##### Table of Contents





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 March 31, 2011
|- | -------------------------------------------------------------------------------------------------------------------------------------

or



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from
 to .
|- | -----------------------------------------------------------------------------------------------------------------------------

Commission File Number: 001-34087





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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.



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

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
April 27, 2011, there were 22,944,234 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                                                                               |  |            |    | 
|         |  |                                                                                                   
|         |  | Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010                   |  |            | 3  | 
|         |  |                                                                                                   
|         |  | Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 |  |            | 4  | 
|         |  |                                                                                                   
|         |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 |  |            | 5  | 
|         |  |                                                                                                   
|         |  | Notes to Consolidated Financial Statements                                                         |  |            | 6  | 
|         |  |                                                                                                   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  |            | 18 | 
|         |  |                                                                                                   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  |            | 35 | 
|         |  |                                                                                                   
|Item 4.  |  | Controls and Procedures                                                                            |  |            | 35 | 
|         |  |                                                                                                   
|Part II. |  | OTHER INFORMATION                                                                                  |  |            |    | 
|         |  |                                                                                                   
|Item 1.  |  | Legal Proceedings                                                                                  |  |            | 36 | 
|         |  |                                                                                                   
|Item 1A. |  | Risk Factors                                                                                       |  |            | 36 | 
|         |  |                                                                                                   
|Item 5.  |  | Other Information                                                                                  |  |            | 37 | 
|         |  |                                                                                                   
|Item 6.  |  | Exhibits                                                                                           |  |            | 40 | 



2



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##### Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share and share data)



|                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                      |  | As of         |        
|                                                                                                                                                                      |  | March 31,2011 |         |   | December 31,2010 |  
|                                                                                                                                                                      |  | (unaudited)   |         |   |                  |  
|ASSETS                                                                                                                                                                |  |               |         |   |                  |   |         |  
|Investments in hotel properties                                                                                                                                       |  | $             | 300,624 |   |                  | $ | 299,834 |  
|Less accumulated depreciation                                                                                                                                         |  |               | 93,490  |   |                  |   | 90,972  |  
|                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|                                                                                                                                                                      |  |               | 207,134 |   |                  |   | 208,862 |  
|                                                                                                                                                                      |  |              
|Cash and cash equivalents                                                                                                                                             |  |               | 319     |   |                  |   | 333     |  
|Accounts receivable, net of allowance for doubtful accounts of $123 and $133                                                                                          |  |               | 1,893   |   |                  |   | 1,717   |  
|Prepaid expenses and other assets                                                                                                                                     |  |               | 14,837  |   |                  |   | 13,372  |  
|Deferred financing costs, net                                                                                                                                         |  |               | 918     |   |                  |   | 988     |  
|Investment in hotel properties, held for sale, net                                                                                                                    |  |               | 28,764  |   |                  |   | 31,372  |  
|                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|                                                                                                                                                                      |  | $             | 253,865 |   |                  | $ | 256,644 |  
|                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|LIABILITIES AND EQUITY                                                                                                                                                |  |               |         |   |                  |   |         |  
|LIABILITIES                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Accounts payable, accrued expenses and other liabilities                                                                                                              |  | $             | 18,561  |   |                  | $ | 17,732  |  
|Debt related to hotel properties held for sale                                                                                                                        |  |               | 27,052  |   |                  |   | 28,175  |  
|Long-term debt                                                                                                                                                        |  |               | 148,429 |   |                  |   | 146,835 |  
|                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|                                                                                                                                                                      |  |               | 194,042 |   |                  |   | 192,742 |  
|                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|Redeemable noncontrolling interest in consolidated partnership, at redemption value                                                                                   |  |               | 511     |   |                  |   | 511     |  
|                                                                                                                                                                      |  |              
|Redeemable preferred stock                                                                                                                                            |  |               |         |   |                  |   |         |  
|10% Series B, 800,000 shares authorized; $.01 par value,
332,500 shares outstanding, liquidation preference of $8,312                                                 |  |               | 7,662   |   |                  |   | 7,662   |  
|                                                                                                                                                                      |  |              
|EQUITY                                                                                                                                                                |  |               |         |   |                  |   |         |  
|Shareholders equity                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Preferred stock, 40,000,000 shares authorized; 8% Series A, 2,500,000 shares authorized; $.01 par value, 803,270 shares
outstanding, liquidation preference of $8,033 |  |               | 8       |   |                  |   | 8       |  
|Common stock, $.01 par value, 100,000,000 shares authorized; 22,917,509 shares outstanding.                                                                           |  |               | 229     |   |                  |   | 229     |  
|Common stock warrants                                                                                                                                                 |  |               | 252     |   |                  |   | 252     |  
|Additional paid-in capital                                                                                                                                            |  |               | 121,398 |   |                  |   | 121,384 |  
|Distributions in excess of retained earnings                                                                                                                          |  |               | (70,547 | ) |                  |   | (66,479 | )
|                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|Total shareholders equity                                                                                                                                            |  |               | 51,340  |   |                  |   | 55,394  |  
|Noncontrolling interest                                                                                                                                               |  |               |         |   |                  |   |         |  
|Noncontrolling interest in consolidated partnership, redemption value $253 and $250                                                                                   |  |               | 310     |   |                  |   | 335     |  
|                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|                                                                                                                                                                      |  |              
|Total equity                                                                                                                                                          |  |               | 51,650  |   |                  |   | 55,729  |  
|                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|                                                                                                                                                                      |  |              
|COMMITMENTS AND CONTINGENCIES                                                                                                                                         |  |               |         |   |                  |   |         |  
|                                                                                                                                                                      |  | $             | 253,865 |   |                  | $ | 256,644 |  
|                                                                                                                                                                      |  |               |         |   |                  |   |         |  

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited  in thousands, except per share data)



|                                                                                                    |  |                             |        |   |      |   |        |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                    |  | Three Months EndedMarch 31, |       
|                                                                                                    |  | 2011                        |        |   | 2010 |  
|REVENUES                                                                                            |  |                             |        |   |      |   |        |  
|Room rentals and other hotel services                                                               |  | $                           | 18,065 |   |      | $ | 17,669 |  
|                                                                                                    |  |                             |        |   |      |   |        |  
|                                                                                                    |  |                            
|EXPENSES                                                                                            |  |                             |        |   |      |   |        |  
|Hotel and property operations                                                                       |  |                             | 15,413 |   |      |   | 14,779 |  
|Depreciation and amortization                                                                       |  |                             | 2,621  |   |      |   | 2,842  |  
|General and administrative                                                                          |  |                             | 1,103  |   |      |   | 999    |  
|Termination cost                                                                                    |  |                             | 540    |   |      |   |       |  
|                                                                                                    |  |                             |        |   |      |   |        |  
|                                                                                                    |  |                             | 19,677 |   |      |   | 18,620 |  
|                                                                                                    |  |                             |        |   |      |   |        |  
|                                                                                                    |  |                            
|EARNINGS BEFORE NET LOSS ON DISPOSITIONS OF ASSETS, OTHER INCOME, INTEREST EXPENSE AND INCOME TAXES |  |                             | (1,612 | ) |      |   | (951   | )
|                                                                                                    |  |                            
|Net loss on dispositions of assets                                                                  |  |                             | (6     | ) |      |   | (16    | )
|Other income                                                                                        |  |                             | 85     |   |      |   | 27     |  
|Interest expense                                                                                    |  |                             | (2,580 | ) |      |   | (2,444 | )
|                                                                                                    |  |                             |        |   |      |   |        |  
|                                                                                                    |  |                            
|LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                 |  |                             | (4,113 | ) |      |   | (3,384 | )
|                                                                                                    |  |                            
|Income tax benefit                                                                                  |  |                             | 892    |   |      |   | 730    |  
|                                                                                                    |  |                             |        |   |      |   |        |  
|                                                                                                    |  |                            
|LOSS FROM CONTINUING OPERATIONS                                                                     |  |                             | (3,221 | ) |      |   | (2,654 | )
|                                                                                                    |  |                            
|Loss from discontinued operations, net of tax                                                       |  |                             | (490   | ) |      |   | (363   | )
|                                                                                                    |  |                             |        |   |      |   |        |  
|                                                                                                    |  |                            
|NET LOSS                                                                                            |  |                             | (3,711 | ) |      |   | (3,017 | )
|                                                                                                    |  |                            
|Noncontrolling interest                                                                             |  |                             | 11     |   |      |   | 7      |  
|                                                                                                    |  |                             |        |   |      |   |        |  
|                                                                                                    |  |                            
|NET LOSS ATTRIBUTABLE TO CONTROLLING INTERESTS                                                      |  |                             | (3,700 | ) |      |   | (3,010 | )
|                                                                                                    |  |                            
|Preferred stock dividends                                                                           |  |                             | (368   | ) |      |   | (368   | )
|                                                                                                    |  |                             |        |   |      |   |        |  
|                                                                                                    |  |                            
|NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                                                        |  | $                           | (4,068 | ) |      | $ | (3,378 | )
|                                                                                                    |  |                             |        |   |      |   |        |  
|                                                                                                    |  |                            
|NET EARNINGS PER COMMON SHARE - BASIC AND DILUTED                                                   |  |                             |        |   |      |   |        |  
|EPS from continuing operations                                                                      |  | $                           | (0.16  | ) |      | $ | (0.14  | )
|                                                                                                    |  |                             |        |   |      |   |        |  
|EPS from discontinued operations                                                                    |  | $                           | (0.02  | ) |      | $ | (0.01  | )
|                                                                                                    |  |                             |        |   |      |   |        |  
|EPS basic and diluted                                                                               |  | $                           | (0.18  | ) |      | $ | (0.15  | )
|                                                                                                    |  |                             |        |   |      |   |        |  

