of approximately $(465,000) were included in accounts payable and other accrued
liabilities. From time to time we may enter into other interest rate hedge contracts such as collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue
these derivative contracts for trading or speculative purposes.

As of September 30, 2007, we had $53.0 million of fixed-rate debt and
approximately $16.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.78%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on
interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the change in 30-day LIBOR, but would be limited to the effect on the gap between the balance on the credit facility and the $30.0 million
notional amount of the interest-rate swap purchased on August 8, 2006. Assuming that the amount outstanding under our credit facility remains at approximately $16.2 million, the balance at September 30, 2007, the impact on our annual
interest incurred and cash flows of a one percent change in 30-day LIBOR would be approximately $138,000.

As of December 31, 2006, we
had approximately $41.6 million of fixed-rate debt and approximately $15.2 million of variable-rate debt. The weighted average interest rate on the fixed-rate debt was 7.95%. At that date, our variable-rate debt was exposed to changes in interest
rates, specifically the change in 30-day LIBOR, but was limited to the effect on the gap between the balance on the credit facility and the $30.0 million notional amount of the interest-rate swap. Had the amount outstanding under the credit facility
remained at approximately $15.2 million, the balance at December 31, 2006, the impact on our annual interest incurred and cash flows of a one percent change in 30-day LIBOR would have been approximately $148,000.



|Item 4. | Controls and Procedures
|------- | -----------------------

The
Chief Executive Officer and Chief Financial Officer of MHI Hospitality Corporation have evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)), as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, and have concluded that as of the end of the period covered by this report, MHI Hospitality Corporations disclosure
controls and procedures were effective.



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There was no change in MHI Hospitality Corporations internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during MHI Hospitality Corporations last fiscal quarter that materially affected, or is reasonably likely to
materially affect, MHI Hospitality Corporations internal control over financial reporting.



|Item 4T. | Controls and Procedures
|-------- | -----------------------

Not
applicable.



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PART II



|Item 1. | Legal Proceedings
|------- | -----------------

We are not
involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are not material to our financial condition and results of
operations.



|Item 1A. | Risk Factors
|-------- | ------------

We do not have the ability
to control the sale of hotel properties acquired through our joint venture program with The Carlyle Group (Carlyle).

Pursuant to the terms of the program agreement with The Carlyle Group, we will retain a minority interest of 10%-25% in each investment. Carlyle controls all major decisions relating to each investment, including, but not limited to,
the sale of individual investment properties. Carlyle will determine the timing and terms and conditions of sale of each investment property. Specifically, we will not be able to control the timing and terms and conditions of sale of our
interest in the Crowne Plaza Resort Hollywood Beach.



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

Not applicable.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable.



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

None.



|Item 5. | Other Information
|------- | -----------------

None.



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|Item 6. | Exhibits
|------- | --------

The following
exhibits are filed as part of this Form 10-Q:



|              |  |                                                                                                                                                                                       
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                
|3.1           |  | Articles of Amendment and Restatement of MHI Hospitality Corporation.(1)                                                                                                              
|              | 
|3.2           |  | Amended and Restated Bylaws of MHI Hospitality Corporation.(2)                                                                                                                        
|              | 
|10.21A        |  | First Amendment to Credit Agreement dated August 1, 2007 (3)                                                                                                                          
|              | 
|10.28         |  | Purchase Agreement between MHI Hospitality Corporation and VanTampa Plaza Hotel, Inc. dated July 16, 2007(4)                                                                          
|              | 
|10.30         |  | Promissory Note dated August 2, 2007 made by Savannah Hotel Associates L.L.C., to the order of MONY Life Insurance Company (3)                                                        
|              | 
|31.1          |  | Certification of President and Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002              
|              | 
|32.1          |  | Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                       
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                     

---

|(1) | Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrants Pre-Effective Amendment No. 1 to its Registration Statement on
Form S-11 filed with the Securities and Exchange Commission on October 20, 2004. (333-118873)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrants Pre-Effective Amendment No. 5 to its Registration Statement on
Form S-11 filed with the Securities and Exchange Commission on December 13, 2004. (333-118873)
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrants Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 3, 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrants Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 18, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                       |  |                             |  |                                                  
|---------------------- |  | --------------------------- |  | -------------------------------------------------
|                       |  | MHI HOSPITALITY CORPORATION
|                       |  |                            
|Date: November 8, 2007 |  | By:                         |  | /s/ Andrew M. Sims                               
|                       |  |                             |  | Andrew M. Sims                                   
|                       |  |                             |  | Chief Executive Officer and Chairman of the Board
|                       |  |                            
|                       |  | By:                         |  | /s/ William J. Zaiser                            
|                       |  |                             |  | William J. Zaiser                                
|                       |  |                             |  | Chief Financial Officer                          



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                       
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                
|3.1           |  | Articles of Amendment and Restatement of MHI Hospitality Corporation.(1)                                                                                                              
|              | 
|3.2           |  | Amended and Restated Bylaws of MHI Hospitality Corporation.(2)                                                                                                                        
|              | 
|10.21A        |  | First Amendment to Credit Agreement dated August 1, 2007 (3)                                                                                                                          
|              | 
|10.28         |  | Purchase Agreement between MHI Hospitality Corporation and VanTampa Plaza Hotel, Inc. dated July 16, 2007(4)                                                                          
|              | 
|10.30         |  | Promissory Note dated August 2, 2007 made by Savannah Hotel Associates L.L.C., to the order of MONY Life Insurance Company (3)                                                        
|              | 
|31.1          |  | Certification of President and Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002              
|              | 
|32.1          |  | Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                       
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                     

---

|(1) | Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrants Pre-Effective Amendment No. 1 to its Registration Statement on
Form S-11 filed with the Securities and Exchange Commission on October 20, 2004. (333-118873)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrants Pre-Effective Amendment No. 5 to its Registration Statement on
Form S-11 filed with the Securities and Exchange Commission on December 13, 2004. (333-118873)
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrants Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 3, 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrants Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 18, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32