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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2008
|- | ------------------------------------------------------------------------------------------------------------------------------------

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: 1-34087





SUPERTEL HOSPITALITY, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Virginia                                                       |  | 52-1889548                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

309 N. 5thSt., Norfolk, NE 68701

(Address of principal executive
offices)

Telephone number: (402) 371-2520





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, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                  |  |                         |  |  
|----------------------- |  | ------------------------------------------------ |  | ----------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer       |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Small reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act).

YES   ̈    NO  x

As of July 24, 2008, there were 20,910,184 shares of common stock, par value $.01 per share, outstanding.









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##### Table of Contents

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|         |  |                                                                                                 |  |           
|-------- |  | ----------------------------------------------------------------------------------------------- |  | ----------
|         |  |                                                                                                 |  | PageNumber
|Part I.  |  | FINANCIAL INFORMATION                                                                           |  |           
|         |  |                                                                                                
|Item 1.  |  | Financial Statements                                                                            |  |           
|         |  |                                                                                                
|         |  | Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007                           |  | 3         
|         |  |                                                                                                
|         |  | Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007 |  | 4         
|         |  |                                                                                                
|         |  | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007           |  | 5         
|         |  |                                                                                                
|         |  | Notes to Consolidated Financial Statements                                                      |  | 6         
|         |  |                                                                                                
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 13        
|         |  |                                                                                                
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                      |  | 26        
|         |  |                                                                                                
|Item 4.  |  | Controls and Procedures                                                                         |  | 26        
|         |  |                                                                                                
|Part II. |  | OTHER INFORMATION                                                                               |  |           
|         |  |                                                                                                
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                             |  | 27        
|         |  |                                                                                                
|Item 5.  |  | Other Information                                                                               |  | 27        
|         |  |                                                                                                
|Item 6.  |  | Exhibits                                                                                        |  | 30        



2



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##### Table of Contents

Part I. FINANCIAL INFORMATION

|Item 1. | FINANCIAL STATEMENTS
|------- | --------------------

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share and share data)



|                                                                                                                                                                                          |  |              |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                          |  | As of        |        
|                                                                                                                                                                                          |  | June 30,2008 |         |   | December 31,2007 |  
|                                                                                                                                                                                          | 
|                                                                                                                                                                                          |  | (unaudited)  |         |   |                  |  
|ASSETS                                                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Investments in hotel properties                                                                                                                                                           |  | $            | 404,931 |   |                  | $ | 376,240 |  
|Less accumulated depreciation                                                                                                                                                             |  |              | 82,520  |   |                  |   | 75,295  |  
|                                                                                                                                                                                          |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                          |  |              | 322,411 |   |                  |   | 300,945 |  
|                                                                                                                                                                                          |  |             
|Cash and cash equivalents                                                                                                                                                                 |  |              | 1,432   |   |                  |   | 1,166   |  
|Accounts receivable                                                                                                                                                                       |  |              | 2,840   |   |                  |   | 2,242   |  
|Prepaid expenses and other assets                                                                                                                                                         |  |              | 4,059   |   |                  |   | 4,725   |  
|Deferred financing costs, net                                                                                                                                                             |  |              | 1,844   |   |                  |   | 1,947   |  
|                                                                                                                                                                                          |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                          |  | $            | 332,586 |   |                  | $ | 311,025 |  
|                                                                                                                                                                                          |  |              |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                      |  |              |         |   |                  |   |         |  
|LIABILITIES                                                                                                                                                                               |  |              |         |   |                  |   |         |  
|Accounts payable, accrued expenses and other liabilities                                                                                                                                  |  | $            | 16,890  |   |                  | $ | 12,401  |  
|Long-term debt                                                                                                                                                                            |  |              | 210,963 |   |                  |   | 196,840 |  
|                                                                                                                                                                                          |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                          |  |              | 227,853 |   |                  |   | 209,241 |  
|                                                                                                                                                                                          |  |              |         |   |                  |   |         |  
|Minority interest in consolidated partnerships, redemption value $8,086 and $9,544                                                                                                        |  |              | 9,936   |   |                  |   | 10,178  |  
|Redeemable preferred stock Series B, 800,000 shares authorized; $.01 par value, 332,500 shares outstanding, liquidation preference of $8,312                                              |  |              | 7,684   |   |                  |   |        |  
|                                                                                                                                                                                          |  |              |         |   |                  |   |         |  
|SHAREHOLDERS EQUITY                                                                                                                                                                      |  |              |         |   |                  |   |         |  
|Preferred stock, 40,000,000 shares authorized; Series A, 2,500,000 shares authorized, $.01 par value, 826,089 and 932,026 shares outstanding,
liquidation preference of $8,261 and $9,320 |  |              | 8       |   |                  |   | 9       |  
|Common stock, $.01 par value, 100,000,000 shares authorized; 20,883,634 and 20,696,126 shares outstanding.                                                                                |  |              | 209     |   |                  |   | 207     |  
|                                                                                                                                                                                          |  |             
|Additional paid-in capital                                                                                                                                                                |  |              | 112,793 |   |                  |   | 112,792 |  
|Distributions in excess of retained earnings                                                                                                                                              |  |              | (25,897 | ) |                  |   | (21,402 | )
|                                                                                                                                                                                          |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                          |  |              | 87,113  |   |                  |   | 91,606  |  
|                                                                                                                                                                                          |  |              |         |   |                  |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                             |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                          |  | $            | 332,586 |   |                  | $ | 311,025 |  
|                                                                                                                                                                                          |  |              |         |   |                  |   |         |  

See accompanying notes to consolidated financial statements.



3



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

|Item 1. | FINANCIAL STATEMENTS, CONTINUED:
|------- | --------------------------------



SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited  in thousands, except per share data)



|                                                                                                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                              |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                                                                              |  | 2008                       |        |   | 2007                     |   |        | 2008 |  |   | 2007   |  
|REVENUES                                                                                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Room rentals and other hotel services                                                                                         |  | $                          | 34,644 |   |                          | $ | 30,820 |      |  | $ | 62,620 |   |  | $ | 50,167 |  
|                                                                                                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|EXPENSES                                                                                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Hotel and property operations                                                                                                 |  |                            | 23,802 |   |                          |   | 20,582 |      |  |   | 45,220 |   |  |   | 35,258 |  
|Depreciation and amortization                                                                                                 |  |                            | 3,741  |   |                          |   | 3,018  |      |  |   | 7,320  |   |  |   | 5,602  |  
|General and administrative                                                                                                    |  |                            | 1,040  |   |                          |   | 927    |      |  |   | 1,996  |   |  |   | 1,850  |  
|                                                                                                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                                                                                              |  |                            | 28,583 |   |                          |   | 24,527 |      |  |   | 54,536 |   |  |   | 42,710 |  
|                                                                                                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|EARNINGS BEFORE NET GAIN (LOSS) ON DISPOSITIONS OF ASSETS, OTHER INCOME, INTEREST EXPENSE, MINORITY INTEREST AND INCOME
TAXES |  |                            | 6,061  |   |                          |   | 6,293  |      |  |   | 8,084  |   |  |   | 7,457  |  
|Net gain (loss) on dispositions of assets                                                                                     |  |                            | (1     | ) |                          |   |       |      |  |   | 1      |   |  |   |       |  
|Other income                                                                                                                  |  |                            | 32     |   |                          |   | 42     |      |  |   | 63     |   |  |   | 77     |  
|Interest expense                                                                                                              |  |                            | (3,441 | ) |                          |   | (3,392 | )    |  |   | (7,101 | ) |  |   | (5,491 | )
|Minority interest                                                                                                             |  |                            | (194   | ) |                          |   | (99    | )    |  |   | (181   | ) |  |   | (142   | )
|                                                                                                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                                         |  |                            | 2,457  |   |                          |   | 2,844  |      |  |   | 866    |   |  |   | 1,901  |  
|Income tax (expense) benefit                                                                                                  |  |                            | (334   | ) |                          |   | (438   | )    |  |   | 364    |   |  |   | 112    |  
|                                                                                                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|NET INCOME                                                                                                                    |  |                            | 2,123  |   |                          |   | 2,406  |      |  |   | 1,230  |   |  |   | 2,013  |  
|Preferred stock dividends                                                                                                     |  |                            | (236   | ) |                          |   | (248   | )    |  |   | (422   | ) |  |   | (538   | )
|                                                                                                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                                                                                   |  | $                          | 1,887  |   |                          | $ | 2,158  |      |  | $ | 808    |   |  | $ | 1,475  |  
|                                                                                                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                                                                                   |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|EPS Basic                                                                                                                     |  | $                          | 0.09   |   |                          | $ | 0.11   |      |  | $ | 0.04   |   |  | $ | 0.07   |  
|                                                                                                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|EPS Diluted                                                                                                                   |  | $                          | 0.09   |   |                          | $ | 0.11   |      |  | $ | 0.04   |   |  | $ | 0.07   |  
|                                                                                                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

See accompanying notes to consolidated financial statements.



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Part I. FINANCIAL INFORMATION, CONTINUED:

|Item 1. | FINANCIAL STATEMENTS, CONTINUED:
|------- | --------------------------------



SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited  in thousands)



|                                                                                  |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Six Months Ended June 30, |        
|                                                                                  |  | 2008                      |         |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                           |         |   |      |   |         |  
|Net income                                                                        |  | $                         | 1,230   |   |      | $ | 2,013   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                           | 7,320   |   |      |   | 5,602   |  
|Amortization of intangible assets and deferred financing costs                    |  |                           | 269     |   |      |   | 171     |  
|Gain on dispositions of assets                                                    |  |                           | (1      | ) |      |   |        |  
|Amortization of stock option expense                                              |  |                           | 2       |   |      |   | 9       |  
|Minority interest                                                                 |  |                           | 181     |   |      |   | 142     |  
|Deferred income taxes                                                             |  |                           | (364    | ) |      |   | (112    | )
|Changes in operating assets and liabilities:                                      |  |                           |         |   |      |   |         |  
|(Increase) decrease in assets                                                     |  |                           | 422     |   |      |   | (2,984  | )
|Increase in liabilities                                                           |  |                           | 4,475   |   |      |   | 5,298   |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                           | 13,534  |   |      |   | 10,139  |  
|                                                                                  |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                           |         |   |      |   |         |  
|Additions to hotel properties                                                     |  |                           | (5,888  | ) |      |   | (4,414  | )
|Acquisition and development of hotel properties                                   |  |                           | (22,903 | ) |      |   | (92,523 | )
|Proceeds from sale of hotel assets                                                |  |                           | 6       |   |      |   | 6       |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Net cash used by investing activities                                             |  |                           | (28,785 | ) |      |   | (96,931 | )
|                                                                                  |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                           |         |   |      |   |         |  
|Deferred financing costs                                                          |  |                           | (165    | ) |      |   | (618    | )
|Principal payments on long-term debt                                              |  |                           | (12,273 | ) |      |   | (1,416  | )
|Proceeds from long-term debt                                                      |  |                           | 26,396  |   |      |   | 87,368  |  
|Distributions to minority partners                                                |  |                           | (423    | ) |      |   | (107    | )
|Common stock offering                                                             |  |                           |        |   |      |   | 3,359   |  
|Preferred stock offering                                                          |  |                           | 7,684   |   |      |   |        |  
|Dividends paid to common shareholders                                             |  |                           | (5,280  | ) |      |   | (3,652  | )
|Dividends paid to preferred shareholders                                          |  |                           | (422    | ) |      |   | (538    | )
|                                                                                  |  |                           |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                           | 15,517  |   |      |   | 84,396  |  
|                                                                                  |  |                           |         |   |      |   |         |  
|Increase (decrease) in cash and cash equivalents                                  |  |                           | 266     |   |      |   | (2,396  | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                    |  |                           | 1,166   |   |      |   | 5,436   |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                          |  | $                         | 1,432   |   |      | $ | 3,040   |  
|                                                                                  |  |                           |         |   |      |   |         |  
|SUPPLEMENTAL CASH FLOW INFORMATION                                                |  |                           |         |   |      |   |         |  
|Interest paid, net of amounts capitalized                                         |  | $                         | 6,918   |   |      | $ | 4,839   |  
|                                                                                  |  |                          
|SCHEDULE OF NONCASH FINANCING ACTIVITIES                                          |  |                           |         |   |      |   |         |  
|Dividends declared common                                                         |  |                           | 5,303   |   |      |   | 4,582   |  
|Dividends declared preferred                                                      |  |                           | 422     |   |      |   | 538     |  
|Dividends declared common units                                                   |  |                           | 315     |   |      |   | 85      |  
|Assumed debt for acquisitions                                                     |  |                           |        |   |      |   | 11,356  |  
|Capital lease obligation                                                          |  |                           |        |   |      |   | 6,950   |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