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited  in thousands)



|                                                                                          |  |                             |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                          |  | Three Months EndedMarch 31, |       
|                                                                                          |  | 2011                        |        |   | 2010 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                             |        |   |      |   |        |  
|Net loss                                                                                  |  | $                           | (3,711 | ) |      | $ | (3,017 | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |                             |        |   |      |   |        |  
|Depreciation and amortization                                                             |  |                             | 2,621  |   |      |   | 3,040  |  
|Amortization of intangible assets and deferred financing costs                            |  |                             | 118    |   |      |   | 147    |  
|Loss on dispositions of assets                                                            |  |                             | 19     |   |      |   | 36     |  
|Amortization of stock option expense                                                      |  |                             | 14     |   |      |   | 12     |  
|Provision for impairment loss                                                             |  |                             | 449    |   |      |   | 120    |  
|Deferred income taxes                                                                     |  |                             | (1,073 | ) |      |   | (1,106 | )
|Changes in operating assets and liabilities:                                              |  |                             |        |   |      |   |        |  
|Increase in assets                                                                        |  |                             | (568   | ) |      |   | (1,464 | )
|Increase in liabilities                                                                   |  |                             | 829    |   |      |   | 2,322  |  
|                                                                                          |  |                             |        |   |      |   |        |  
|Net cash (used in) provided by operating activities                                       |  |                             | (1,302 | ) |      |   | 90     |  
|                                                                                          |  |                             |        |   |      |   |        |  
|                                                                                          |  |                            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                             |        |   |      |   |        |  
|Additions to hotel properties                                                             |  |                             | (990   | ) |      |   | (505   | )
|Proceeds from sale of hotel assets                                                        |  |                             | 2,237  |   |      |   | 2,644  |  
|                                                                                          |  |                             |        |   |      |   |        |  
|Net cash provided by investing activities                                                 |  |                             | 1,247  |   |      |   | 2,139  |  
|                                                                                          |  |                             |        |   |      |   |        |  
|                                                                                          |  |                            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                             |        |   |      |   |        |  
|Deferred financing costs                                                                  |  |                             | (47    | ) |      |   | (11    | )
|Principal payments on long-term debt                                                      |  |                             | (3,585 | ) |      |   | (2,606 | )
|Proceeds from long-term debt, net                                                         |  |                             | 4,055  |   |      |   | 762    |  
|Distributions to noncontrolling interest                                                  |  |                             | (14    | ) |      |   | (14    | )
|Dividends paid to preferred shareholders                                                  |  |                             | (368   | ) |      |   | (368   | )
|                                                                                          |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                                       |  |                             | 41     |   |      |   | (2,237 | )
|                                                                                          |  |                             |        |   |      |   |        |  
|                                                                                          |  |                            
|Decrease in cash and cash equivalents                                                     |  |                             | (14    | ) |      |   | (8     | )
|                                                                                          |  |                            
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                            |  |                             | 333    |   |      |   | 428    |  
|                                                                                          |  |                             |        |   |      |   |        |  
|                                                                                          |  |                            
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                  |  | $                           | 319    |   |      | $ | 420    |  
|                                                                                          |  |                             |        |   |      |   |        |  
|                                                                                          |  |                            
|SUPPLEMENTAL CASH FLOW INFORMATION                                                        |  |                             |        |   |      |   |        |  
|Interest paid, net of amounts capitalized                                                 |  | $                           | 2,985  |   |      | $ | 2,928  |  
|                                                                                          |  |                             |        |   |      |   |        |  
|                                                                                          |  |                            
|SCHEDULE OF NONCASH FINANCING ACTIVITIES                                                  |  |                             |        |   |      |   |        |  
|Dividends declared preferred                                                              |  | $                           | 368    |   |      | $ | 368    |  
|                                                                                          |  |                             |        |   |      |   |        |  

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 Months Ended March 31, 2011 and 2010

(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 95
properties with the exception of furniture, fixtures and equipment on 72 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 March 31, 2011 owned approximately 99% of the partnership interests in Supertel Limited Partnership. Supertel Limited Partnership is the general partner
in SBILP. At March 31, 2011, 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. References to we,
our, and us, herein refer to Supertel Hospitality, Inc., including as the context requires, its direct and indirect subsidiaries.

As of March 31, 2011, the Company owned 105 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, as amended, between TRS Lessee and Royco Hotels, the manager of 95 of the Companys hotels, provides
for Royco Hotels to operate and manage the hotels through December 31, 2011, with extension to December 31, 2016 upon achievement of average annual net operating income of at least 10% of the Companys investment in the hotels. Under
the agreement, Royco Hotels receives a base management fee ranging from 4.25% to 3.0% of gross hotel revenues as revenues increase above thresholds that range from up to $75 million to over $100 million, and an annual incentive fee of 10% of up to
the first $1 million of annual net operating income in excess of 10% of the Companys investment in the hotels, and 20% of the excess above $1 million. On March 25, 2011, Royco Hotels and the Company settled a lawsuit filed by Royco Hotels
against the Company. The settlement agreement between the parties provides that (a) the Company will pay an aggregate of $590,000 in varying amounts of installments through July 1, 2013 to Royco Hotels as financial settlement of the
lawsuit and fees owed to Royco Hotels as termination fees for hotels that have been sold, (b) Royco Hotels will permit the Company and new managers access to certain Royco Hotels employees and waive any prohibitions under the management
agreement with respect to such access, and (c) the management agreement will be terminated effective May 31, 2011.

On April 21, 2011, the Company through TRS Lessee entered into separate management agreements with Hospitality Management Advisors,
Inc. (HMA), Strand Development Company LLC (Strand) and Kinseth Hotel Corporation (Kinseth) as eligible independent operators to manage 95 of the Companys hotels commencing June 1, 2011. These hotels
are currently managed by Royco 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 Months Ended March 31, 2011 and 2010

(Unaudited)



HMA will manage 25 Company hotels in Arkansas, Louisiana, Tennessee, Kentucky, Indiana,
Virginia and Florida. Strand will manage the Companys seven economy extended-stay hotels as well as 17 additional Company hotels located in Georgia, Delaware, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia.
Kinseth will manage 46 Company hotels in eight states primarily in the Midwest. Each of the management agreements expire on May 31, 2014 and will renew for additional terms of one year unless either party to the agreement gives the other party
written notice of termination at least 90 days before the end of a term.

Each of HMA, Strand and Kinseth will receive a
monthly management fee with respect to the hotels they manage equal to 3.5% of the gross hotel income and 2.25% of hotel net operating income (NOI). NOI is equal to gross hotel income less operating expenses (exclusive of management
fees, certain insurance premiums and employee bonuses, and personal and real property taxes).

Supertel Limited Partnership
owns 10 hotels which are operated under the Masters Inn name. TRS, the lessee of the hotels, entered into a management agreement with HLC, an affiliate of the sellers of the 10 hotels. The management agreement, as amended, provides for HLC to
operate and manage the 10 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.

The management agreements generally require TRS Lessee to
fund debt service, working capital needs, capital expenditures and third-party operating expenses for the management companies excluding 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.

The hotel industry is seasonal in nature. Generally, occupancy
rates, revenues and operating results for hotels operating in the geographic areas in which we operate are greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located
in Florida, which experience peak demand in the first and fourth quarters of the year.

Consolidated Financial Statements

The Company has prepared the condensed consolidated balance sheet as of March 31, 2011, the condensed consolidated statements of
operations for the three months ended March 31, 2011 and 2010, and the condensed consolidated statements of cash flows for the three months ended March 31, 2011 and 2010 without audit, in conformity with U. S. generally accepted accounting
principles. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position as of March 31, 2011 and the results of operations and cash flows for
all periods presented. Balance sheet data as of December 31, 2010 has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Actual results could differ from those estimates.

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, 2010. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the operating results for the full year.



7



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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 Months Ended March 31, 2011 and 2010

(Unaudited)



Fair Value Measurements

We currently do not have any financial instruments that must be measured on a recurring basis under Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 820-10
Fair Value Measurements and Disclosures - Overall; however, we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures - Overall - Subsequent Measurement, for our nonfinancial assets which include our
held for sale hotels. We measure these assets using inputs from Level 3 of the fair value hierarchy.

Level 1 inputs are
unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than
quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated
inputs).

Level 3 includes unobservable inputs that reflect our assumptions about the assumptions that market participants
would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.

During the three months ended March 31, 2011 and 2010, Level 3 inputs were used to determine an impairment loss of $474,000 for nine hotels held for sale and $120,000 for one hotel held for sale,
respectively.

In accordance with ASC 360-10-35 Property Plant and EquipmentOverallSubsequent Measurement,
the Company determines the fair value of an asset held for sale based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market
approach. The estimated selling costs are based on our experience with similar asset sales.

The Company estimates the fair
value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt
obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. As of March 31, 2011, the carrying value and estimated fair value of the Companys debt, excluding debt related to
hotel properties held for sale, was $148.4 million and $151.5 million, respectively. As of December 31, 2010, the carrying value and estimated fair value of the Companys debt, excluding debt related to hotel properties held for sale, was
$146.8 million and $150.9 million, respectively. The carrying value of the Companys other financial instruments approximates fair value due to the short-term nature of these financial instruments.

Hotel Properties Held for Sale and Discontinued Operations

During the three months ended March 31, 2011, one of the Companys held for sale hotels was reclassified as held for use. The reclassification of this hotel was due to changes in the
propertys market condition. At March 31, 2011 the Company had sixteen hotels identified that it intends to sell and that met the Companys criteria to be classified as held for sale. Nine of the hotels had an impairment loss



8



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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 Months Ended March 31, 2011 and 2010

(Unaudited)



recognized during the three months ended March 31, 2011, in the amount of $474,000. The Company also recorded recovery of $25,000 of previously recorded impairment on one hotel at the time
of sale. The fair value of an asset held for sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The
estimated selling costs are based on our experience with similar asset sales. We record impairment charges and write down the carrying value of an asset if the carrying value exceeds the estimated selling price less costs to sell.

In accordance with FASB ASC 205-20 Presentation of Financial Statements  Discontinued Operations, gains, losses and
impairment losses on hotel properties sold or classified as held for sale are presented in discontinued operations. The operating results of the hotels held for sale and sold are included in discontinued operations and are summarized below. The
operating results for the three months ended March 31, 2011 include sixteen hotels held for sale and one hotel that was sold. The operating results for the three months ended March 31, 2010 include sixteen hotels held for sale, one hotel
that was sold in 2011, and nine hotels that were sold in 2010 (in thousands):



|                                       |  |                             |        |   |      |   |        |  
|-------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                       |  | Three Months EndedMarch 31, |       
|                                       |  | 2011                        |        |   | 2010 |  
|Revenues                               |  | $                           | 3,510  |   |      | $ | 4,053  |  
|Hotel and property operations expenses |  |                             | (3,146 | ) |      |   | (3,843 | )
|Interest expense                       |  |                             | (523   | ) |      |   | (611   | )
|Depreciation expense                   |  |                             |       |   |      |   | (198   | )
|Net loss on disposition of assets      |  |                             | (13    | ) |      |   | (20    | )
|General and administrative expense     |  |                             | (50    | ) |      |   |       |  
|Impairment loss                        |  |                             | (449   | ) |      |   | (120   | )
|Income tax benefit                     |  |                             | 181    |   |      |   | 376    |  
|                                       |  |                             |        |   |      |   |        |  
|                                       |  | $                           | (490   | ) |      | $ | (363   | )
|                                       |  |                             |        |   |      |   |        |  



9



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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 Months Ended March 31, 2011 and 2010

(Unaudited)