|Item 1. | FINANCIAL STATEMENTS, CONTINUED:
|------- | --------------------------------

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2008 and 2007

(Unaudited)

General

Supertel Hospitality, Inc. (SHI) was
incorporated in Virginia on August 23, 1994. SHI is a self-administered real estate investment trust (REIT) for Federal income tax purposes.

SHI, through its wholly owned subsidiaries, Supertel Hospitality REIT Trust and E&P REIT Trust (collectively, the Company) owns a controlling interest in Supertel Limited Partnership (SLP) and E&P Financing
Limited Partnership (E&P LP). All of the Companys interests in 115 properties with the exception of furniture, fixtures and equipment on 85 properties held by TRS Leasing, Inc. and its subsidiaries are held directly or
indirectly by E&P LP, Supertel Limited Partnership or Solomons Beacon Inn Limited Partnership (SBILP) (collectively, the Partnerships). The Companys interests in ten properties are held directly by either SPPR-Hotels, LLC
(SHLLC), SPPR-South Bend, LLC (SSBLLC), or SPPR-BMI, LLC (SBMILLC). SHI, through Supertel Hospitality REIT Trust, is the sole general partner in Supertel Limited Partnership and at June 30, 2008 owned approximately 94% of the partnership
interests in Supertel Limited Partnership. Supertel Limited Partnership is the general partner in SBILP. At June 30, 2008, Supertel Limited Partnership and SHI owned 99% and 1% interests in SBILP, respectively, and SHI owned 100% of Supertel
Hospitality Management, Inc, SPPR Holdings, Inc. (SPPRHI), and SPPR-BMI Holdings, Inc. (SBMIHI). Supertel Limited Partnership and SBMIHI owned 99% and 1% of SBMILLC, respectively. Supertel Limited Partnership and SPPRHI owned 99% and 1% of SHLLC,
respectively, and Supertel Limited Partnership owned 100% of SSBLLC.

As of June 30, 2008, the Company owned 125 limited service
hotels and one office building. All of the hotels are leased to our wholly owned taxable REIT subsidiary, TRS Leasing, Inc. (TRS), and its wholly owned subsidiaries (collectively TRS Lessee), and are managed by Royco Hotels,
Inc (Royco Hotels), and HLC Hotels Inc. (HLC).

The hotel management agreement with Royco Hotels, the manager of
110 of the Companys hotels, was amended effective January 1, 2007. The amendment, among other things, provides for: (a) the amendment of the base management fee calculation so that the base management fee is reduced as a percentage
of gross hotel revenue (ranging from 4.25% to 3.0%) as revenues increase above certain thresholds; (b) the automatic extension of the term of the management agreement for five years (unless Royco Hotels elects otherwise) in the event of Royco
managed hotels achieving a specified return on SHIs hotel investment for the four years ended December 31, 2010; (c) an increase in the termination fee payable to Royco Hotels under certain circumstances equal to the greater of
(i) $3.6 million less an amount equal to $0.1 million multiplied by the number of months after December 31, 2006 preceding the month of termination or (ii) 50% of the base management fee paid to Royco Hotels during the twelve months
prior to notice of termination; and (d) the base compensation of Royco Hotels district managers to be included in the operating expenses paid by TRS Lessee.

On May 16, 2007, Supertel Limited Partnership acquired 15 hotels which are operated under the Masters Inn name. In connection with the acquisition, TRS, the lessee of the 15 hotels, entered into a management
agreement with HLC, an affiliate of the sellers of the hotels. The management agreement, as amended, provides for HLC to operate and manage the 15 hotels through December 31, 2011 and receive management fees equal to 5.0% of the gross revenues
derived from the operation of the hotels and incentive fees equal to 10% of the annual operating income of the hotels in excess of 10.5% of the companys investment in the hotels.



6



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

|Item 1. | FINANCIAL STATEMENTS, CONTINUED:
|------- | --------------------------------

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Six Months Ended June 30, 2008 and 2007

(Unaudited)



The management agreements generally require TRS Lessee to fund debt service, working capital needs
and capital expenditures and fund Royco Hotels, and HLCs third-party operating expenses, except those expenses not related to the operation of the hotels. TRS Lessee is responsible for obtaining and maintaining insurance policies with
respect to the hotels.

Consolidated Financial Statements

The Company has prepared the consolidated balance sheet as of June 30, 2008, the consolidated statements of operations for the three and six months ended June 30, 2008 and 2007, and the consolidated
statements of cash flows for the six months ended June 30, 2008 and 2007 without audit, in conformity with U. S. generally accepted accounting principles. In the opinion of management, all necessary adjustments (which include normal recurring
adjustments) have been made to present fairly the financial position as of June 30, 2008 and the results of operations and cash flows for all periods presented. Balance sheet data as of December 31, 2007 has been derived from the audited
consolidated financial statements as of that date.

Certain information and footnote disclosures, normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles, have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007. The results of operations for the three and
six months ended June 30, 2008 are not necessarily indicative of the operating results for the full year.

Hotel Acquisitions

On January 2, 2008 the Company acquired seven hotels in Kentucky, two hotels in Sioux Falls, SD and a hotel in Green Bay, WI. The combined purchase
price of $22 million was funded by term loans of $15.6 million and $6.4 million from our existing credit facilities. The franchise brands consisted of Comfort Inn (2), Comfort Suites (1), Days Inn (4), Quality Inn (1), Sleep Inn (1) and Super 8
(1).

The results of the acquired properties operations have been included in the consolidated financial statements since their dates
of acquisition.

Earnings Per Share

Basic earnings per share (EPS) is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator
of the basic EPS computation for the effects of any dilutive potential common shares outstanding during the period, if any. The computation of basic and diluted earnings per common share is presented below:

(dollars in thousands, except share data)



|                                                 |  |                            |            |                          |   |            |  |      |            |  |   |           
|------------------------------------------------ |  | -------------------------- | ---------- | ------------------------ | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                 |  | Three MonthsEnded June 30, |            | Six MonthsEnded June 30,
|                                                 |  | 2008                       |            | 2007                     |   | 2008       |  | 2007
|Numerator:                                       |  |                            |            |                          |   |            |  |      |            |  |   |           
|Net income available to common shareholders      |  | $                          | 1,887      |                          | $ | 2,158      |  | $    | 808        |  | $ | 1,475     
|                                                 |  |                            |            |                          |   |            |  |      |            |  |   |           
|Denominator:                                     |  |                            |            |                          |   |            |  |      |            |  |   |           
|Weighted average number of common sharesbasic   |  |                            | 20,826,079 |                          |   | 20,083,232 |  |      | 20,763,583 |  |   | 19,865,800
|                                                 |  |                            |            |                          |   |            |  |      |            |  |   |           
|Weighted average number of common sharesdiluted |  |                            | 20,826,079 |                          |   | 20,105,219 |  |      | 20,764,314 |  |   | 19,887,787
|                                                 |  |                            |            |                          |   |            |  |      |            |  |   |           
|Earnings Per Common Share:                       |  |                            |            |                          |   |            |  |      |            |  |   |           
|Net income available to common shareholders:     |  |                            |            |                          |   |            |  |      |            |  |   |           
|per weighted average common sharebasic          |  | $                          | 0.09       |                          | $ | 0.11       |  | $    | 0.04       |  | $ | 0.07      
|                                                 |  |                            |            |                          |   |            |  |      |            |  |   |           
|per weighted average common sharediluted        |  | $                          | 0.09       |                          | $ | 0.11       |  | $    | 0.04       |  | $ | 0.07      
|                                                 |  |                            |            |                          |   |            |  |      |            |  |   |           



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

|Item 1. | FINANCIAL STATEMENTS, CONTINUED:
|------- | --------------------------------

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Six Months Ended June 30, 2008 and 2007

(Unaudited)



Preferred and Common Limited Partnership Units in SLP

At June 30, 2008 and 2007 there were 1,235,806 and 372,195 of SLP common operating units outstanding held by the limited partners. These units have
been excluded from the diluted earnings per share calculation as there would be no effect on the amounts allocated to the limited partners holding common operating units (whose units are convertible on a one-to-one basis to common shares) since
their share of income (loss) would be added back to income (loss). In addition, the 195,610 shares of SLP preferred operating units held by the limited partners are antidilutive.

Preferred Stock of SHI

There were 826,089 shares of Series A Convertible Preferred Stock that
remained outstanding after converting 98,400 shares into 174,168 shares of common stock during the three months ended June 30, 2008. There were preferred stock warrants outstanding as of June 30, 2007 exercisable for 126,311 shares of
Series A Convertible Preferred Stock. These warrants were fully exercised during July 2007. The convertible provision of the Series A Convertible Preferred Stock, after adjusting the numerator and denominator for the basic EPS computation, is
antidilutive for the earnings per share computation for the three months ended June 30, 2008 and 2007. The preferred stock warrants were excluded from the computation of diluted earnings per share for the three months ended June 30, 2007,
since the preferred stock is antidilutive.

At June 30, 2008 there were 332,500 shares of Series B Cumulative Preferred Stock
outstanding. There is no convertible provision for Series B, therefore, there is no dilutive effect on earnings per share.

Stock Options

The potential common shares represented by outstanding stock options for the three and six months ended June 30, 2007 totaled
165,000 of which 65,000 shares are antidilutive and 78,013 shares are assumed to be purchased with proceeds from the exercise of stock options resulting in 21,987 shares that are dilutive.



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

|Item 1. | FINANCIAL STATEMENTS, CONTINUED:
|------- | --------------------------------

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Six Months Ended June 30, 2008 and 2007

(Unaudited)



The potential common shares represented by outstanding stock options for the three and six months
ended June 30, 2008 totaled 192,143. For the six months ended June 30, 2008 95,000 shares are antidilutive and 96,412 shares are assumed to be purchased with proceeds from the exercise of stock options resulting in 731 shares that are
dilutive. For the three months ended June 30, 2008 all 192,143 shares are antidulitive.