Earnings Per Share

Basic earnings per share (EPS) is computed by dividing earnings attributable 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 per share data)                |  | Three months endedMarch 31, |           
|                                                             |  | 2011                        |            |   | 2010 |  
|                                                             |  |                            
|Basic and Diluted Earnings per Share Calculation:            |  |                             |            |   |      |   |            |  
|                                                             |  |                            
|Numerator:                                                   |  |                             |            |   |      |   |            |  
|Net loss attributable to common shareholders:                |  |                             |            |   |      |   |            |  
|Continuing operations                                        |  | $                           | (3,581     | ) |      | $ | (3,017     | )
|Discontinued operations                                      |  |                             | (487       | ) |      |   | (361       | )
|                                                             |  |                             |            |   |      |   |            |  
|Net loss attributable to common shareholders - total         |  | $                           | (4,068     | ) |      | $ | (3,378     | )
|                                                             |  |                            
|Denominator:                                                 |  |                             |            |   |      |   |            |  
|Weighted average number of common shares - basic and diluted |  |                             | 22,917,509 |   |      |   | 22,002,322 |  
|                                                             |  |                            
|Basic and Diluted Earnings Per Common Share:                 |  |                             |            |   |      |   |            |  
|Continuing operations                                        |  | $                           | (0.16      | ) |      | $ | (0.14      | )
|Discontinued operations                                      |  |                             | (0.02      | ) |      |   | (0.01      | )
|                                                             |  |                             |            |   |      |   |            |  
|Total - basic and diluted                                    |  | $                           | (0.18      | ) |      | $ | (0.15      | )
|                                                             |  |                             |            |   |      |   |            |  

Noncontrolling Interest of Common and Preferred Units in SLP

At March 31, 2011 and 2010 there were 158,161 and 158,161, respectively, 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 51,035 shares of SLP preferred operating units held by the limited partners, as of March 31, 2011 and 2010, are antidilutive.

Preferred Stock of SHI

There were 803,270 shares of Series A Preferred Stock that remained outstanding at March 31, 2011 and 2010. At March 31, 2011 and 2010 there were 332,500 shares of Series B preferred stock
outstanding. There are no convertible provisions for Series A or 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 months ended March 31, 2011 and 2010 totaled 255,143 and 230,715, respectively, all of which are assumed to be purchased with proceeds from the exercise of stock options and are antidilutive.

Warrants

There were
299,403 warrants issued in a private placement to accredited investors on May 10, 2010. Each warrant allows the holder to purchase a share of common stock at $2.50 per share. The warrants will expire on May 10, 2013. The exercise price of
the warrants exceeds the market price of the common stock and as a result is antidilutive and excluded from the computation of diluted earnings per share.



10



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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 Months Ended March 31, 2011 and 2010

(Unaudited)



Debt Financing

A summary of the Companys long term debt as of March 31, 2011 is as follows (in thousands):



|                                                          |  |         |         |  |              |  |      |          |  |                
|--------------------------------------------------------- |  | ------- | ------- |  | ------------ |  | ---- | -------- |  | ---------------
|Fixed Rate Debt                                           |  | Balance |         |  | InterestRate |  |      | Maturity
|                                                          |  |         |        
|Lender                                                    |  |         |         |  |              |  |      |          |  |                
|Elkhorn Valley Bank                                       |  | $       | 1,950   |  |              |  | 5.90 | %        |  | 10/2011        
|Great Western Bank                                        |  |         | 11,735  |  |              |  | 5.50 | %        |  | 12/2011        
|GE Capital                                                |  |         | 306     |  |              |  | 5.00 | %        |  | 1/2012         
|First National Bank of Omaha                              |  |         | 840     |  |              |  | 5.00 | %        |  | 3/2012         
|Great Western Bank                                        |  |         | 9,476   |  |              |  | 5.50 | %        |  | 5/2012         
|Greenwich Capital Financial Products                      |  |         | 30,584  |  |              |  | 7.50 | %        |  | 12/2012        
|Elkhorn Valley Bank                                       |  |         | 851     |  |              |  | 6.50 | %        |  | 4/2014         
|Citigroup Global Markets Realty Corp                      |  |         | 13,286  |  |              |  | 5.97 | %        |  | 11/2015        
|GE Capital                                                |  |         | 32,809  |  |              |  | 7.17 | %        |  | 9/2016 - 3/2017
|GE Capital                                                |  |         | 18,607  |  |              |  | 7.69 | %        |  | 6/2017         
|Wachovia Bank                                             |  |         | 9,119   |  |              |  | 7.38 | %        |  | 3/2020         
|                                                          |  |         |         |  |              |  |      |          |  |                
|Total Fixed Rate Debt                                     |  | $       | 129,563 |  |              |  |      |          |  |                
|                                                          |  |         |         |  |              |  |      |          |  |                
|                                                          |  |         |        
|Variable Rate Debt                                        |  |         |         |  |              |  |      |         
|                                                          |  |         |        
|Lender                                                    |  |         |         |  |              |  |      |          |  |                
|Wells Fargo Bank                                          |  |         | 5,070   |  |              |  | 4.50 | %        |  | 9/2011         
|Great Western Bank                                        |  |         | 17,719  |  |              |  | 5.50 | %        |  | 2/2012         
|GE Capital                                                |  |         | 20,686  |  |              |  | 3.81 | %        |  | 2/2018         
|GE Capital                                                |  |         | 2,443   |  |              |  | 4.37 | %        |  | 2/2018         
|                                                          |  |         |         |  |              |  |      |          |  |                
|Total Variable Rate Debt                                  |  | $       | 45,918  |  |              |  |      |          |  |                
|                                                          |  |         |         |  |              |  |      |          |  |                
|                                                          |  |         |        
|Subtotal debt                                             |  | $       | 175,481 |  |              |  |      |          |  |                
|                                                          |  |         |         |  |              |  |      |          |  |                
|                                                          |  |         |        
|Less: debt associated with hotel properties held for sale |  |         | 27,052  |  |              |  |      |          |  |                
|                                                          |  |         |         |  |              |  |      |          |  |                
|                                                          |  |         |        
|Total Long-Term Debt                                      |  | $       | 148,429 |  |              |  |      |          |  |                
|                                                          |  |         |         |  |              |  |      |          |  |                

In January 2011, the Company borrowed $1.95 million from Elkhorn Valley Bank in Norfolk, Nebraska.
The note has a maturity date of October 1, 2011. The note bears interest at 5.9%. The borrowings were used to fund operations.

In March 2011, covenant waivers and other amendments were obtained for our credit facilities with Great Western Bank and Wells Fargo Bank, including an extension of the maturity date of our credit
facility with Wells Fargo Bank from March 12, 2011 to September 30, 2011. These changes were reflected in the notes to our consolidated financial statements included in our Form 10-K for year ended December 31, 2010.

On March 29, 2011, we sold a Masters Inn in Atlanta (Tucker), Georgia (107 rooms) for approximately $2.4 million with no gain or
loss on the sale. The majority of the proceeds were used to pay down the loan with General Electric Capital Corporation, with approximately $0.2 million used to reduce the revolving line of credit with Great Western Bank.



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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 Months Ended March 31, 2011 and 2010

(Unaudited)



In March 2011, the maturity date of the $0.8 million promissory note to First National
Bank of Omaha was extended to March 1, 2012.

We are required to comply with certain financial covenants for some of our
lenders. As of March 31, 2011, the Company was in compliance with all financial covenants. As a result, we are not in default of any of our loans.

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. At the annual shareholders meeting on May 28, 2009, the shareholders of Supertel Hospitality, Inc. approved an
amendment to the Supertel 2006 Stock Plan. The amendment increases the maximum number of shares reserved for issuance under the plan from 200,000 to 300,000 and changes the definition of fair market value to mean the closing price of Supertel common
stock with respect to future awards under the plan.

Share-Based Compensation Expense

The expense recognized in the condensed consolidated financial statements for the three months ended March 31, 2011 and 2010 for
share-based compensation related to employees and directors was $14,400 and $12,480, respectively.

Impairment Losses

In accordance with FASB ASC 360-10-35 Property Plant and Equipment  Overall  Subsequent Measurement, the Company
analyzes its assets for impairment when events or circumstances occur that indicate the carrying amount may not be recoverable. As part of this process, the Company utilizes a two-step analysis to determine whether a trigger event (within the
meaning of ASC 360-10-35) has occurred with respect to cash flow of, or a significant adverse change in business climate for, its hotel properties. Quarterly and annually the Company reviews all of its held for use hotels to determine any property
whose cash flow or operating performance significantly underperformed from budget or prior year, which the Company has set as a shortfall against budget or prior year as 15% or greater.

Each quarter we apply a second analysis on those properties identified in the 15% change analysis or which have had a trigger event. The
analysis estimates the expected future cash flows to identify any property whose carrying amount potentially exceeded the recoverable value. In performing this analysis, the Company makes the following assumptions:



| |  |  | Holding periods range from three to five years, for non-core assets, and ten years for those assets considered as core.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Cash flow from trailing twelve months for the individual properties multiplied by the holding period as noted above. The Company does not assume growth
rates on cash flows as part of its step one analysis.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A revenue multiplier for the terminal value based on an average of historical sales from leading industry broker of like properties was applied
according to the assigned holding period.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 Months Ended March 31, 2011 and 2010

(Unaudited)



During the three months ended March 31, 2011, no trigger events as described in ASC 360-10-35
occurred for any of our held for use hotels.

Income Taxes

The TRS Lessee income tax benefit from continuing operations for the three months ended March 31, 2011 and 2010 was approximately $0.9 million and $0.7 million, respectively. The TRS Lessee has
estimated its income tax benefit using a combined federal and state rate of 38%. As of March 31, 2011, TRS Lessee had a deferred tax asset of $5.1 million primarily due to current and past years tax net operating losses. These loss
carryforwards will begin to expire in 2022. 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.

Income taxes are accounted for under the asset and liability method in accordance with accounting
principles generally accepted in the United States of America (GAAP). 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 basis and for net 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 of
a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. The realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Managements evaluation
of the need for a valuation allowance must consider positive and negative evidence, and the weight given to the potential effects of such positive and negative evidence is based on the extent to which it can be objectively verified.

Related to accounting for uncertainty in income taxes, we follow a process by which the likelihood of a tax position is gauged based upon
the technical merits of the position, perform a subsequent measurement related to the maximum benefit and the degree of likelihood, and determine the amount of benefit to be recognized in the financial statements, if any.

Noncontrolling Interest in Redeemable Preferred Units

At March 31, 2011, 51,035 of SLPs preferred operating partnership units (Preferred OP Units) were outstanding. The redemption value for the Preferred OP Units is $0.5 million for
March 31, 2011. Each limited partner of SLP may, subject to certain limitations, require that SLP redeem all or a portion of his or her Preferred OP Units, at any time after a specified period following the date the units were acquired, by
delivering a redemption notice to SLP. The Preferred OP Units are convertible by the holders into Common operating units (Common OP Units) on a one-for-one basis or, pursuant to an extension agreement by the holders, may be redeemed for
cash at the option of the holder at $10 per unit on or after October 24, 2011.