Debt Financing

Debt financing with respect to hotels acquired by the Company during the three month period ended June 30, 2008 is described above under Hotel
Acquisitions.

In June 2008, the Company completed an offering of 332,500 shares of 10% Series B Cumulative Preferred Stock (NASDAQ:
SPPRO) in June 2008. We used the net proceeds of $7.7 million and additional cash to repay the $8.5 million bridge loan with General Electric Capital Corporation (GECC).

Effective May 1, 2008, the Company converted the variable interest rate on $64.6 million of long-term debt to an average annual fixed rate equal to
5.9% for the remaining term of 8.8 years. The debt consists of four mortgage loans payable to GECC.

Stock-Based Compensation

Options

The Company has a 2006 Stock Plan (the
Plan) which has been approved by the Companys shareholders. The Plan authorized the grant of stock options, stock appreciation rights, restricted stock and stock bonuses for up to 200,000 shares of common stock.

Share-Based Compensation Expense

The expense
recognized in the consolidated financial statements for the six months ended June 30, 2008 and 2007 for share-based compensation related to employees and directors was $2,100 and $9,000, respectively.

Income Taxes

For the three months ended
June 30, 2008, the TRS reflected an income tax expense of $334,000 which is comprised of a net state and local tax expense of $66,000 and a federal tax expense of $268,000. For the six months ended June 30, 2008, the TRS reflected an
income tax benefit of $364,000 which is comprised of a net state and local tax benefit of $56,000 and a federal tax benefit of $308,000.



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|Item 1. | FINANCIAL STATEMENTS, CONTINUED:
|------- | --------------------------------

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Six Months Ended June 30, 2008 and 2007

(Unaudited)



The components of a TRS income tax (expense) benefit were as follows (dollars in thousands):



|                                   |  |                                    |      |   |                                  |   |      |      |  |      |     |  |   |    
|---------------------------------- |  | ---------------------------------- | ---- | - | -------------------------------- | - | ---- | ---- |  | ---- | --- |  | - | ---
|                                   |  | For the three monthsended June 30, |      |   | For the six monthsended June 30,
|                                   |  | 2008                               |      |   | 2007                             |   |      | 2008 |  | 2007
|Federal                            |  |                                    |      |   |                                  |   |      |      |  |      |     |  |   |    
|Deferred                           |  | $                                  | (268 | ) |                                  | $ | (362 | )    |  | $    | 308 |  | $ | 93 
|State & Local                      |  |                                    |      |   |                                  |   |      |      |  |      |     |  |   |    
|Deferred                           |  |                                    | (66  | ) |                                  |   | (76  | )    |  |      | 56  |  |   | 19 
|                                   |  |                                    |      |   |                                  |   |      |      |  |      |     |  |   |    
|Total income tax (expense) benefit |  | $                                  | (334 | ) |                                  | $ | (438 | )    |  | $    | 364 |  | $ | 112
|                                   |  |                                    |      |   |                                  |   |      |      |  |      |     |  |   |    

The provision for income taxes differs from the amount of income tax determined by applying the
applicable U.S. statutory federal income tax rate to pretax income as a result of the following difference (dollars in thousands):



|                                                                     |  |                                    |      |   |                                  |   |      |      |  |      |     |  |   |    
|-------------------------------------------------------------------- |  | ---------------------------------- | ---- | - | -------------------------------- | - | ---- | ---- |  | ---- | --- |  | - | ---
|                                                                     |  | For the three monthsended June 30, |      |   | For the six monthsended June 30,
|                                                                     |  | 2008                               |      |   | 2007                             |   |      | 2008 |  | 2007
|Expected federal tax (expense) benefit at 34%                      |  | $                                  | (291 | ) |                                  | $ | (372 | )    |  | $    | 302 |  | $ | 95 
|State income tax (expense) benefit, net of federal income tax effect |  |                                    | (44  | ) |                                  |   | (51  | )    |  |      | 37  |  |   | 13 
|Other (expense) benefit, net                                         |  |                                    | 1    |   |                                  |   | (15  | )    |  |      | 25  |  |   | 4  
|                                                                     |  |                                    |      |   |                                  |   |      |      |  |      |     |  |   |    
|Total income tax (expense) benefit                                   |  | $                                  | (334 | ) |                                  | $ | (438 | )    |  | $    | 364 |  | $ | 112
|                                                                     |  |                                    |      |   |                                  |   |      |      |  |      |     |  |   |    

The TRS has estimated its income tax benefit using a combined federal and state rate of 39%. As of
June 30, 2008, TRS had a deferred tax asset of $1.6 million primarily due to current and past years tax net operating losses. These loss carryforwards will expire in 2023. Management believes that it is more likely than not that the
results of future operations will generate sufficient taxable income to realize the deferred tax asset and has determined that no valuation allowance is required. Reversal of the deferred tax asset in the subsequent year cannot be reasonably
estimated.

Income taxes are accounted for under the asset and liability method. The Company uses an estimate of its annual effective rate
based on the facts and circumstances at the time while the actual effective rate is calculated at year-end. 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 and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Preferred Stock Offering

At June 30, 2008 there were 332,500 shares of 10.0% Series B
Cumulative Preferred Stock outstanding.



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Part I. FINANCIAL INFORMATION, CONTINUED:

|Item 1. | FINANCIAL STATEMENTS, CONTINUED:
|------- | --------------------------------

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Six Months Ended June 30, 2008 and 2007

(Unaudited)



The shares were sold for $25.00 per share and bear a liquidation preference of $25.00 per share. Underwriting and other costs of the offering totaled
approximately $0.6 million to the Company. The proceeds were used by the Company to pay an $8.5 million bridge loan with General Electric Capital Corporation.

Dividends on the Series B Cumulative Preferred Stock are cumulative and are payable quarterly in arrears on each March 31, June 30, September 30 and December 31, or, if not a business
day, the next succeeding business day, at the annual rate of 10.0% of the $25.00 liquidation preference per share, equivalent to a fixed annual amount of $2.50 per share. Dividends on the Series B Cumulative Preferred Stock accrue whether or
not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, whether or not such dividends are declared and whether or not such dividends are prohibited by agreement. Accrued but unpaid dividends
on the Series B Cumulative Preferred Stock will not bear interest.

The Series B Cumulative Preferred Stock will, with respect to dividend
rights and rights upon the Companys liquidation, dissolution or winding up, rank senior to the Companys common stock, senior to all classes or series of preferred stock issued by the Company and ranking junior to the Series B Cumulative
Preferred Stock with respect to dividend rights or rights upon the Companys liquidation, dissolution or winding up, on a parity with the Companys Series A Convertible Preferred Stock and with all classes or series of preferred stock
issued by the Company and ranking on a parity with the Series B Cumulative Preferred Stock with respect to dividend rights or rights upon the Companys liquidation, dissolution or winding up and junior to all of the Companys existing and
future indebtedness.

The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common
shares, unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for the current and all past dividend periods. The Series B Cumulative Preferred Stock has no stated maturity and is not subject to
any sinking fund or mandatory redemption.

The Series B Cumulative Preferred Stock is not redeemable prior to June 3, 2013, except in
certain limited circumstances relating to the maintenance of the Companys ability to qualify as a REIT as provided in the Companys articles of incorporation or a change of control (as defined in the Companys amendment to its
articles of incorporation establishing the Series B Cumulative Preferred Stock). The Company may redeem the Series B Cumulative Preferred Stock, in whole or in part, at any time or from time to time on or after June 3, 2013 for cash at a
redemption price of $25.00 per share, plus all accrued and unpaid dividends. Also, upon a change of control, each outstanding share of the Companys Series B Cumulative Preferred Stock will be redeemed for cash at a redemption price of $25.00
per share, plus all accrued and unpaid dividends. At June 30, 2008, no events have occurred that would lead the Company to believe redemption of the preferred stock, due to a change of control or failure to maintain its REIT qualification, is
probable.

Adoption of New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (FAS
157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in the those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. This guidance was issued to increase
consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Adoption on
January 1, 2008 did not have a material effect on the Company. The Company has deferred the application of FAS 157 related to non-financial assets and liabilities.



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|Item 1. | FINANCIAL STATEMENTS, CONTINUED:
|------- | --------------------------------

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Six Months Ended June 30, 2008 and 2007

(Unaudited)



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (FAS 159). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the guidance is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. FAS 159 is effective as of the beginning of the
first fiscal year that begins after November 15, 2007. Adoption on January 1, 2008 did not have a material effect on the Company since the Company did not elect to measure any financial assets or liabilities at fair value.

Recently Issued Accounting Pronouncements

In
December 2007, the FASB issued revised SFAS No. 141, Business Combinations (FAS 141(R)). FAS 141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquirer; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The objective of the guidance is to improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about a business combination and its effects. FAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Adoption on January 1, 2009 will impact the Companys accounting for future acquisitions and related transaction costs.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (FAS 160). FAS
160 establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within
equity, but separate from the parents equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes
in a parents ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value; and entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The objective of the guidance is to
improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. FAS 160 is effective for fiscal years beginning on or after December 15, 2008.
Management is currently evaluating the impact FAS 160 will have on the Companys consolidated financial statements.



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|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Forward-Looking Statements

Certain information both included and incorporated by reference in this
managements discussion and analysis and other sections of this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, 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. These forward-looking statements are based on assumptions that management has made in light of experience in the business in which we operate, as well as managements perceptions of
historical trends, current conditions, expected future developments, and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of
which are beyond our control), and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions.

Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words may, will, should,
expect, anticipate, estimate, believe, intend or project or the negative thereof or other variations thereon or comparable terminology. Factors that could have a material
adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions, generally, and the real estate market specifically; legislative/regulatory changes (including changes to laws governing the
taxation of real estate investment trusts); availability of capital; risks associated with debt financing, interest rates; competition; supply and demand for hotel rooms in our current and proposed market areas; and policies and guidelines
applicable to real estate investment trusts and other risks and uncertainties described herein and in our filings with the SEC from time to time. These risks and uncertainties should be considered in evaluating any forward-looking statements
contained or incorporated by reference herein. We caution readers not to place undue reliance on any forward-looking statements included in this report that speak only as of the date of this report.

Following is managements discussion and analysis of our operating results as well as liquidity and capital resources which should be read together
with our financial statements and related notes contained in this report and with the financial statements and managements discussion and analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Results
for the three and six months ended June 30, 2008 are not necessarily indicative of results that may be attained in the future.

References to we, our, us, Company, and Supertel Hospitality refer to Supertel Hospitality, Inc., including as the context requires, its direct and indirect subsidiaries.

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of
these statements requires management to make certain estimates and judgments that affect our financial position and results of operations. A summary of significant accounting policies and a description of accounting policies that are considered
critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2007.

Overview

We are a self-administered real estate investment trust, and through our subsidiaries, as of June 30, 2008 we owned 125 hotels in 24 states. Our
hotels operate under several national and independent brands.