Preferred OP 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 SLP. Distributions to holders of Preferred OP Units have priority over distributions to holders
of Common OP Units. Supertel offered to each of the Preferred OP Unit holders the option to extend until October 24, 2011 their right to have units redeemed at $10 per unit. All holders elected to extend until October 24, 2011. The
remaining 51,035 units will continue to be carried outside of permanent equity at redemption value.



13



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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 Months Ended March 31, 2011 and 2010

(Unaudited)



Noncontrolling Interest Reconciliation of Common and Preferred Units



|                             |  |                                  |     |   |                        |   |     |                             |  |   |     |  
|---------------------------- |  | -------------------------------- | --- | - | ---------------------- | - | --- | --------------------------- |  | - | --- | -
|(in thousands)               |  | RedeemableNoncontrollingInterest |     |   | NoncontrollingInterest |   |     | TotalNoncontrollingInterest | 
|                             |  |                                  |    
|Balance at December 31, 2010 |  | $                                | 511 |   |                        | $ | 335 |                             |  | $ | 846 |  
|                             |  |                                  |    
|Partner Distribution         |  |                                  | (14 | ) |                        |   |    |                             |  |   | (14 | )
|Noncontrolling Interest      |  |                                  | 14  |   |                        |   | (25 | )                           |  |   | (11 | )
|                             |  |                                  |     |   |                        |   |     |                             |  |   |     |  
|                             |  |                                  |    
|Balance at March 31, 2011    |  | $                                | 511 |   |                        | $ | 310 |                             |  | $ | 821 |  
|                             |  |                                  |     |   |                        |   |     |                             |  |   |     |  

Equity Reconciliation of Parent and Noncontrolling Interest



|                             |  |                          |   |  |                     |   |     |                       |  |   |                          |  |  |                                          |         |  |                       |   |         |                                                   |  |   |             |   |  |   |     |   |  |   |        |  
|---------------------------- |  | ------------------------ | - |  | ------------------- | - | --- | --------------------- |  | - | ------------------------ |  |  | ---------------------------------------- | ------- |  | --------------------- | - | ------- | ------------------------------------------------- |  | - | ----------- | - |  | - | --- | - |  | - | ------ | -
|(in thousands)               |  | PreferredSharesPar Value |   |  | CommonStockWarrants |   |     | CommonSharesPar Value |  |   | AdditionalPaid-inCapital |  |  | Distributionin ExcessAccumulatedEarnings |         |  | NetShareholdersEquity |   |         | NoncontrollingInterest inConsolidatedPartnerships |  |   | TotalEquity |  
|                             |  |                          |   |  |                     |   |     |                      
|Balance at December 31, 2010 |  | $                        | 8 |  |                     | $ | 252 |                       |  | $ | 229                      |  |  | $                                        | 121,384 |  |                       | $ | (66,479 | )                                                 |  | $ | 55,394      |   |  | $ | 335 |   |  | $ | 55,729 |  
|                             |  |                          |   |  |                     |   |     |                      
|Stock compensation           |  |                          |  |  |                     |   |    |                       |  |   |                         |  |  |                                          | 14      |  |                       |   |        |                                                   |  |   | 14          |   |  |   |    |   |  |   | 14     |  
|Dividends                    |  |                          |  |  |                     |   |    |                       |  |   |                         |  |  |                                          |        |  |                       |   | (368    | )                                                 |  |   | (368        | ) |  |   |    |   |  |   | (368   | )
|Net loss                     |  |                          |  |  |                     |   |    |                       |  |   |                         |  |  |                                          |        |  |                       |   | (3,700  | )                                                 |  |   | (3,700      | ) |  |   | (25 | ) |  |   | (3,725 | )
|                             |  |                          |   |  |                     |   |     |                       |  |   |                          |  |  |                                          |         |  |                       |   |         |                                                   |  |   |             |   |  |   |     |   |  |   |        |  
|                             |  |                          |   |  |                     |   |     |                      
|Balance at March 31, 2011    |  | $                        | 8 |  |                     | $ | 252 |                       |  | $ | 229                      |  |  | $                                        | 121,398 |  |                       | $ | (70,547 | )                                                 |  | $ | 51,340      |   |  | $ | 310 |   |  | $ | 51,650 |  
|                             |  |                          |   |  |                     |   |     |                       |  |   |                          |  |  |                                          |         |  |                       |   |         |                                                   |  |   |             |   |  |   |     |   |  |   |        |  

Series B Redeemable Preferred Stock

At March 31, 2011 there were 332,500 shares of 10.0% Series B preferred stock outstanding. The shares were sold on June 3, 2008 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 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 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 preferred stock will not bear interest.

The Series B
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



14



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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 Months Ended March 31, 2011 and 2010

(Unaudited)



series of preferred stock issued by the Company and ranking junior to the Series B 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 preferred stock and with all classes or series of preferred stock issued by the Company and ranking on a parity with the Series B 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 preferred stock has no stated maturity and is not subject to any sinking fund or mandatory redemption (except as described below).

The Series B 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
preferred stock). The Company may redeem the Series B 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 preferred stock will be redeemed for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. At March 31, 2011, 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.

Series A Preferred Stock

On December 30, 2005, the Company offered
and sold 1,521,258 shares of 8% Series A preferred stock. At March 31, 2011, 803,270 shares of Series A preferred stock remained outstanding. Dividends on the Series A preferred stock are cumulative and payable monthly in arrears on the last
day of each month, at the annual rate of 8% of the $10.00 liquidation preference per share, equivalent to a fixed annual amount of $.80 per share.

Common Stock and Warrants

On March 26, 2010, the Company entered into
a Standby Equity Distribution Agreement (the SEDA) with YA Global Master SPV Ltd. (YA Global), a fund managed by Yorkville Advisors, LLC. Pursuant to the SEDA, YA Global has agreed to purchase up to $10.0 million (which may
be increased to $20.0 million upon written notice from the Company to YA Global prior to March 26, 2011) (the Commitment Amount) of newly issued Company common stock, par value $0.01 per share (Common Stock), if notified
to do so by the Company in accordance with the terms and conditions of the SEDA. Unless terminated earlier, the SEDA will automatically terminate on the earlier of April 1, 2012 or the date on which the aggregate purchases by YA Global under
the SEDA total the Commitment Amount. The amount of Common Stock issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 4,400,464 shares of Common Stock, which is less than 20% of the aggregate number of outstanding shares of
Common Stock. The Common Stock is currently sold pursuant to the Companys registration statement on Form S-3 (333-170756). No shares were sold under this agreement during the three months ended March 31, 2011.



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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 Months Ended March 31, 2011 and 2010

(Unaudited)



On May 10, 2010, the Company consummated the private sale of 598,803 shares of its
common stock and 299,403 warrants to purchase up to an additional 299,403 shares of the Companys common stock for aggregate gross proceeds of $1.0 million. The warrants are exercisable for a period of three years from the date of issuance at
an exercise price of $2.50

On March 29, 2011, the Company entered into an equity distribution agreement with JMP
Securities LLC (JMP) pursuant to which the Company may offer and sell up to 2.0 million shares of common stock from time to time through JMP. Sales of shares of the Company common stock, if any, under the agreement may be made in
negotiated transactions or other transactions that are deemed to be at the market offerings, including sales made directly on the Nasdaq Global Market or sales made to or through a market maker other than on an exchange. The common stock
will be sold pursuant to the Companys registration statement on Form S-3 (333-170756). During the three months ended March 31, 2011, the Company sold (with settlement in April 2011), through JMP, as its agent, an aggregate of 26,725
shares of common stock pursuant to ordinary brokers transactions on the Nasdaq Global Market. Gross proceeds were $43,685, commissions to agent were $2,184 and net proceeds to the Company (before expenses) were $41,501.

Commitments and Contingencies

Litigation

Various
claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties. Based upon the information available, the Company believes that the resolution of any of these claims and legal
proceedings should not have a material adverse affect on its consolidated financial position, results of operations or cash flows. Three separate lawsuits have been filed against the Company in Jefferson Circuit Court, Louisville, Kentucky; one
lawsuit filed by a plaintiff on June 26, 2008, a second lawsuit filed by fourteen plaintiffs on December 15, 2008 and a third lawsuit filed by six plaintiffs on January 16, 2009. The plaintiffs in the three cases, now consolidated as
one action, allege that as guests at the Companys hotel in Louisville, Kentucky, they were exposed to carbon monoxide as a consequence of a faulty water heater at the hotel.

Plaintiffs are seeking to recover for damages arising out of physical and mental injury, lost wages, pain and suffering, past and future
medical expenses and punitive or exemplary damages. At this time, the company has reached agreement to settle the claims, subject to court approval for certain minor plaintiffs, and one settlement has been paid. The settlements were made with
authorization from the insurers and the Company has recorded a liability for the amount of the unpaid claims and a receivable reflecting recoverability of the claim from the insurers.

On March 25, 2011, Royco Hotels and the Company settled a lawsuit filed by Royco Hotels against the Company. The settlement
agreement between the parties provides that (a) the Company will pay an aggregate of $590,000 in varying amounts of installments through July 1, 2013 to Royco Hotels as financial settlement of the lawsuit and fees owed to Royco Hotels as
termination fees for hotels that have been sold, (b) Royco Hotels will permit the Company and new managers access to certain Royco Hotels employees and waive any prohibitions under the management agreement with respect to such access, and
(c) the management agreement will be terminated effective May 31, 2011.



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Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2011 and 2010

(Unaudited)



Subsequent Event

On April 21, 2011, the Company through TRS Lessee entered into separate management agreements with Hospitality Management Advisors, Inc. (HMA), Strand Development Company LLC
(Strand) and Kinseth Hotel Corporation (Kinseth) as eligible independent operators to manage 95 of the Companys hotels commencing June 1, 2011. These hotels are currently managed by Royco Hotels.

HMA will manage 25 Company hotels in Arkansas, Louisiana, Tennessee, Kentucky, Indiana, Virginia and Florida. Strand will manage the
Companys seven economy extended-stay hotels as well as 17 additional Company hotels located in Georgia, Delaware, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia. Kinseth will manage 46 Company hotels in eight
states primarily in the Midwest. Each of the management agreements expire on May 31, 2014 and will renew for additional terms of one year unless either party to the agreement gives the other party written notice of termination at least 90 days
before the end of a term.

Each of HMA, Strand and Kinseth will receive a monthly management fee with respect to the hotels
they manage equal to 3.5% of the gross hotel income and 2.25% of hotel net operating income (NOI). NOI is equal to gross hotel income less operating expenses (exclusive of management fees, certain insurance premiums and employee bonuses,
and personal and real property taxes).

On May 6, 2011 we sold a Super 8 in Wichita, Kansas (59 rooms) for approximately
$1.4 million. Approximately $0.9 million of the proceeds were used to pay down borrowings from Elkhorn Valley Bank in Norfolk, Nebraska, with the remaining amount used to reduce the revolving line of credit with Great Western Bank.



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Part I. FINANCIAL INFORMATION, CONTINUED:



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, 2010. Results for the three months ended March 31, 2011 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, 2010.

Overview

We are a
self-administered real estate investment trust, and through our subsidiaries, as of March 31, 2011 we owned 105 hotels in 23 states. Our hotels operate under several national and independent brands.



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



Our significant events for the three months ended March 31, 2011 include:



| |  |  | In January 2011, the Company borrowed $1.95 million from Elkhorn Valley Bank in Norfolk, Nebraska. The note has a maturity date of October 1,
2011. The note bears interest at 5.9%. The borrowings were used to fund operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 29, 2011, we sold a Masters Inn in Atlanta (Tucker), Georgia (107 rooms) for approximately $2.4 million with no gain or loss on the sale.
The majority of the proceeds were used to pay down the loan with General Electric Capital Corporation, with approximately $0.2 million used to reduce the revolving line of credit with Great Western Bank.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 29, 2011, we entered into an Equity Distribution Agreement with JMP Securities LLC (JMP) pursuant to which the Company may
offer and sell up to 2.0 million shares of common stock of the Company from time to time.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In March 2011, covenant waivers and other amendments were obtained for our credit facilities with Great Western Bank and Wells Fargo Bank, including an
extension of the maturity date of our credit facility with Wells Fargo Bank from March 12, 2011 to September 30, 2011. These changes were reflected in the notes to our consolidated financial statements included in our Form 10-K for year
ended December 31, 2010.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 25, 2011, Royco Hotels and the Company settled a lawsuit filed by Royco Hotels against the Company. The settlement agreement between the
parties provides that (a) the Company will pay an aggregate of $590,000 in varying amounts of installments through July 1, 2013 to Royco Hotels as financial settlement of the lawsuit and fees owed to Royco Hotels as termination fees for
hotels that have been sold, (b) Royco Hotels will permit the Company and new managers access to certain Royco Hotels employees and waive any prohibitions under the management agreement with respect to such access, and (c) the management
agreement will be terminated effective May 31, 2011.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, on May 6, 2011, we sold a
Super 8 in Wichita, Kansas (59 rooms) for approximately $1.4 million. Approximately $0.9 million of the proceeds were used to pay down borrowings from Elkhorn Valley Bank in Norfolk, Nebraska, with the remaining amount used to reduce the revolving
line of credit with Great Western Bank.

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 99% general partnership interest in Supertel Limited Partnership and a 100% partnership interest in E&P Financing Limited Partnership.

As of March 31, 2011, we owned 105 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 95 of our hotels and HLC is the
manager of 10 of our hotels. On April 21, 2011, the Company through TRS Lessee entered into separate management agreements with Hospitality Management Advisors, Inc. (HMA), Strand Development Company LLC (Strand) and
Kinseth Hotel Corporation (Kinseth) as eligible independent operators to manage 95 of the Companys hotels commencing June 1, 2011. These hotels are currently managed by Royco Hotels.

HMA will manage 25 Company hotels in Arkansas, Louisiana, Tennessee, Kentucky, Indiana, Virginia and Florida. Strand will manage the
Companys seven economy extended-stay hotels as well as 17 additional Company hotels located in Georgia, Delaware, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia. Kinseth will manage 46 Company hotels in eight
states primarily in the Midwest. Each of the management agreements expire on May 31, 2014 and will renew for additional terms of one year unless either party to the agreement gives the other party written notice of termination at least 90 days
before the end of a term.



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



Each of HMA, Strand and Kinseth will receive a monthly management fee with respect to
the hotels they manage equal to 3.5% of the gross hotel income and 2.25% of hotel net operating income (NOI). NOI is equal to gross hotel income less operating expenses (exclusive of management fees, certain insurance premiums and
employee bonuses, and personal and real property taxes).

Overview of Discontinued Operations

The condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010 include the results of
operations for the 16 hotels classified as held for sale at March 31, 2011, as well as all properties that have been sold during 2011 and 2010 in accordance with FASB ASC 205-20 Presentation of Financial Statements  Discontinued
Operations.

The assets held for sale at March 31, 2011 and 2010 are separately disclosed in the Condensed
Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that
significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize
the sale of all or any of these assets on favorable terms or at all. We believe that all our held for sale assets as of March 31, 2011 remain properly classified in accordance with ASC 205-20.

Where the carrying value of an asset held for sale exceeded the estimated fair value, net of selling costs, we reduced the carrying value
and recorded an impairment charge. During the three months ended March 31, 2011, an impairment loss of $474,000 for nine hotels held for sale was recorded by the Company. The Company also recorded recovery of $25,000 of previously recorded
impairment on one hotel at the time of sale. The fair value of an asset held for sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling
price using a market approach. The estimated selling costs are based on our experience with similar asset sales.

The
discontinued operations are the result of managements strategy to reevaluate its hotels as well as the length of the period in which the company anticipates holding its properties based on new and more stringent criteria. These criteria
include strategic review of debt service capability, estimated return on investment, and local market conditions.

Our
continuing operations reflect the results of operations of those hotels which we are likely to retain in our portfolio for the foreseeable future as well as those assets which do not currently meet the held for sale criteria in ASC 205-20. We
periodically evaluate the assets in our portfolio to ensure they continue to meet our performance objectives. Accordingly, from time to time, we could identify other assets for disposition.

General

The discussion that follows is based primarily on the condensed
consolidated financial statements of the three months ended March 31, 2011 and 2010, and should be read along with the condensed consolidated financial statements and notes.

The comparisons below reflect revenues and expenses of the companys 105 and 114 hotels as of March 31, 2011 and 2010,
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 March 31, 2011 to the three months ended March 31, 2010

Operating results are summarized as follows (in thousands):



|                                       |  |                                  |         |   |                                  |   |        |                              |  |   |                      |   |  |                        |         |   |       |   |        |   |  |   |         |   |  |   |      |  
|-------------------------------------- |  | -------------------------------- | ------- | - | -------------------------------- | - | ------ | ---------------------------- |  | - | -------------------- | - |  | ---------------------- | ------- | - | ----- | - | ------ | - |  | - | ------- | - |  | - | ---- | -
|                                       |  | Three months endedMarch 31,
2011 |         |   | Three months endedMarch 31,
2010 |   |        | ContinuingOperationsVariance | 
|                                       |  | ContinuingOperations             |         |   | DiscontinuedOperations           |   |        | Total                        |  |   | ContinuingOperations |   |  | DiscontinuedOperations |         |   | Total |   |       
|Revenues                               |  | $                                | 18,065  |   |                                  | $ | 3,510  |                              |  | $ | 21,575               |   |  | $                      | 17,669  |   |       | $ | 4,053  |   |  | $ | 21,722  |   |  | $ | 396  |  
|Hotel and property operations expenses |  |                                  | (15,413 | ) |                                  |   | (3,146 | )                            |  |   | (18,559              | ) |  |                        | (14,779 | ) |       |   | (3,843 | ) |  |   | (18,622 | ) |  |   | (634 | )
|Interest expense                       |  |                                  | (2,580  | ) |                                  |   | (523   | )                            |  |   | (3,103               | ) |  |                        | (2,444  | ) |       |   | (611   | ) |  |   | (3,055  | ) |  |   | (136 | )
|Depreciation and amortization expense  |  |                                  | (2,621  | ) |                                  |   |       |                              |  |   | (2,621               | ) |  |                        | (2,842  | ) |       |   | (198   | ) |  |   | (3,040  | ) |  |   | 221  |  
|General and administrative expenses    |  |                                  | (1,103  | ) |                                  |   | (50    | )                            |  |   | (1,153               | ) |  |                        | (999    | ) |       |   |       |   |  |   | (999    | ) |  |   | (104 | )
|Net loss on dispositions of assets     |  |                                  | (6      | ) |                                  |   | (13    | )                            |  |   | (19                  | ) |  |                        | (16     | ) |       |   | (20    | ) |  |   | (36     | ) |  |   | 10   |  
|Other income                           |  |                                  | 85      |   |                                  |   |       |                              |  |   | 85                   |   |  |                        | 27      |   |       |   |       |   |  |   | 27      |   |  |   | 58   |  
|Impairment loss                        |  |                                  |        |   |                                  |   | (449   | )                            |  |   | (449                 | ) |  |                        |        |   |       |   | (120   | ) |  |   | (120    | ) |  |   |     |  
|Termination cost                       |  |                                  | (540    | ) |                                  |   |       |                              |  |   | (540                 | ) |  |                        |        |   |       |   |       |   |  |   |        |   |  |   | (540 | )
|Income tax benefit                     |  |                                  | 892     |   |                                  |   | 181    |                              |  |   | 1,073                |   |  |                        | 730     |   |       |   | 376    |   |  |   | 1,106   |   |  |   | 162  |  
|                                       |  |                                  |         |   |                                  |   |        |                              |  |   |                      |   |  |                        |         |   |       |   |        |   |  |   |         |   |  |   |      |  
|Net loss                               |  | $                                | (3,221  | ) |                                  | $ | (490   | )                            |  | $ | (3,711               | ) |  | $                      | (2,654  | ) |       | $ | (363   | ) |  | $ | (3,017  | ) |  | $ | (567 | )
|                                       |  |                                  |         |   |                                  |   |        |                              |  |   |                      |   |  |                        |         |   |       |   |        |   |  |   |         |   |  |   |      |  

Revenues and Operating Expenses

Revenues from continuing operations for the three months ended March 31, 2011 compared to the three months ended March 31, 2010, increased $0.4 million or 2.2%, which was primarily due to
increased average daily rate (ADR). We refer to our entire portfolio as limited service hotels which we further describe as midscale hotels, economy hotels and extended stay hotels. The same store portfolio used for comparison of the
first quarter of 2011 over the same period of 2010 consists of the 89 hotels in continuing operations that were owned by the Company as of January 1, 2010. Compared to the year ago period, ADR for the entire 89 same store hotel portfolio
increased 2.0% to $46.58 and revenue per available room (RevPAR) increased 2.2% to $25.95. The occupancy for all same store hotels for the three months ended March 31, 2011 increased 0.1 percentage points from that of the year ago
period. Our 31 same store midscale hotels reflected an ADR increase of 2.5% to $62.16, a decrease in occupancy of 1.9% and a RevPAR increase of 0.6% to $32.04 for the first quarter of 2011 over the same period of 2010. Our 51 same store economy
hotels reflected an ADR increase of 2.8% to $46.69, an increase in occupancy of 0.1 percentage points and an increase in RevPAR of 3.0% to $24.47 for the first quarter of 2011 over the same period of 2010. Occupancy for the seven same store extended
stay properties rose 3.2% to 76.7%, and RevPAR was up 4.8% to $18.02. ADR increased 1.5% to $23.48.