Our significant events for the six months ended June 30, 2008 include:



| |  |  | On June 3, 2008, we completed an offering of 332,500 shares of 10% Series B Cumulative Preferred Stock (NASDAQ: SPPRO). The net proceeds of $7.7 million were
used to pay down existing debt.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
|------- | -------------------------------------------------------------------------------------------------



| |  |  | On January 2, 2008, we acquired seven hotels in Kentucky, two hotels in Sioux Falls, SD and one hotel in Green Bay, WI. The combined purchase price of $22
million was funded by term loans of $15.6 million and $6.4 million from our existing credit facilities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We declared dividends on our common stock for the second quarter ended June 30, 2008 of $0.1275 per share, an increase of $0.0125 from the dividend declared
for the second quarter 2007 of $0.1150 per share.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Effective May 1, 2008, the Company converted the variable interest rate on four mortgage loans payable to GECC totaling $64.6 million to an average annual
fixed rate of 5.9% for the remaining term of 8.8 years.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We conduct our business through a traditional umbrella
partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnerships, Supertel Limited Partnership and E & P Financing Limited Partnership, limited partnerships, limited liability companies or other subsidiaries of
our operating partnerships. We currently own, indirectly, an approximate 94% general partnership interest in Supertel Limited Partnership and a 100% partnership interest in E & P Financing Limited Partnership.

As of June 30, 2008, we owned 125 limited service hotels and one office building. The hotels are leased to our wholly owned taxable REIT subsidiary,
TRS Leasing, Inc, and its wholly owned subsidiaries (collectively TRS Lessee), and are managed by Royco Hotels Inc (Royco Hotels) and HLC Hotels Inc. (HLC). Royco Hotels is the manager of 110 of our hotels and HLC is the manager of 15 of
our hotels.

General

The discussion
that follows is based primarily on our consolidated financial statements for the three and six months ended June 30, 2008 and 2007, and should be read along with the consolidated financial statements and notes.

The comparisons below reflect revenues and expenses of our 125 and 115 hotels as of June 2008 and 2007, respectively.



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|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
|------- | -------------------------------------------------------------------------------------------------



Results of Operations

Comparison of the three months ended June 30, 2008 to the three months ended June 30, 2007

Operating results are summarized as
follows (in thousands):



|                                       |  |      |         |   |      |   |         |          |  |   |        |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -------- |  | - | ------ | -
|                                       |  | 2008 |         |   | 2007 |   |         | Variance | 
|Revenues                               |  | $    | 34,644  |   |      | $ | 30,820  |          |  | $ | 3,824  |  
|Hotel and property operations expenses |  |      | (23,802 | ) |      |   | (20,582 | )        |  |   | (3,220 | )
|Interest expense                       |  |      | (3,441  | ) |      |   | (3,392  | )        |  |   | (49    | )
|Depreciation and amortization expense  |  |      | (3,741  | ) |      |   | (3,018  | )        |  |   | (723   | )
|General and administrative expenses    |  |      | (1,040  | ) |      |   | (927    | )        |  |   | (113   | )
|Net loss on dispositions of assets     |  |      | (1      | ) |      |   |        |          |  |   | (1     | )
|Other income                           |  |      | 32      |   |      |   | 42      |          |  |   | (10    | )
|Minority interest                      |  |      | (194    | ) |      |   | (99     | )        |  |   | (95    | )
|Income tax expense                     |  |      | (334    | ) |      |   | (438    | )        |  |   | 104    |  
|                                       |  |      |         |   |      |   |         |          |  |   |        |  
|Net income                             |  | $    | 2,123   |   |      | $ | 2,406   |          |  | $ | (283   | )
|                                       |  |      |         |   |      |   |         |          |  |   |        |  

Revenues and Operating Expenses

Revenues for the three months ended June 30, 2008 compared to the three months ended June 30, 2007, increased $3.8 million or 12.4%. Of this, $4
million was due to the increase in revenue from 32 hotels which were acquired after the first quarter 2007. The offsetting $(0.2) million was due to a decrease in revenue from the same store portfolio. We refer to our entire portfolio as limited
service hotels which we further describe as midscale without food and beverage hotels, economy hotels and extended stay hotels. The same store portfolio used for comparison of the second quarter of 2008 over the same period of 2007 consists of the
93 hotels owned by the Company as of April 1, 2007. Our 56 same store economy hotels reflected an average daily rate (ADR) increase of 1.1% to $49.04, an increase in occupancy of 2.8% and a revenue per available room
(RevPAR) increase of 3.9% to $34.41 for the second quarter of 2008 over the same period of 2007. Our 30 same store midscale without food and beverage hotels reflected an ADR decrease of 1.7% to $72.91, a 2.7% decrease in occupancy and
RevPAR decrease of 4.4% to $49.48 for the second quarter of 2008 over the same period of 2007. Our seven same store extended stay properties reflected an ADR decrease of 5.0% to $25.21, a decrease in occupancy of 2.0% and a RevPAR decrease of 6.9%
to $17.07. During the second quarter of 2008 compared to the year ago period, ADR for the entire 93 same store hotel portfolio decreased 0.9% to $52.78 and RevPAR decreased 0.6% to $36.46. The occupancy for all same store hotels for the three months
ended June 30, 2008 increased 0.3% from that of the year ago period.

During the second quarter of 2008, hotel and property operations
expenses increased $3.2 million, all of which was from hotels added after the first quarter of 2007.

Interest Expense, Depreciation and Amortization
Expense and General and Administrative Expense

Interest expense did not experience a material change compared to the year ago period.
The depreciation and amortization expense increased $0.7 million for the three months ended June 30, 2008 compared to the year ago period. This is primarily related to hotel acquisitions as well as asset additions for the other hotels outpacing
the amount of assets exceeding their useful life. The general and administrative expense for the same period increased $0.1 million compared to the year ago period. This is primarily related to increases in salaries and professional fees.



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|------- | -------------------------------------------------------------------------------------------------



Income Tax Expense

The income tax expense is related to the taxable earnings from the companys taxable subsidiary, the TRS Lessee. Management believes the combined federal and state income tax rate for the TRS Lessee will be
approximately 39%. The tax expense is a result of TRS Lessees income for the three months ended June 30, 2008 and the year ago period. The income tax expense will vary based on the taxable earnings of the TRS Lessee.

The income tax expense decreased by approximately $104,000 during the three months ended June 30, 2008 compared to the year ago period, due to a
reduction in income by the TRS.

Comparison of the six months ended June 30, 2008 to the six months ended June 30, 2007

Operating results are summarized as follows (in thousands):



|                                       |  |      |         |   |      |   |         |          |  |   |        |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -------- |  | - | ------ | -
|                                       |  | 2008 |         |   | 2007 |   |         | Variance | 
|Revenues                               |  | $    | 62,620  |   |      | $ | 50,167  |          |  | $ | 12,453 |  
|Hotel and property operations expenses |  |      | (45,220 | ) |      |   | (35,258 | )        |  |   | (9,962 | )
|Interest expense                       |  |      | (7,101  | ) |      |   | (5,491  | )        |  |   | (1,610 | )
|Depreciation and amortization expense  |  |      | (7,320  | ) |      |   | (5,602  | )        |  |   | (1,718 | )
|General and administrative expenses    |  |      | (1,996  | ) |      |   | (1,850  | )        |  |   | (146   | )
|Gain on dispositions of assets         |  |      | 1       |   |      |   |        |          |  |   | 1      |  
|Other income                           |  |      | 63      |   |      |   | 77      |          |  |   | (14    | )
|Minority interest                      |  |      | (181    | ) |      |   | (142    | )        |  |   | (39    | )
|Income tax benefit                     |  |      | 364     |   |      |   | 112     |          |  |   | 252    |  
|                                       |  |      |         |   |      |   |         |          |  |   |        |  
|Net income                             |  | $    | 1,230   |   |      | $ | 2,013   |          |  | $ | (783   | )
|                                       |  |      |         |   |      |   |         |          |  |   |        |  

Revenues and Operating Expenses

Revenues for the six months ended June 30, 2008 compared to the six months ended June 30, 2007, increased $12.5 million or 24.8%, of which $12.2
million was due to the increase in revenue from 37 hotels which were acquired after the end of year 2006. The same store portfolio used for comparison of the six months of 2008 over the same period of 2007 consists of the 88 hotels owned by the
Company as of January 1, 2007. Our 52 same store economy hotels reflected an average daily rate (ADR) increase of 0.6% to $48.42, an increase in occupancy of 4.2% and a revenue per available room (RevPAR) increase of
4.9% to $30.04. Our 29 same store midscale without food and beverage hotels reflected an ADR decrease of 1.6% to $71.34, a 2.8% decrease in occupancy and a RevPAR decrease of 4.3% to $44.45 for the first six months of 2008 over the same period of
2007. Our seven same store extended stay properties reflected an ADR decrease of 5.4% to $25.11, an increase in occupancy of 4.9% and a RevPAR decrease of 0.8% to $17.30. During the first six months of 2008 compared to the year ago period, ADR for
the entire 88 same store hotel portfolio decreased 1.8% to $51.59 and RevPAR increased 0.2% to $32.63. The occupancy for all same store hotels for the six months ended June 30, 2008 increased 1.9% from that of the year ago period.

During the six months ended June 30, 2008, hotel and property operations expenses increased $10.0 million, of which $9.8 million was from hotels
added after January 1, 2007 and $0.2 million was from the same store portfolio. The same store portfolio increase was primarily caused by increases in hotel utility cost.



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Interest Expense, Depreciation and Amortization Expense and General and Administrative Expense

Interest expense increased by $1.6 million for the six months ended June 30, 2008 compared to the year ago period, due primarily to increased debt
used for hotel acquisitions. The depreciation and amortization expense increased $1.7 million for the six months ended June 30, 2008 compared to the year ago period. This is primarily related to hotel acquisitions as well as asset additions for
the other hotels outpacing the amount of assets exceeding their useful life. The general and administrative expense for the same period increased $0.1 million compared to the year ago period. This is primarily related to increases in salaries and
professional fees.

Income Tax Benefit

The income tax benefit is related to the taxable loss from the TRS Lessee. The tax benefit is a result of TRS Lessees losses for the six months ended June 30, 2008 and the year ago period. The income tax benefit will vary based
on the taxable earnings of the TRS Lessee.

The income tax benefit increased by approximately $252,000 during the six months ended
June 30, 2008 compared to the year ago period, due to an increased loss by the TRS Lessee for the same period.

Liquidity and Capital Resources

Our income and ability to meet our debt service obligations, and make distributions to our shareholders, depends upon the operations of
the hotels being conducted in a manner that maintains or increases revenue, or reduces expenses, to generate sufficient hotel operating income for TRS Lessee to pay the hotels operating expenses, including management fees and rents to us. We
depend on rent payments from TRS Lessee to pay our operating expenses and debt service and to make distributions to shareholders.

We
expect to meet our short-term liquidity requirements generally through net cash provided by operations and borrowings on our revolving credit facility with Great Western Bank. We believe that our net cash provided by operations and available
borrowing capacity will be adequate to fund our operating requirements, scheduled debt maturities and the payment of dividends in accordance with REIT requirements. We may also refinance certain borrowings upon their maturity.

Financing

At June 30, 2008, the Company had
long-term debt of $211 million, consisting of notes and mortgages payable, with a weighted average term to maturity of 6.1 years and a weighted average interest rate of 6.0%. Aggregate annual principal payments for the remainder of 2008 and
thereafter are as follows (in thousands):



|                  |  |   |        
|----------------- |  | - | -------
|Remainder of 2008 |  | $ | 5,622  
|2009              |  |   | 57,513 
|2010              |  |   | 5,145  
|2011              |  |   | 6,184  
|2012              |  |   | 34,414 
|Thereafter        |  |   | 102,085
|                  |  |   |        
|                  |  | $ | 210,963
|                  |  |   |        



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Approximately $2.6 million of the maturities in 2008 consist of principal amortization on mortgage
loans, which we expect to fund through cash flows from operations. The remaining maturities consist of a note payable to BankFirst in the amount of $3 million, which subsequently was paid in full in July 2008.

The Company is required to comply with certain quarterly covenant compliance tests for some of its lenders. As of June 30, 2008, we are in
compliance with the financial covenants of our lenders.

We completed an offering of 332,500 shares of 10% Series B Cumulative Preferred
Stock (NASDAQ: SPPRO) in June 2008. We used the net proceeds of $7.7 million and additional cash to repay the $8.5 million bridge loan with General Electric Capital Corporation.

On January 2, 2008, we acquired seven hotels in Kentucky, two hotels in Sioux Falls, SD and a hotel in Green Bay, WI. The combined purchase price of
$22 million was funded by term loans of $15.6 million and $6.4 million from our existing credit facilities.

Effective May 1, 2008,
the Company converted the variable interest rate on $64.6 million of long-term debt to a fixed rate equal to the seven-year weekly U.S. dollar interest rate swap plus 1.98%. The debt consists of four mortgage loans payable to GECC. The interest rate
on these loans prior to May 1, 2008, bore interest at a three-month LIBOR plus 1.70% (reset monthly). Effective May 1, 2008 the average annual fixed rate is 5.9% for the remaining term of 8.8 years. The average amortization on this debt is
18.7 years.

Redemption of Preferred and Common Operating Partnership Units

As of June 30, 2008 we owned, through our subsidiary, Supertel Hospitality REIT Trust, an approximate 94% general partnership interest in Supertel
Limited Partnership, through which we own 66 of our hotels. We are the sole general partner of the limited partnership, and the remaining approximate 6% is held by limited partners. Limited partners hold, as of June 30, 2008, 1,235,806 common
operating partnership units. A limited partner may, subject to certain limitations, require that Supertel Limited Partnership redeem all or a portion of his or her common units, at any time after a specified period following the date he or she
acquired the common units, by delivering a redemption notice to Supertel Limited Partnership. When a limited partner tenders his or her common units to the partnership for redemption, we can, at our sole discretion, choose to purchase the units for
either (1) a number of our shares of common stock equal to the number of units redeemed (subject to certain adjustments) or (2) cash in an amount equal to the market value of the number of our shares of common stock the limited partner
would have received if we chose to purchase the units for common stock. We anticipate that we generally will elect to purchase the common units for common stock. Limited partners also held 195,610 preferred operating partnership units as of
June 30, 2008. The preferred units are convertible by the holders into common units on a one-for-one basis or may be redeemed for cash at $10 per unit until October 2009. The preferred units receive a preferred dividend distribution of $1.10
per preferred unit annually, payable on a monthly basis and do not participate in the allocations of profits and losses of Supertel Limited Partnership. There were no common operating partnership units or preferred operating partnership units
converted during the three and six months ended June 30, 2008.

Capital Commitments

Below is a summary of certain obligations that will require capital (in thousands):



|                                  |  |       |                 |                        |          |        |          |   |                  |  |   |        |  |   |        
|--------------------------------- |  | ----- | --------------- | ---------------------- | -------- | ------ | -------- | - | ---------------- |  | - | ------ |  | - | -------
|                                  |  | Total |                 | Payments Due by Period
|Contractual Obligations           |  |       | Less than1 Year |                        | 1-3Years |        | 4-5Years |   | More than5 years
|Long-term debt including interest |  | $     | 276,855         |                        | $        | 11,919 |          | $ | 82,110           |  | $ | 57,559 |  | $ | 125,267
|Land leases                       |  |       | 7,729           |                        |          | 102    |          |   | 425              |  |   | 429    |  |   | 6,773  
|                                  |  |       |                 |                        |          |        |          |   |                  |  |   |        |  |   |        
|Total contractual obligations     |  | $     | 284,584         |                        | $        | 12,021 |          | $ | 82,535           |  | $ | 57,988 |  | $ | 132,040
|                                  |  |       |                 |                        |          |        |          |   |                  |  |   |        |  |   |        



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The column titled Less than 1 Year represents payments due for the balance of 2008.

We have various standing or renewable contracts with vendors. These contracts are all cancelable with immaterial or no cancellation penalties. Contract
terms are generally one year or less. In addition, the Company has management agreements with Royco Hotels and HLC Hotels, providing for the management and operation of the hotels, which are discussed further within this document.

Other

To maintain our REIT tax status, we generally
must distribute at least 90% of our taxable income to our shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount
specified under the federal income tax laws. We have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual amount of any future dividends will be determined by the Board of Directors based on our actual
results of operations, economic conditions, capital expenditure requirements and other factors that the Board of Directors deems relevant.

Off Balance
Sheet Financing Transactions

We have not entered into any off balance sheet financing transactions.

Funds from Operations

Our funds from operations
available to common shareholders (FFO) for the three months and six months ended June 30, 2008 were $5.6 million and $8.1 million, respectively, representing an increase of $0.5 million and $1.0 million from FFO reported for the
three and six months ended June 30, 2007, respectively. FFO is reconciled to net income available to common shareholders as follows (in thousands):



|                                                     |  |                            |       |                          |   |       |  |   |       |   |  |   |      
|---------------------------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | - | ----- | - |  | - | -----
|                                                     |  | Three monthsended June 30, |       | Six months endedJune 30,
|                                                     |  | 2008                       |       | 2007                     |   | 2008  |  |   | 2007 
|Net Income available to common shareholders          |  | $                          | 1,887 |                          | $ | 2,158 |  | $ | 808   |   |  | $ | 1,475
|Depreciation and amortization                        |  |                            | 3,741 |                          |   | 3,018 |  |   | 7,320 |   |  |   | 5,602
|Net (gain) loss on disposition of real estate assets |  |                            | 1     |                          |   |      |  |   | (1    | ) |  |   |     
|                                                     |  |                            |       |                          |   |       |  |   |       |   |  |   |      
|FFO available to common shareholders                 |  | $                          | 5,629 |                          | $ | 5,176 |  | $ | 8,127 |   |  | $ | 7,077
|                                                     |  |                            |       |                          |   |       |  |   |       |   |  |   |      

FFO is a non-GAAP financial measure. We consider FFO to be a market accepted measure of an equity
REITs operating performance, which is necessary, along with net earnings (loss), for an understanding of our operating results. FFO, as defined under the National Association of Real Estate Investment Trusts (NAREIT) standards, consists of net
income computed in accordance with accounting principles generally accepted in the United States of America (GAAP), excluding gains (or losses) from



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sales of real estate assets, plus depreciation and amortization of real estate assets. We believe our method of calculating FFO complies with the NAREIT
definition. FFO does not represent amounts available for managements discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an
alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including its ability to pay dividends or make distributions. All REITs do not
calculate FFO in the same manner; therefore, our calculation may not be the same as the calculation of FFO for similar REITs.

We use FFO
as a performance measure to facilitate a periodic evaluation of our operating results relative to those of our peers, who like us, are typically members of NAREIT. We consider FFO a useful additional measure of performance for an equity REIT because
it facilitates an understanding of the operating performance of its properties without giving effect to real estate depreciation and amortization, which assume that the value of real estate assets diminishes predictably over time. Since real estate
values have historically risen or fallen with market conditions, we believe that FFO provides a meaningful indication of our performance.

Revenue Per
Available Room (RevPAR), Average Daily Rate (ADR), and Occupancy

The following table presents our RevPAR, ADR and Occupancy, by
region, for the three months ended June 30, 2008 and 2007, respectively. The comparisons of same store operations are for 93 hotels owned as of April 1, 2007. Hotel acquisitions which were excluded from same store calculations for the
three months ended June 30, 2008 and 2007 were 32 hotels acquired during 2007 and 2008. The excluded properties were not owned by the Company throughout each of the periods presented and therefore are excluded from the same store calculations.



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|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|--------------------------- |  | --------- | ------ | ------------------------------- | --------- | --------- | ---- | ------------------------------- | --- | - | --------- |  | --------- |  | --------- | ----- |  | ---- | - |  | - | -----
|                            |  | RoomCount |        | Three months ended June 30,2008 |           | RoomCount |      | Three months ended June 30,2007
|Same Store Region           |  |           | RevPAR |                                 | Occupancy |           |      | ADR                             |     |   | RevPAR    |  | Occupancy |  |           | ADR  
|Mountain                    |  | 214       |        | $                               | 41.52     |           | 79.3 | %                               |     | $ | 52.38     |  | 214       |  | $         | 44.08 |  | 94.6 | % |  | $ | 46.58
|West North Central          |  | 2,844     |        |                                 | 34.45     |           | 70.6 | %                               |     |   | 48.77     |  | 2,844     |  |           | 32.59 |  | 67.7 | % |  |   | 48.11
|East North Central          |  | 998       |        |                                 | 45.56     |           | 71.8 | %                               |     |   | 63.44     |  | 998       |  |           | 45.93 |  | 70.4 | % |  |   | 65.21
|Middle Atlantic/New England |  | 336       |        |                                 | 51.88     |           | 67.2 | %                               |     |   | 77.20     |  | 336       |  |           | 52.51 |  | 69.2 | % |  |   | 75.85
|South Atlantic              |  | 2,257     |        |                                 | 32.33     |           | 67.3 | %                               |     |   | 48.05     |  | 2,257     |  |           | 34.93 |  | 69.1 | % |  |   | 50.56
|East South Central          |  | 450       |        |                                 | 37.48     |           | 60.4 | %                               |     |   | 62.05     |  | 450       |  |           | 36.88 |  | 60.3 | % |  |   | 61.12
|West South Central          |  | 132       |        |                                 | 30.75     |           | 63.7 | %                               |     |   | 48.29     |  | 132       |  |           | 31.13 |  | 64.5 | % |  |   | 48.26
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Same Store            |  | 7,231     |        | $                               | 36.46     |           | 69.1 | %                               |     | $ | 52.78     |  | 7,231     |  | $         | 36.67 |  | 68.9 | % |  | $ | 53.24
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|                            |  |           |        |                                 |           |           |      |                                
|Acquisitions Region         |  | RoomCount |        | RevPAR                          |           | Occupancy |      |                                 | ADR |   | RoomCount |  | RevPAR    |  | Occupancy |       |  | ADR 
|West North Central          |  | 167       |        | $                               | 31.23     |           | 57.3 | %                               |     | $ | 54.46     |  |          |  | $         |      |  |     |   |  | $ |     
|East North Central          |  | 83        |        |                                 | 32.58     |           | 53.6 | %                               |     |   | 60.80     |  |          |  |           |      |  |     |   |  |   |     
|South Atlantic              |  | 2,444     |        |                                 | 28.97     |           | 61.0 | %                               |     |   | 47.52     |  | 2,444     |  |           | 33.03 |  | 66.8 | % |  |   | 49.47
|East South Central          |  | 637       |        |                                 | 29.25     |           | 55.5 | %                               |     |   | 52.72     |  | 151       |  |           | 26.59 |  | 79.8 | % |  |   | 33.32
|West South Central          |  | 324       |        |                                 | 29.47     |           | 62.7 | %                               |     |   | 47.02     |  | 324       |  |           | 32.66 |  | 77.3 | % |  |   | 42.27
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Acquisitions          |  | 3,655     |        | $                               | 29.24     |           | 59.8 | %                               |     | $ | 48.88     |  | 2,919     |  | $         | 32.72 |  | 69.0 | % |  | $ | 47.45
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Hotel Portfolio       |  | 10,886    |        | $                               | 34.04     |           | 66.0 | %                               |     | $ | 51.59     |  | 10,150    |  | $         | 35.82 |  | 68.9 | % |  | $ | 52.00
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      