During the first quarter
of 2011, hotel and property operations expenses from continuing operations increased $0.6 million. The majority of the variance consisted of increased payroll expense, repairs and maintenance, and franchise related expenses.

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

Interest expense from continuing operations rose 5.6% to $2.6 million for the quarter. The increase resulted primarily from prepayment
penalties associated with the sale of two Masters Inn hotels. Depreciation and amortization expense from continuing operations declined $0.2 million from the first quarter of 2010 to $2.6 million. The general and administrative expense for the 2011
first quarter increased $0.1 million compared to the prior period.



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Impairment loss

For the first quarter of 2011, we recorded an impairment charge of $0.4 million on nine hotels classified as held for sale. In the prior year there was an impairment charge of $0.1 million against one
held for sale hotel that was subsequently sold in the fourth quarter of 2010.

Termination cost

Termination cost reflects financial settlement fees directly related to the Companys termination of Royco Hotels. The one time
charge of $0.5 million reflects settlement of the lawsuit filed by Royco Hotels against the Company.

Dispositions

In the first quarter of 2011, we recognized a negligible gain on the disposition of assets related to the sale of a Masters Inn in Atlanta
(Tucker), Georgia. The prior period results include a negligible gain on the sale of a Comfort Inn in Dublin, Virginia. The net losses on dispositions of assets in continuing operations are due primarily to normal operations.

Income tax benefit

The
income tax benefit from continuing operations is related to the taxable loss from our taxable subsidiary, the TRS Lessee. Management believes the combined federal and state income tax rate for the TRS Lessee will be approximately 38%. The tax
benefit is a result of TRS Lessees loss for the three months ended March 31, 2011. The income tax will vary based on the taxable earnings or loss of the TRS Lessee.

The income tax benefit from continuing operations was $0.9 million compared with a benefit of $0.7 million in the year ago period, due to an increased loss by the TRS Lessee.

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.

The Companys operating performance, as well as its
liquidity position, has been and continues to be negatively affected by recent economic conditions, many of which are beyond our control. The Company anticipates that these adverse economic conditions will improve somewhat over the next year;
however, in addition to our operating performance, the other sources described below will be essential to our liquidity and financial position.

Our business requires continued access to adequate capital to fund our liquidity needs. In 2010, the Company reviewed its entire portfolio, identified properties considered non-core and developed
timetables for disposal of those assets deemed non-core. We focused on improving our liquidity through cash generating asset sales and disposition of assets that are not generating cash at levels consistent with our investment principles. In 2011,
our foremost priorities continue to be preserving and generating capital sufficient to fund our liquidity needs. Given the deterioration and uncertainty in the economy and financial markets, management believes that access to conventional sources of
capital will be challenging and management has planned accordingly. We are also working to proactively address challenges to our short-term and long-term liquidity position.



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The following are the expected actual and potential sources of liquidity, which we
currently believe will be sufficient to fund our near-term obligations:



| |  |  | Cash and cash equivalents;
| | - |  | --------------------------



| |  |  | Cash generated from operations;
| | - |  | -------------------------------



| |  |  | Proceeds from asset dispositions;
| | - |  | ---------------------------------



| |  |  | Proceeds from additional secured or unsecured debt financings; and/or
| | - |  | ---------------------------------------------------------------------



| |  |  | Proceeds from public or private issuances of debt or equity securities.
| | - |  | -----------------------------------------------------------------------

These sources are essential to our liquidity and financial position, and we cannot assure you that we will be able to successfully access
them (particularly in the current economic environment). If we are unable to generate cash from these sources, we may have liquidity-related capital shortfalls and will be exposed to default risks. While we believe that we will have adequate capital
for our near-term uses, significant issues with access to the liquidity sources identified above could lead to our insolvency.

In the near-term, the Companys cash flow from operations is not projected to be sufficient to meet all of our liquidity needs. In
response, management has identified non-core assets in our portfolio to be liquidated over a one to ten year period. Among the criteria for determining properties to be sold was the potential upside when hotel fundamentals return to stabilized
levels. The 16 properties held for sale as of March 31, 2011 were determined to be less likely to participate in increased cash flow levels when markets do improve. As such, we expect these dispositions to help us (1) preserve cash,
through potential disposition of properties with current or projected negative cash flow and/or other potential near-term cash outlay requirements (including debt maturities) and (2) generate cash, through the potential disposition of
strategically identified non-core assets that we believe have equity value above debt.

We are actively marketing the 16
properties held for sale, which we anticipate will result in the elimination of $27.0 million of debt and generate an expected $1.5 million of proceeds for operations. We continue to receive strong interest in our 16 held for sale properties. The
marketing process has been affected by deteriorating economic conditions and we have experienced some decreases in expected pricing. If this trend continues to worsen, we may be unable to complete the disposition of identified properties in a manner
that would generate cash flow in line with managements estimates as noted above. Our ability to dispose of these assets is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions,
availability of financing and interest rates. In light of the current economic conditions, we cannot predict:



| |  |  | whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | whether potential buyers will be able to secure financing; and
| | - |  | --------------------------------------------------------------



| |  |  | the length of time needed to find a buyer and to close the sale of a property.
| | - |  | ------------------------------------------------------------------------------

As our debt matures, our principal payment obligations also present significant future cash requirements. We may not be able to
successfully extend, refinance or repay our debt due to a number of factors, including decreased property valuations, limited availability of credit, tightened lending standards and deteriorating economic conditions. Historically, extending or
refinancing loans has required the payment of certain fees to, and expenses of, the applicable lenders. Any future extensions or refinancing will likely require increased fees due to tightened lending practices. These fees and cash flow restrictions
will affect our ability to fund other liquidity uses. In addition, the terms of the extensions or refinancing may include operational and financial covenants significantly more restrictive than our current debt covenants.



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Part I. FINANCIAL INFORMATION, CONTINUED:

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



The Company is required to meet various financial covenants required by its existing
lenders. If the Companys future financial performance fails to meet these financial covenants, then its lenders also have the ability to take control of its encumbered hotel assets. Defaults with lenders due to failure to repay or refinance
debt when due or failure to comply with financial covenants could also result in defaults under our credit facilities with Great Western Bank and Wells Fargo Bank. Our Great Western Bank and Wells Fargo Bank credit facilities contain cross-default
provisions which would allow Great Western Bank and Wells Fargo Bank to declare a default and accelerate our indebtedness to them if we default on our other loans, and such default would permit that lender to accelerate our indebtedness under any
such loan. If this were to happen, whether due to failure to repay or refinance debt when due or failure to comply with financial covenants, the Companys ability to conduct business could be severely impacted as there can be no assurance that
the adequacy and timeliness of cash flow would be available to meet the Companys liquidity requirements. The Company believes it has the ability to repay its indebtedness when due with cash generated from operations, sales of hotels,
refinancings or the issuance of stock, while at the same time continuing to be a substantial owner of limited service and economy hotels. If the economic environment does not improve in 2011, the Companys plans and actions may not be
sufficient and could lead to possibly failing financial debt covenant requirements.

The Company did not declare a common
stock dividend for the three months ended March 31, 2011. The Company will monitor requirements to maintain its REIT status and will routinely evaluate the dividend policy. The Company intends to continue to meet its dividend requirements to
retain its REIT status.

Financing

On March 29, 2011, we entered into an equity distribution agreement with JMP Securities LLC (JMP) pursuant to which we may offer and sell up to 2.0 million shares of common stock from
time to time through JMP. Sales of shares of the Company common stock, if any, under the agreement may be made in negotiated transactions or other transactions that are deemed to be at the market offerings, including sales made directly
on the Nasdaq Global Market or sales made to or through a market maker other than on an exchange. The common stock will be sold pursuant to our registration statement on Form S-3 (333-170756). During the three months ended March 31, 2011, we
sold (with settlement in April 2011), through JMP, as our agent, an aggregate of 26,725 shares of common stock pursuant to ordinary brokers transactions on the Nasdaq Global Market. Gross proceeds were $43,685.23, commissions to agent were
$2,184.26 and net proceeds to us (before expenses) were $41,500.97.

On March 26, 2010, we entered into a standby equity
distribution agreement with YA Global Master SPV Ltd., or YA Global, for the offer and sale of up to $10 million of shares of our common stock at a price per share determined in accordance with the agreement. The common stock will be sold pursuant
to our registration statement on Form S-3 (333-170756). No shares were sold under this agreement during the three months ended March 31, 2011.



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Part I. FINANCIAL INFORMATION, CONTINUED:

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



At March 31, 2011, the Company had long-term debt of $148.4 million associated with
assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 3.8 years and a weighted average interest rate of 6.1%. The weighted average fixed rate was 6.8%, and the weighted average variable rate was
4.6%. Debt held on properties in continuing operations is classified as held for use. Debt is classified as held for sale if the properties collateralizing it are included in discontinued operations. Debt associated with assets held for sale is
classified as a short-term liability due within the next year irrespective of whether the notes and mortgages evidencing such debt mature within the next year. Aggregate annual principal payments on debt associated with assets held for use for the
remainder of 2011 and thereafter, and debt associated with assets held for sale, are as follows (in thousands):



|                  |  |               |        |  |              |   |         |       |  |   |         | 
|----------------- |  | ------------- | ------ |  | ------------ | - | ------- | ----- |  | - | ------- | 
|                  |  | Held For Sale |        |  | Held For Use |   |         | TOTAL | 
|Remainder of 2011 |  | $             | 26,745 |  |              | $ | 16,083  |       |  | $ | 42,828  | 
|2012              |  |               | 307    |  |              |   | 60,497  |       |  |   | 60,804  | 
|2013              |  |               |       |  |              |   | 3,507   |       |  |   | 3,507   | 
|2014              |  |               |       |  |              |   | 4,237   |       |  |   | 4,237   | 
|2015              |  |               |       |  |              |   | 15,287  |       |  |   | 15,287  | 
|Thereafter        |  |               |       |  |              |   | 48,818  |       |  |   | 48,818  | 
|                  |  |               |        |  |              |   |         |       |  |   |         | 
|                  |  | $             | 27,052 |  |              | $ | 148,429 |       |  | $ | 175,481 | 
|                  |  |               |        |  |              |   |         |       |  |   |         | 

At March 31, 2011 the Company had $22.5 million of long-term debt associated with assets held for use
and debt associated with assets held for sale which matures in 2011 pursuant to the notes and mortgages evidencing such debt. These 2011 maturities consist of:



| |  |  | a $11.7 million balance on a term loan with Great Western Bank;
| | - |  | ---------------------------------------------------------------



| |  |  | a $5.1 million balance on the credit facility with Wells Fargo Bank;
| | - |  | --------------------------------------------------------------------



| |  |  | a $1.95 million note payable to Elkhorn Valley Bank in Norfolk, Nebraska; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | $3.7 million of principal amortization on mortgage loans.
| | - |  | ---------------------------------------------------------

The remaining $20.3 million of debt due in 2011 (at March 31, 2011), as set forth in the table above, is associated with assets held for sale. This debt matures at the time of sale and is expected to
be funded from the proceeds of such sales.

The key financial covenants for certain of our loan agreements and compliance
calculations as of March 31, 2011 are discussed below (each such covenant is calculated pursuant to the applicable loan agreement). As of March 31, 2011, we were in compliance with the financial covenants. As a result, we are not in
default of any of our loans.



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Part I. FINANCIAL INFORMATION, CONTINUED:

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



|                                                                    |  |                           |  |                           |         |  
|------------------------------------------------------------------- |  | ------------------------- |  | ------------------------- | ------- | -
|dollar amounts in thousands                                         |  |                           |  |                           |        
|Great Western Bank Covenants                                        |  | March 31, 2011Requirement |  | March 31, 2011Calculation |        
|Consolidated debt service coverage ratio calculated as follows *:   |  | 31.05:1                   |  |                           |         |  
|Adjusted NOI (A) / Debt service (B)                                 |  |                           |  |                           |         |  
|Net loss per financial statements                                   |  |                           |  | $                         | (11,296 | )
|Net adjustments per loan agreement                                  |  |                           |  |                           | 33,053  |  
|                                                                    |  |                           |  |                           |         |  
|Adjusted NOI per loan agreement (A)                                 |  |                           |  | $                         | 21,757  |  
|                                                                    |  |                           |  |                           |         |  
|                                                                    |  |                          
|Interest expense per financial statements - continuing operations   |  |                           |  |                           | 10,079  |  
|Interest expense per financial statements - discontinued operations |  |                           |  |                           | 2,193   |  
|                                                                    |  |                           |  |                           |         |  
|Total Interest expense per financial statements                     |  |                           |  | $                         | 12,272  |  
|Net adjustments per loan agreement                                  |  |                           |  |                           | 6,217   |  
|                                                                    |  |                           |  |                           |         |  
|Debt service per loan agreement (B)                                 |  |                           |  | $                         | 18,489  |  
|                                                                    |  |                           |  |                           |         |  
|                                                                    |  |                          
|Consolidated debt service coverage ratio                            |  |                           |  |                           | 1.18:1  |  
|*  Calculations based on prior four quarters                        |  |                           |  |                           |         |  
|                                                                    |  |                          
|Loan-specific debt service coverage ratio calculated as follows *:  |  | 31.05:1                   |  |                           |         |  
|Adjusted NOI (A) / Debt service (B)                                 |  |                           |  |                           |         |  
|Net loss per financial statements                                   |  |                           |  | $                         | (11,296 | )
|Net adjustments per loan agreement                                  |  |                           |  |                           | 15,340  |  
|                                                                    |  |                           |  |                           |         |  
|Adjusted NOI per loan agreement (A)                                 |  |                           |  | $                         | 4,044   |  
|                                                                    |  |                           |  |                           |         |  
|                                                                    |  |                          
|Interest expense per financial statements - continuing operations   |  |                           |  |                           | 10,079  |  
|Interest expense per financial statements - discontinued operations |  |                           |  |                           | 2,193   |  
|                                                                    |  |                           |  |                           |         |  
|Total Interest expense per financial statements                     |  |                           |  | $                         | 12,272  |  
|Net adjustments per loan agreement                                  |  |                           |  |                           | (8,694  | )
|                                                                    |  |                           |  |                           |         |  
|Debt service per loan agreement (B)                                 |  |                           |  | $                         | 3,578   |  
|                                                                    |  |                           |  |                           |         |  
|                                                                    |  |                          
|Loan-specific debt service coverage ratio                           |  |                           |  |                           | 1.13:1  |  
|*  Calculations based on prior four quarters                        |  |                           |  |                           |         |  

The Great Western Bank credit facilities also require maintenance of consolidated and
loan-specific loan to value ratios that do not exceed 70%, tested annually, and that we not pay dividends in excess of 75% of our funds from operations per year.



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Part I. FINANCIAL INFORMATION, CONTINUED:

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



The credit facilities with Great Western Bank were amended on March 15, 2011 to
require maintenance of consolidated and loan specific debt service coverage ratios of at least 1.05 to 1, tested quarterly, from December 31, 2010 through the maturity of the credit facilities (prior to the amendment, the requirement for the
loan-specific debt service coverage ratio covenant was 1.20 to 1). The Great Western Bank amendment also: (a) modified the borrowing base so that the loans available to us under the credit facilities may not exceed the lesser of (i) an
amount equal to 70% of the total appraised value of the hotels securing the credit facilities and (ii) an amount that would result in a loan-specific debt service coverage ratio of less than 1.05 to 1 from December 31, 2010 through
December 31, 2011 and 1.5 to 1 from January 1, 2012 through the maturity of the credit facilities; (b) maintained the interest rate on the revolving credit portion of the credit facilities at 5.50% from March 15, 2011 through
December 31, 2011 and prime (subject to a 5.50% floor rate) from January 1, 2012 through the maturity of the credit facilities; and (c) provided Great Western Bank the option to increase the interest rates of the credit facilities up
to 4.00% any time after January 1, 2012.



|                                                            |  |                           |  |                           |         |  
|----------------------------------------------------------- |  | ------------------------- |  | ------------------------- | ------- | -
|dollar amounts in thousands                                 |  |                           |  |                           |        
|Wells Fargo Bank Covenants                                  |  | March 31, 2011Requirement |  | March 31, 2011Calculation |        
|Consolidated loan to value ratio calculated as follows:     |  | £85.0%                    |  |                           |         |  
|                                                            |  |                          
|Loan balance (A) / Value (B)                                |  |                           |  |                           |         |  
|Loan balance (A)                                            |  |                           |  | $                         | 175,481 |  
|                                                            |  |                          
|Value (B)                                                   |  |                           |  |                           | 223,020 |  
|                                                            |  |                           |  |                           |         |  
|Consolidated loan to value ratio                            |  |                           |  |                           | 78.7    | %
|                                                            |  |                          
|Consolidated tangible net worth calculated as follows:      |  | >$50 million              |  |                           |         |  
|Consolidated shareholder equity (A) -                       |  |                           |  |                           |         |  
|Intangible assets (B)                                       |  |                           |  |                           |         |  
|Total shareholders equity per financial statements         |  |                           |  | $                         | 51,340  |  
|Redeemable noncontrolling interest per financial statements |  |                           |  |                           | 511     |  
|Noncontrolling interest in consolidated partnership         |  |                           |  |                           | 310     |  
|Redeemable preferred stock per financial statements         |  |                           |  |                           | 7,662   |  
|                                                            |  |                           |  |                           |         |  
|Consolidated shareholder equity (A)                         |  |                           |  | $                         | 59,823  |  
|Intangible assets (B)                                       |  |                           |  |                           | 0       |  
|                                                            |  |                           |  |                           |         |  
|Consolidated tangible net worth                             |  |                           |  | $                         | 59,823  |  



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Part I. FINANCIAL INFORMATION, CONTINUED:

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



|                                                                    |  |  |                                   |  |  |   |         |  
|------------------------------------------------------------------- |  |  | --------------------------------- |  |  | - | ------- | -
|dollars in thousands                                                |  |  |                                   |  |  |  
|                                                                    |  | 
|Consolidated fixed charge coverage ratio calculated as follows *:   |  |  | 30.80:1 beforepreferred dividends |  |  |   |         |  
|                                                                    |  | 
|EBITDA (A) / Fixed charges (B)                                      |  |  |                                   |  |  |   |         |  
|Net loss per financial statements                                   |  |  |                                   |  |  | $ | (11,296 | )
|                                                                    |  | 
|Net adjustments per loan agreement                                  |  |  |                                   |  |  |   | 28,953  |  
|                                                                    |  |  |                                   |  |  |   |         |  
|EBITDA per loan agreement (A)                                       |  |  |                                   |  |  | $ | 17,657  |  
|                                                                    |  | 
|Interest expense per financial statements - continuing operations   |  |  |                                   |  |  | $ | 10,079  |  
|Interest expense per financial statements - discontinued operations |  |  |                                   |  |  |   | 2,193   |  
|                                                                    |  |  |                                   |  |  |   |         |  
|Total interest expense per financial statements                     |  |  |                                   |  |  | $ | 12,272  |  
|Net adjustments per loan agreement                                  |  |  |                                   |  |  |   | 5,594   |  
|                                                                    |  |  |                                   |  |  |   |         |  
|Fixed charges per loan agreement (B)                                |  |  |                                   |  |  | $ | 17,866  |  
|                                                                    |  | 
|Consolidated fixed charge coverage ratio                            |  |  |                                   |  |  |   | 0.99:1  |  
|*  Calculations based on prior four quarters                        |  |  |                                   |  |  |   |         |  
|                                                                    |  | 
|Consolidated fixed charge coverage ratio calculated as follows *:   |  |  | 30.75:1 afterpreferred dividends  |  |  |   |         |  
|EBITDA (A) / Fixed charges (B)                                      |  |  |                                   |  |  |   |         |  
|Net loss per financial statements                                   |  |  |                                   |  |  | $ | (11,296 | )
|                                                                    |  | 
|Net adjustments per loan agreement                                  |  |  |                                   |  |  |   | 28,953  |  
|                                                                    |  |  |                                   |  |  |   |         |  
|EBITDA per loan agreement (A)                                       |  |  |                                   |  |  | $ | 17,657  |  
|                                                                    |  | 
|Interest expense per financial statements - continuing operations   |  |  |                                   |  |  | $ | 10,079  |  
|Interest expense per financial statements - discontinued operations |  |  |                                   |  |  |   | 2,193   |  
|                                                                    |  |  |                                   |  |  |   |         |  
|Total interest expense per financial statements                     |  |  |                                   |  |  | $ | 12,272  |  
|Net adjustments per loan agreement                                  |  |  |                                   |  |  |   | 7,068   |  
|                                                                    |  |  |                                   |  |  |   |         |  
|Fixed charges per loan agreement (B)                                |  |  |                                   |  |  | $ | 19,340  |  
|                                                                    |  | 
|Consolidated fixed charge coverage ratio                            |  |  |                                   |  |  |   | 0.91:1  |  
|*  Calculations based on prior four quarters                        |  |  |                                   |  |  |   |         |  

Our credit facility with Wells Fargo Bank was amended on March 11, 2011 to require
maintenance of a minimum tangible net worth which exceeds $50 million through the maturity of the credit facility (prior to the amendment, the requirement was $65 million). The amendment also: (a) extended the maturity date from March 12,
2011 to September 30, 2011; and (b) decreased the interest rate from LIBOR plus 5.0% (subject to a 5.5% floor) to LIBOR plus 4.0% (subject to a 4.5% floor).