|                               |  |                                                                                                 
|------------------------------ |  | ------------------------------------------------------------------------------------------------
|States included in the Regions |  |                                                                                                 
|Mountain                       |  | Idaho and Montana                                                                               
|West North Central             |  | Iowa, Kansas, Missouri, Nebraska and South Dakota                                               
|East North Central             |  | Indiana and Wisconsin                                                                           
|Middle Atlantic/New England    |  | Maine and Pennsylvania                                                                          
|South Atlantic                 |  | Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
|East South Central             |  | Alabama, Kentucky and Tennessee                                                                 
|West South Central             |  | Arkansas and Louisiana                                                                          



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Our RevPAR, ADR, and Occupancy, by franchise affiliation, for the three months ended June 30,
2008 and 2007, were as follows:



|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|--------------------------- |  | --------- | ------ | ------------------------------- | --------- | --------- | ---- | ------------------------------- | --- | - | --------- |  | --------- |  | --------- | ----- |  | ---- | - |  | - | -----
|                            |  | RoomCount |        | Three months ended June 30,2008 |           | RoomCount |      | Three months ended June 30,2007
|Same Store Brand            |  |           | RevPAR |                                 | Occupancy |           |      | ADR                             |     |   | RevPAR    |  | Occupancy |  |           | ADR  
|Limited Service             |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Midscale w/o F&B            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Comfort Inn/ Comfort Suites |  | 1,691     |        | $                               | 47.84     |           | 67.4 | %                               |     | $ | 71.00     |  | 1,691     |  | $         | 50.53 |  | 69.2 | % |  | $ | 73.01
|Hampton Inn                 |  | 216       |        |                                 | 60.23     |           | 69.3 | %                               |     |   | 86.92     |  | 216       |  |           | 63.61 |  | 73.4 | % |  |   | 86.71
|Holiday Inn Express         |  | 176       |        |                                 | 53.37     |           | 70.1 | %                               |     |   | 76.14     |  | 176       |  |           | 52.99 |  | 71.9 | % |  |   | 73.67
|Other Midscale (1)          |  | 163       |        |                                 | 48.01     |           | 68.5 | %                               |     |   | 70.09     |  | 163       |  |           | 47.53 |  | 68.8 | % |  |   | 69.08
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Midscale w/o F&B      |  | 2,246     |        |                                 | 49.48     |           | 67.9 | %                               |     |   | 72.91     |  | 2,246     |  |           | 51.76 |  | 69.8 | % |  |   | 74.16
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Economy                     |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Days Inn                    |  | 58        |        |                                 | 44.46     |           | 67.9 | %                               |     |   | 65.48     |  | 58        |  |           | 35.83 |  | 57.7 | % |  |   | 62.05
|Super 8                     |  | 3,472     |        |                                 | 34.60     |           | 72.1 | %                               |     |   | 47.99     |  | 3,472     |  |           | 33.33 |  | 70.4 | % |  |   | 47.32
|Other Economy (2)           |  | 357       |        |                                 | 30.93     |           | 51.9 | %                               |     |   | 59.57     |  | 357       |  |           | 30.61 |  | 49.1 | % |  |   | 62.38
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Economy               |  | 3,887     |        |                                 | 34.41     |           | 70.2 | %                               |     |   | 49.04     |  | 3,887     |  |           | 33.12 |  | 68.3 | % |  |   | 48.50
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Midscale/Economy      |  | 6,133     |        |                                 | 39.93     |           | 69.3 | %                               |     |   | 57.60     |  | 6,133     |  |           | 39.94 |  | 68.8 | % |  |   | 58.03
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Extended Stay (3)           |  | 1,098     |        |                                 | 17.07     |           | 67.7 | %                               |     |   | 25.21     |  | 1,098     |  |           | 18.34 |  | 69.1 | % |  |   | 26.55
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Same Store            |  | 7,231     |        | $                               | 36.46     |           | 69.1 | %                               |     | $ | 52.78     |  | 7,231     |  | $         | 36.67 |  | 68.9 | % |  | $ | 53.24
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|                            |  |           |        |                                 |           |           |      |                                
|Acquisitions Brand          |  | RoomCount |        | RevPAR                          |           | Occupancy |      |                                 | ADR |   | RoomCount |  | RevPAR    |  | Occupancy |       |  | ADR 
|Limited Service             |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Midscale w/o F&B            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Comfort Inn/ Comfort Suites |  | 346       |        | $                               | 53.60     |           | 64.6 | %                               |     | $ | 82.91     |  | 150       |  | $         | 70.15 |  | 79.3 | % |  | $ | 88.45
|Other Midscale              |  | 63        |        |                                 | 31.89     |           | 54.0 | %                               |     |   | 59.01     |  |          |  |           |      |  |     |   |  |   |     
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Midscale w/o F&B      |  | 409       |        |                                 | 50.26     |           | 63.0 | %                               |     |   | 79.76     |  | 150       |  |           | 70.15 |  | 79.3 | % |  |   | 88.45
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Economy                     |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Days Inn                    |  | 1,089     |        |                                 | 34.26     |           | 63.5 | %                               |     |   | 53.97     |  | 800       |  |           | 35.66 |  | 70.6 | % |  |   | 50.50
|Masters Inn                 |  | 1,947     |        |                                 | 22.92     |           | 58.2 | %                               |     |   | 39.34     |  | 1,842     |  |           | 26.19 |  | 67.2 | % |  |   | 39.00
|Super 8                     |  | 83        |        |                                 | 32.58     |           | 53.6 | %                               |     |   | 60.80     |  |          |  |           |      |  |     |   |  |   |     
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Economy               |  | 3,119     |        |                                 | 27.13     |           | 59.9 | %                               |     |   | 45.26     |  | 2,642     |  |           | 30.50 |  | 68.7 | % |  |   | 44.38
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Midscale/Economy      |  | 3,528     |        |                                 | 29.81     |           | 60.3 | %                               |     |   | 49.44     |  | 2,792     |  |           | 33.61 |  | 69.6 | % |  |   | 48.32
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Extended Stay (4)           |  | 127       |        |                                 | 13.42     |           | 46.5 | %                               |     |   | 28.84     |  | 127       |  |           | 18.38 |  | 59.3 | % |  |   | 31.01
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Acquisitions          |  | 3,655     |        | $                               | 29.24     |           | 59.8 | %                               |     | $ | 48.88     |  | 2,919     |  | $         | 32.72 |  | 69.0 | % |  | $ | 47.45
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Hotel Portfolio       |  | 10,886    |        | $                               | 34.04     |           | 66.0 | %                               |     | $ | 51.59     |  | 10,150    |  | $         | 35.82 |  | 68.9 | % |  | $ | 52.00
|                            |  |           |        |                                 |           |           |      |                                 |     |   |           |  |           |  |           |       |  |      |   |  |   |      



|1 | Includes Ramada Limited and Sleep Inn brands
|- | --------------------------------------------

|2 | Includes Guesthouse Inn and independent hotels
|- | ----------------------------------------------

|3 | Includes seven Savannah Suites
|- | ------------------------------

|4 | Tara Inn & Suites
|- | -----------------



22



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
|------- | -------------------------------------------------------------------------------------------------



The following table presents our RevPAR, ADR and Occupancy, by region, for the six months ended
June 30, 2008 and 2007, respectively. The comparisons of same store operations are for 88 hotels owned as of January 1, 2007. Hotel acquisitions which were excluded from same store calculations for the six months ended June 30, 2008
and 2007 were 37 hotels acquired during 2007 and 2008. The excluded properties were not owned by the Company throughout each of the periods presented and therefore are excluded from the same store calculations.



|                            |  |           |        |                                |           |           |      |                                |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|--------------------------- |  | --------- | ------ | ------------------------------ | --------- | --------- | ---- | ------------------------------ | --- | - | --------- |  | --------- |  | --------- | ----- |  | ---- | - |  | - | -----
|                            |  | RoomCount |        | Six months ended June 30, 2008 |           | RoomCount |      | Six months ended June 30, 2007
|Same Store Region           |  |           | RevPAR |                                | Occupancy |           |      | ADR                            |     |   | RevPAR    |  | Occupancy |  |           | ADR  
|West North Central          |  | 2,844     |        | $                              | 30.14     |           | 63.1 | %                              |     | $ | 47.80     |  | 2,844     |  | $         | 28.87 |  | 61.2 | % |  | $ | 47.20
|East North Central          |  | 881       |        |                                | 40.88     |           | 62.2 | %                              |     |   | 65.70     |  | 881       |  |           | 41.53 |  | 61.9 | % |  |   | 67.07
|Middle Atlantic/New England |  | 273       |        |                                | 40.96     |           | 57.0 | %                              |     |   | 71.86     |  | 273       |  |           | 42.18 |  | 58.7 | % |  |   | 71.89
|South Atlantic              |  | 2,183     |        |                                | 31.34     |           | 66.3 | %                              |     |   | 47.29     |  | 2,183     |  |           | 32.91 |  | 65.4 | % |  |   | 50.30
|East South Central          |  | 450       |        |                                | 34.51     |           | 56.6 | %                              |     |   | 60.93     |  | 450       |  |           | 32.52 |  | 54.0 | % |  |   | 60.23
|West South Central          |  | 132       |        |                                | 28.65     |           | 59.6 | %                              |     |   | 48.09     |  | 132       |  |           | 27.54 |  | 58.0 | % |  |   | 47.50
|                            |  |           |        |                                |           |           |      |                                |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Same Store            |  | 6,763     |        | $                              | 32.63     |           | 63.2 | %                              |     | $ | 51.59     |  | 6,763     |  | $         | 32.58 |  | 62.0 | % |  | $ | 52.54
|                            |  |           |        |                                |           |           |      |                                |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|                            |  |           |        |                                |           |           |      |                               
|Acquisitions Region         |  | RoomCount |        | RevPAR                         |           | Occupancy |      |                                | ADR |   | RoomCount |  | RevPAR    |  | Occupancy |       |  | ADR 
|Mountain                    |  | 214       |        | $                              | 36.43     |           | 73.3 | %                              |     | $ | 49.69     |  | 214       |  | $         | 38.18 |  | 79.6 | % |  | $ | 47.95
|West North Central          |  | 167       |        |                                | 28.48     |           | 54.8 | %                              |     |   | 51.96     |  |          |  |           |      |  |     |   |  |   |     
|East North Central          |  | 200       |        |                                | 30.97     |           | 67.3 | %                              |     |   | 46.02     |  | 117       |  |           | 30.68 |  | 75.1 | % |  |   | 40.88
|Middle Atlantic/New England |  | 63        |        |                                | 26.25     |           | 42.6 | %                              |     |   | 61.70     |  | 63        |  |           | 28.91 |  | 55.0 | % |  |   | 52.57
|South Atlantic              |  | 2,518     |        |                                | 26.76     |           | 58.9 | %                              |     |   | 45.41     |  | 2,518     |  |           | 33.79 |  | 68.0 | % |  |   | 49.70
|East South Central          |  | 637       |        |                                | 26.70     |           | 52.1 | %                              |     |   | 51.26     |  | 151       |  |           | 26.59 |  | 79.8 | % |  |   | 33.32
|West South Central          |  | 324       |        |                                | 27.66     |           | 61.2 | %                              |     |   | 45.18     |  | 324       |  |           | 32.66 |  | 77.3 | % |  |   | 42.27
|                            |  |           |        |                                |           |           |      |                                |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Acquisitions          |  | 4,123     |        | $                              | 27.59     |           | 58.8 | %                              |     | $ | 46.93     |  | 3,387     |  | $         | 33.65 |  | 71.0 | % |  | $ | 47.40
|                            |  |           |        |                                |           |           |      |                                |     |   |           |  |           |  |           |       |  |      |   |  |   |      
|Total Hotel Portfolio       |  | 10,886    |        | $                              | 30.72     |           | 61.6 | %                              |     | $ | 49.90     |  | 10,150    |  | $         | 32.77 |  | 63.6 | % |  | $ | 51.53
|                            |  |           |        |                                |           |           |      |                                |     |   |           |  |           |  |           |       |  |      |   |  |   |      



|                               |  |                                                                                                 
|------------------------------ |  | ------------------------------------------------------------------------------------------------
|States included in the Regions |  |                                                                                                 
|Mountain                       |  | Idaho and Montana                                                                               
|West North Central             |  | Iowa, Kansas, Missouri, Nebraska and South Dakota                                               
|East North Central             |  | Indiana and Wisconsin                                                                           
|Middle Atlantic/New England    |  | Maine and Pennsylvania                                                                          
|South Atlantic                 |  | Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
|East South Central             |  | Alabama, Kentucky and Tennessee                                                                 
|West South Central             |  | Arkansas and Louisiana                                                                          



23



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
|------- | -------------------------------------------------------------------------------------------------



Our RevPAR, ADR, and Occupancy, by franchise affiliation, for the six months ended June 30, 2008
and 2007, were as follows:



|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|--------------------------- |  | --------- |  | ------------------------------ | ----- | --------- | ---- | ------------------------------ | --- | - | --------- |  | ------ |  | --------- | ----- |  | ---- | - |  | - | -----
|                            |  |           |  | Six months ended June 30, 2008 |       |           |      | Six months ended June 30, 2007
|Same Store Brand            |  | RoomCount |  | RevPAR                         |       | Occupancy |      |                                | ADR |   | RoomCount |  | RevPAR |  | Occupancy |       |  | ADR 
|Limited Service             |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Midscale w/o F&B            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Comfort Inn/ Comfort Suites |  | 1,628     |  | $                              | 41.51 |           | 60.2 | %                              |     | $ | 69.00     |  | 1,628  |  | $         | 43.79 |  | 62.0 | % |  | $ | 70.60
|Hampton Inn                 |  | 216       |  |                                | 62.15 |           | 70.2 | %                              |     |   | 88.57     |  | 216    |  |           | 65.04 |  | 74.3 | % |  |   | 87.49
|Holiday Inn Express         |  | 176       |  |                                | 45.02 |           | 63.4 | %                              |     |   | 71.03     |  | 176    |  |           | 42.77 |  | 62.2 | % |  |   | 68.78
|Other Midscale (1)          |  | 163       |  |                                | 49.86 |           | 72.3 | %                              |     |   | 68.98     |  | 163    |  |           | 52.64 |  | 73.0 | % |  |   | 72.13
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Total Midscale w/o F&B      |  | 2,183     |  |                                | 44.45 |           | 62.3 | %                              |     |   | 71.34     |  | 2,183  |  |           | 46.47 |  | 64.1 | % |  |   | 72.52
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Economy                     |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Days Inn                    |  | 58        |  |                                | 37.25 |           | 59.1 | %                              |     |   | 62.98     |  | 58     |  |           | 30.86 |  | 52.6 | % |  |   | 58.64
|Super 8                     |  | 3,067     |  |                                | 29.65 |           | 63.3 | %                              |     |   | 46.86     |  | 3,067  |  |           | 28.42 |  | 61.2 | % |  |   | 46.41
|Other Economy (2)           |  | 357       |  |                                | 32.20 |           | 52.0 | %                              |     |   | 61.96     |  | 357    |  |           | 30.16 |  | 46.0 | % |  |   | 65.58
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Total Economy               |  | 3,482     |  |                                | 30.04 |           | 62.0 | %                              |     |   | 48.42     |  | 3,482  |  |           | 28.64 |  | 59.5 | % |  |   | 48.11
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Total Midscale/Economy      |  | 5,665     |  |                                | 35.59 |           | 62.1 | %                              |     |   | 57.28     |  | 5,665  |  |           | 35.51 |  | 61.3 | % |  |   | 57.94
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Extended Stay (3)           |  | 1,098     |  |                                | 17.30 |           | 68.9 | %                              |     |   | 25.11     |  | 1,098  |  |           | 17.44 |  | 65.7 | % |  |   | 26.55
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Total Same Store            |  | 6,763     |  | $                              | 32.63 |           | 63.2 | %                              |     | $ | 51.59     |  | 6,763  |  | $         | 32.58 |  | 62.0 | % |  | $ | 52.54
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|                            |  |           |  |                                |       |           |      |                               
|Acquisitions Brand          |  | RoomCount |  | RevPAR                         |       | Occupancy |      |                                | ADR |   | RoomCount |  | RevPAR |  | Occupancy |       |  | ADR 
|Limited Service             |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Midscale w/o F&B            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Comfort Inn/ Comfort Suites |  | 409       |  | $                              | 42.33 |           | 55.0 | %                              |     | $ | 76.98     |  | 213    |  | $         | 51.27 |  | 68.2 | % |  | $ | 75.20
|Other Midscale              |  | 63        |  |                                | 27.74 |           | 47.6 | %                              |     |   | 58.29     |  |       |  |           |      |  |     |   |  |   |     
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Total Midscale w/o F&B      |  | 472       |  |                                | 40.38 |           | 54.0 | %                              |     |   | 74.78     |  | 213    |  |           | 51.27 |  | 68.2 | % |  |   | 75.20
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Days Inn                    |  | 1,089     |  |                                | 29.14 |           | 56.7 | %                              |     |   | 51.43     |  | 800    |  |           | 35.66 |  | 70.6 | % |  |   | 50.50
|Masters Inn                 |  | 1,947     |  |                                | 22.71 |           | 58.1 | %                              |     |   | 39.05     |  | 1,842  |  |           | 26.19 |  | 67.2 | % |  |   | 39.00
|Super 8                     |  | 488       |  |                                | 34.30 |           | 70.5 | %                              |     |   | 48.67     |  | 405    |  |           | 36.72 |  | 78.6 | % |  |   | 46.72
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Total Economy               |  | 3,524     |  |                                | 26.30 |           | 59.4 | %                              |     |   | 44.28     |  | 3,047  |  |           | 32.46 |  | 71.8 | % |  |   | 45.19
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Total Midscale/Economy      |  | 3,996     |  |                                | 27.96 |           | 58.8 | %                              |     |   | 47.59     |  | 3,260  |  |           | 34.29 |  | 71.5 | % |  |   | 47.96
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Extended Stay (4)           |  | 127       |  |                                | 15.73 |           | 59.8 | %                              |     |   | 26.29     |  | 127    |  |           | 18.38 |  | 59.3 | % |  |   | 31.01
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Total Acquisitions          |  | 4,123     |  | $                              | 27.59 |           | 58.8 | %                              |     | $ | 46.93     |  | 3,387  |  | $         | 33.65 |  | 71.0 | % |  | $ | 47.40
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      
|Total Hotel Portfolio       |  | 10,886    |  | $                              | 30.72 |           | 61.6 | %                              |     | $ | 49.90     |  | 10,150 |  | $         | 32.77 |  | 63.6 | % |  | $ | 51.53
|                            |  |           |  |                                |       |           |      |                                |     |   |           |  |        |  |           |       |  |      |   |  |   |      



|1 | Includes Ramada Limited and Sleep Inn brands
|- | --------------------------------------------

|2 | Includes Guesthouse Inn and independent hotels
|- | ----------------------------------------------

|3 | Includes seven Savannah Suites
|- | ------------------------------

|4 | Tara Inn & Suites
|- | -----------------



24



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:
|------- | -------------------------------------------------------------------------------------------------



Adoption of New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having previously concluded in the those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new
fair value measurements. This guidance was issued to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. Adoption on January 1, 2008 did not have a material effect on the Company. The Company has deferred the application of FAS 157 related to non-financial assets and liabilities.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS
159). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the guidance is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. FAS 159 is effective as of the beginning of the first fiscal year that begins after
November 15, 2007. Adoption on January 1, 2008 did not have a material effect on the Company since the Company did not elect to measure any financial assets or liabilities at fair value.

Recently Issued Accounting Pronouncements

In
December 2007, the FASB issued revised SFAS No. 141, Business Combinations (FAS 141(R)). FAS 141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquirer; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The objective of the guidance is to improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about a business combination and its effects. FAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Adoption on January 1, 2009 will impact the Companys accounting for future acquisitions and related transaction costs.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (FAS 160). FAS
160 establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within
equity, but separate from the parents equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes
in a parents ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value; and entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The objective of the guidance is to
improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. FAS 160 is effective for fiscal years beginning on or after December 15, 2008.
Management is currently evaluating the impact FAS 160 will have on the Companys consolidated financial statements.



25



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Part I. FINANCIAL INFORMATION, CONTINUED:



|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

There has been no material change in our market risk exposure subsequent to December 31, 2007.

Item 4.
CONTROLS AND PROCEDURES

Evaluation was performed under the supervision of management, with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective to provide reasonable assurance
that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 was (1) accumulated and communicated to management, including the Companys Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms. No changes in
the Companys internal controls over financial reporting occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting.



26



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##### Table of Contents

Part II. OTHER INFORMATION:



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

We held our 2008 annual meeting of shareholders on Thursday, May 22, 2008. The vote for each matter voted upon at the meeting is set forth below.

Eight nominees were elected to serve as directors of the Company for an annual term by the following vote:



|                     |  |            |  |          
|-------------------- |  | ---------- |  | ---------
|                     |  | For        |  | Withheld 
|Paul J. Schulte      |  | 19,289,371 |  | 111,041  
|Steve H. Borgmann    |  | 17,353,923 |  | 2,046,489
|Jeffrey M. Zwerdling |  | 17,368,045 |  | 2,032,367
|George R. Whittemore |  | 17,304,983 |  | 2,095,429
|Loren Steele         |  | 19,184,855 |  | 215,557  
|Joseph Caggiano      |  | 17,315,326 |  | 2,085,086
|Allen L. Dayton      |  | 17,201,430 |  | 2,198,982
|Patrick J. Jung      |  | 17,310,767 |  | 2,089,645

Ratification of the appointment of KPMG LLP as the Companys independent registered public accounting firm
for 2008:



|        |  |           
|------- |  | ----------
|FOR     |  | 17,309,678
|AGAINST |  | 151,236   
|ABSTAIN |  | 1,939,497 

Item 5. Other Information

Summary Financial Data

The following sets forth
summary financial data that has been prepared by the Company without audit. We believe the following data should be used as a supplement to the consolidated statements of operations and should be read in conjunction with our Annual Report on Form
10-K for the year ended December 31, 2007.



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Supertel Hospitality, Inc., and Subsidiaries

(In thousands, except per share and statistical data)



|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                              |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|                                                                                              |  | 2008                       |        |   | 2007                     |   |         | 2008 |  |   | 2007    |  
|Income from continuing operations before income taxes                                         |  | $                          | 2,457  |   |                          | $ | 2,844   |      |  | $ | 866     |   |  | $ | 1,901   |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net income available to common shareholders                                                   |  | $                          | 1,887  |   |                          | $ | 2,158   |      |  | $ | 808     |   |  | $ | 1,475   |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings per sharebasic                                                                      |  | $                          | 0.09   |   |                          | $ | 0.11    |      |  | $ | 0.04    |   |  | $ | 0.07    |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings per sharediluted                                                                    |  | $                          | 0.09   |   |                          | $ | 0.11    |      |  | $ | 0.04    |   |  | $ | 0.07    |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Adjusted EBITDA (1)                                                                           |  | $                          | 9,833  |   |                          | $ | 9,353   |      |  | $ | 15,468  |   |  | $ | 13,136  |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|FFO available to common shareholders (2)                                                      |  | $                          | 5,629  |   |                          | $ | 5,176   |      |  | $ | 8,127   |   |  | $ | 7,077   |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|FFO per sharebasic                                                                           |  |                            | 0.27   |   |                          |   | 0.26    |      |  |   | 0.39    |   |  |   | 0.36    |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|FFO per sharediluted                                                                         |  |                            | 0.26   |   |                          |   | 0.24    |      |  |   | 0.38    |   |  |   | 0.34    |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net cash flow:                                                                                |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Provided by operating activities                                                              |  | $                          | 8,448  |   |                          | $ | 9,446   |      |  | $ | 13,534  |   |  | $ | 10,139  |  
|Used by investing activities                                                                  |  | $                          | (3,188 | ) |                          | $ | (71,350 | )    |  | $ | (28,785 | ) |  | $ | (96,931 | )
|Provided (used) by financing activities                                                       |  | $                          | (5,673 | ) |                          | $ | 63,297  |      |  | $ | 15,517  |   |  | $ | 84,396  |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Weighted average number of shares outstanding for:                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|calculation of earnings per sharebasic                                                       |  |                            | 20,826 |   |                          |   | 20,083  |      |  |   | 20,764  |   |  |   | 19,866  |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|calculation of earnings per sharediluted                                                     |  |                            | 20,826 |   |                          |   | 20,105  |      |  |   | 20,764  |   |  |   | 19,888  |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Weighted average number of shares outstanding for:                                            |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|calculation of FFO per sharebasic                                                            |  |                            | 20,826 |   |                          |   | 20,083  |      |  |   | 20,764  |   |  |   | 19,866  |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|calculation of FFO per sharediluted                                                          |  |                            | 22,346 |   |                          |   | 22,356  |      |  |   | 22,347  |   |  |   | 22,335  |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|RECONCILIATION OF WEIGHTED AVERAGE NUMBER OF SHARES FOR EPS DILUTED TO FFO PER SHARE DILUTED: |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|EPS diluted shares                                                                            |  |                            | 20,826 |   |                          |   | 20,105  |      |  |   | 20,764  |   |  |   | 19,888  |  
|Common stock issuable upon exercise or conversion of:                                         |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Warrants                                                                                      |  |                            |       |   |                          |   | 32      |      |  |   |        |   |  |   | 23      |  
|Series A Preferred Stock                                                                      |  |                            | 1,520  |   |                          |   | 2,219   |      |  |   | 1,583   |   |  |   | 2,424   |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|FFO per share diluted shares                                                                  |  |                            | 22,346 |   |                          |   | 22,356  |      |  |   | 22,347  |   |  |   | 22,335  |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA                                               |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net income available to common shareholders                                                   |  | $                          | 1,887  |   |                          | $ | 2,158   |      |  | $ | 808     |   |  | $ | 1,475   |  
|Interest                                                                                      |  |                            | 3,441  |   |                          |   | 3,392   |      |  |   | 7,101   |   |  |   | 5,491   |  
|Income tax (benefit) expense                                                                  |  |                            | 334    |   |                          |   | 438     |      |  |   | (364    | ) |  |   | (112    | )
|Depreciation and amortization                                                                 |  |                            | 3,741  |   |                          |   | 3,018   |      |  |   | 7,320   |   |  |   | 5,602   |  
|Minority interest                                                                             |  |                            | 194    |   |                          |   | 99      |      |  |   | 181     |   |  |   | 142     |  
|Preferred stock dividends                                                                     |  |                            | 236    |   |                          |   | 248     |      |  |   | 422     |   |  |   | 538     |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Adjusted EBITDA (1)                                                                           |  | $                          | 9,833  |   |                          | $ | 9,353   |      |  | $ | 15,468  |   |  | $ | 13,136  |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|RECONCILIATION OF NET INCOME TO FFO                                                           |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net income available to common shareholders                                                   |  | $                          | 1,887  |   |                          | $ | 2,158   |      |  | $ | 808     |   |  | $ | 1,475   |  
|Depreciation and amortization                                                                 |  |                            | 3,741  |   |                          |   | 3,018   |      |  |   | 7,320   |   |  |   | 5,602   |  
|Net (gain) loss on disposition of assets                                                      |  |                            | 1      |   |                          |   |        |      |  |   | (1      | ) |  |   |        |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|FFO available to common shareholders (2)                                                      |  | $                          | 5,629  |   |                          | $ | 5,176   |      |  | $ | 8,127   |   |  | $ | 7,077   |  
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|ADDITIONAL INFORMATION                                                                        |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Average Daily Rate                                                                            |  | $                          | 51.59  |   |                          | $ | 52.00   |      |  | $ | 49.90   |   |  | $ | 51.53   |  
|Revenue Per Available Room                                                                    |  | $                          | 34.04  |   |                          | $ | 35.82   |      |  | $ | 30.72   |   |  | $ | 32.77   |  
|Occupancy                                                                                     |  |                            | 66.0   | % |                          |   | 68.9    | %    |  |   | 61.6    | % |  |   | 63.6    | %
|                                                                                              |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  



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(1) Adjusted EBITDA is a non-GAAP financial measure. We calculate Adjusted EBITDA by adding back to
net earnings (loss) available to common shareholders certain non-operating expenses and non-cash charges which are based on historical cost accounting and we believe may be of limited significance in evaluating current performance. We believe these
adjustments can help eliminate the accounting effects of depreciation and amortization and financing decisions and facilitate comparisons of core operating profitability between periods, even though Adjusted EBITDA also does not represent an amount
that accrues directly to common shareholders. In calculating Adjusted EBITDA, we also add back preferred stock dividends, which are a cash charge.

Adjusted EBITDA doesnt represent cash generated from operating activities determined by GAAP and should not be considered as an alternative to net income, cash flow from operations or any other operating performance measure prescribed
by GAAP. Adjusted EBITDA is not a measure of our liquidity, nor is Adjusted EBITDA indicative of funds available to fund our cash needs, including our ability to make cash distributions. Neither measurement reflects cash expenditures for long-term
assets and other items that have been and will be incurred. Adjusted EBITDA may include funds that may not be available for managements discretionary use due to functional requirements to conserve funds for capital expenditures, property
acquisitions, and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or the evaluation of our operating performance. Adjusted
EBITDA, as presented, may not be comparable to similarly titled measures of other companies.

(2) FFO is a non-GAAP financial measure. We
consider FFO to be a market accepted measure of an equity REITs operating performance, which is necessary, along with net earnings (loss), for an understanding of our operating results. FFO, as defined under the National Association of Real
Estate Investment Trusts (NAREIT) standards, consists of net income computed in accordance with accounting principles generally accepted in the United States of America (GAAP), excluding gains (or losses) from sales of real estate
assets, plus depreciation and amortization of real estate assets. We believe our method of calculating FFO complies with the NAREIT definition. FFO does not represent amounts available for managements discretionary use because of needed
capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor is it
indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. All REITs do not calculate FFO in the same manner; therefore, our calculation may not be the same as the calculation of FFO for
similar REITs.

We use FFO as a performance measure to facilitate a periodic evaluation of our operating results relative to those of our
peers, who, like us, are typically members of NAREIT. We consider FFO a useful additional measure of performance for an equity REIT because it facilitates an understanding of the operating performance of our properties without giving effect to real
estate depreciation and amortization, which assume that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO provides a meaningful
indication of our performance.



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



|            |  |                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                  
|3.1         |  | Second Amended and Restated Articles of the Company, as amended                                                              
|            | 
|10.1        |  | Amendment dated July 15, 2008 to Hotel Management Agreement dated May 16, 2007 Between TRS Leasing, Inc. and HLC Hotels, Inc.
|            | 
|31.1        |  | Section 302 Certificate of Chief Executive Officer                                                                           
|            | 
|31.2        |  | Section 302 Certificate of Chief Financial Officer                                                                           
|            | 
|32.1        |  | Section 906 Certifications of Chief Executive Officer and Chief Financial Officer                                            



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SIGNATURES

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



|                           |  |                                      
|-------------------------- |  | -------------------------------------
|SUPERTEL HOSPITALITY, INC.
|                           | 
|By:                        |  | /s/ Paul J. Schulte                  
|                           |  | Paul J. Schulte                      
|                           |  | President and Chief Executive Officer

Dated this 1stday of August, 2008



|    |  |                                      
|--- |  | -------------------------------------
|By: |  | /s/ Donavon A. Heimes                
|    |  | Donavon A. Heimes                    
|    |  | Chief Financial Officer and Secretary

Dated this 1stday of August, 2008



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|Exhibits | 
|-------- | 



|            |  |                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                  
|3.1         |  | Second Amended and Restated Articles of the Company, as amended                                                              
|            | 
|10.1        |  | Amendment dated July 15, 2008 to Hotel Management Agreement dated May 16, 2007 Between TRS Leasing, Inc. and HLC Hotels, Inc.
|            | 
|31.1        |  | Section 302 Certificate of Chief Executive Officer                                                                           
|            | 
|31.2        |  | Section 302 Certificate of Chief Financial Officer                                                                           
|            | 
|32.1        |  | Section 906 Certifications of Chief Executive Officer and Chief Financial Officer                                            



32