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Part I. FINANCIAL INFORMATION, CONTINUED:

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



|                                                                    |  |                           |  |                           |         |  
|------------------------------------------------------------------- |  | ------------------------- |  | ------------------------- | ------- | -
|dollars in thousands                                                |  |                           |  |                           |        
|GE Covenants                                                        |  | March 31, 2011Requirement |  | March 31, 2011Calculation |        
|Loan-specific total adjusted EBITDA calculated as follows *:        |  | 3$3.9 million             |  |                           |         |  
|Net loss per financial statements                                   |  |                           |  | $                         | (11,296 | )
|Net adjustments per loan agreement                                  |  |                           |  |                           | 16,909  |  
|                                                                    |  |                           |  |                           |         |  
|Loan-specific total adjusted EBITDA                                 |  |                           |  | $                         | 5,613   |  
|*  Calculations based on prior four quarters                        |  |                           |  |                           |         |  
|                                                                    |  |                          
|Consolidated debt service coverage ratio calculated as follows *:   |  | 31.05:1                   |  |                           |         |  
|Adjusted EBITDA (A) / Debt service (B)                              |  |                           |  |                           |         |  
|Net loss per financial statements                                   |  |                           |  | $                         | (11,296 | )
|Net adjustments per loan agreement                                  |  |                           |  |                           | 34,485  |  
|                                                                    |  |                           |  |                           |         |  
|Adjusted EBITDA per loan agreement (A)                              |  |                           |  | $                         | 23,189  |  
|                                                                    |  |                           |  |                           |         |  
|Interest expense per financial statements - continuing operations   |  |                           |  |                           | 10,079  |  
|Interest expense per financial statements - discontinued operations |  |                           |  |                           | 2,193   |  
|                                                                    |  |                           |  |                           |         |  
|Total interest expense per financial statements                     |  |                           |  | $                         | 12,272  |  
|                                                                    |  |                          
|Net adjustments per loan agreement                                  |  |                           |  |                           | 5,594   |  
|Debt service per loan agreement (B)                                 |  |                           |  |                           | 17,866  |  
|                                                                    |  |                           |  |                           |         |  
|Consolidated debt service coverage ratio                            |  |                           |  |                           | 1.30:1  |  
|*  Calculations based on prior four quarters                        |  |                           |  |                           |         |  

Our credit facilities with General Electric Capital Corporation require that, commencing in 2012
and continuing for the term of the loans, we maintain, with respect to our GE-encumbered properties, a before dividend fixed charge coverage ratio (FCCR) (based on a rolling twelve month period) of 1.30:1 and after dividend FCCR (based on a rolling
twelve month period) of 1.00:1. The consolidated debt service coverage ratio for the GE credit facilities increases to 1.50:1 in 2012 through the term of the loans. In connection with previous amendments and waivers, the interest rates of the loans
under our credit facilities with GE have increased by 1.5%. If our FCCR with respect to our GE-encumbered properties equals or exceeds 1.30:1 before dividends and 1.00:1 after dividends for two consecutive quarters, the cumulative 1.5% increase in
the interest rate of the loans will be eliminated.

If we fail to pay our indebtedness when due, fail to comply with covenants
or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness and ultimately lose our hotels through lender foreclosure if we are
unable to obtain alternative sources of financing with acceptable terms. Our Great Western Bank and Wells Fargo Bank credit facilities contain cross-default provisions which would allow Great Western Bank and Wells Fargo Bank to declare a default
and accelerate our indebtedness to them if we default on our other loans, and such default would permit that lender to accelerate our indebtedness under any such loan. We are not in default of any of our loans.



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Part I. FINANCIAL INFORMATION, CONTINUED:

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



A summary of the Companys long term debt as of March 31, 2011 is as follows
(in thousands):



|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|--------------------------------------------------------- |  | ------- | ------- |  | ------------ |  | ---- | -------- |  |  | --------------- | 
|Fixed Rate Debt                                           |  | Balance |         |  | InterestRate |  |      | Maturity | 
|                                                          |  |         |        
|Lender                                                    |  |         |         |  |              |  |      |          |  |  |                 | 
|Elkhorn Valley Bank                                       |  | $       | 1,950   |  |              |  | 5.90 | %        |  |  | 10/2011         | 
|Great Western Bank                                        |  |         | 11,735  |  |              |  | 5.50 | %        |  |  | 12/2011         | 
|GE Capital                                                |  |         | 306     |  |              |  | 5.00 | %        |  |  | 1/2012          | 
|First National Bank of Omaha                              |  |         | 840     |  |              |  | 5.00 | %        |  |  | 3/2012          | 
|Great Western Bank                                        |  |         | 9,476   |  |              |  | 5.50 | %        |  |  | 5/2012          | 
|Greenwich Capital Financial Products                      |  |         | 30,584  |  |              |  | 7.50 | %        |  |  | 12/2012         | 
|Elkhorn Valley Bank                                       |  |         | 851     |  |              |  | 6.50 | %        |  |  | 4/2014          | 
|Citigroup Global Markets Realty Corp                      |  |         | 13,286  |  |              |  | 5.97 | %        |  |  | 11/2015         | 
|GE Capital                                                |  |         | 32,809  |  |              |  | 7.17 | %        |  |  | 9/2016 - 3/2017 | 
|GE Capital                                                |  |         | 18,607  |  |              |  | 7.69 | %        |  |  | 6/2017          | 
|Wachovia Bank                                             |  |         | 9,119   |  |              |  | 7.38 | %        |  |  | 3/2020          | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|Total Fixed Rate Debt                                     |  | $       | 129,563 |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |        
|Variable Rate Debt                                        |  |         |         |  |              |  |      |          | 
|                                                          |  |         |        
|Lender                                                    |  |         |         |  |              |  |      |          |  |  |                 | 
|Wells Fargo Bank                                          |  |         | 5,070   |  |              |  | 4.50 | %        |  |  | 9/2011          | 
|Great Western Bank                                        |  |         | 17,719  |  |              |  | 5.50 | %        |  |  | 2/2012          | 
|GE Capital                                                |  |         | 20,686  |  |              |  | 3.81 | %        |  |  | 2/2018          | 
|GE Capital                                                |  |         | 2,443   |  |              |  | 4.37 | %        |  |  | 2/2018          | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|Total Variable Rate Debt                                  |  | $       | 45,918  |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |        
|Subtotal debt                                             |  | $       | 175,481 |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |        
|Less: debt associated with hotel properties held for sale |  |         | 27,052  |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |        
|Total Long-Term Debt                                      |  | $       | 148,429 |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 

In January 2011, the Company borrowed $1.95 million from Elkhorn Valley Bank in Norfolk, Nebraska.
The note has a maturity date of October 1, 2011. The note bears interest at 5.9%. The borrowings were used to fund operations.

In March 2011, covenant waivers and other amendments were obtained for our credit facilities with Great Western Bank and Wells Fargo Bank, including an extension of the maturity date of our credit
facility, with Wells Fargo Bank from March 12, 2011 to September 30, 2011. These changes were reflected in the notes to our consolidated financial statements included in our Form 10-K for year ended December 31, 2010.

On March 29, 2011, we sold a Masters Inn in Atlanta (Tucker), Georgia (107 rooms) for approximately $2.4 million with no gain or
loss on sale. The majority of the proceeds were used to pay down the loan with General Electric Capital Corporation, with approximately $0.2 million used to reduce the revolving line of credit with Great Western Bank.



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Part I. FINANCIAL INFORMATION, CONTINUED:

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



In March 2011, the maturity date of the $0.8 million promissory note to First National
Bank of Omaha was extended to March 1, 2012.

Redemption of Noncontrolling Preferred Operating Partnership Units

At March 31, 2011, 51,035 of SLPs preferred operating partnership units (Preferred OP Units) were outstanding. The
redemption value for the Preferred OP Units is $0.5 million for March 31, 2011. Each limited partner of SLP may, subject to certain limitations, require that SLP redeem all or a portion of his or her Preferred OP Units, at any time after a
specified period following the date the units were acquired, by delivering a redemption notice to SLP. The Preferred OP Units are convertible by the holders into Common operating units (Common OP Units) on a one-for-one basis or,
pursuant to an extension agreement by the holders, may be redeemed for cash at the option of the holder at $10 per unit on or after October 24, 2011.

The holders of the 51,035 units elected to extend to October 24, 2011, their right to have units redeemed at $10 per unit. The 51,035 units will continue to be carried outside of permanent equity at
redemption value. The Preferred OP 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 SLP. Distributions to holders of
Preferred OP Units have priority over distributions to holders of Common OP Units. There were no Preferred OP Units redeemed during the three months ending March 31, 2011.

Capital Commitments

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



|                                  |  |       |         |  |                        |   |        |           |  |   |           |  |  |                  |        |  |  |   |        | 
|--------------------------------- |  | ----- | ------- |  | ---------------------- | - | ------ | --------- |  | - | --------- |  |  | ---------------- | ------ |  |  | - | ------ | 
|                                  |  |       |         |  | Payments Due by Period |  
|Contractual Obligations           |  | Total |         |  | Less than1
Year        |   |        | 1-3 Years |  |   | 4-5 Years |  |  | More than5 years |       
|Long-term debt including interest |  | $     | 178,266 |  |                        | $ | 22,896 |           |  | $ | 75,296    |  |  | $                | 27,260 |  |  | $ | 52,814 | 
|Land leases                       |  |       | 5,258   |  |                        |   | 81     |           |  |   | 219       |  |  |                  | 225    |  |  |   | 4,733  | 
|                                  |  |       |         |  |                        |   |        |           |  |   |           |  |  |                  |        |  |  |   |        | 
|Total contractual obligations     |  | $     | 183,524 |  |                        | $ | 22,977 |           |  | $ | 75,515    |  |  | $                | 27,485 |  |  | $ | 57,547 | 
|                                  |  |       |         |  |                        |   |        |           |  |   |           |  |  |                  |        |  |  |   |        | 

The column titled Less than 1 Year represents payments due for the balance of 2011. Long-term debt includes
debt on properties classified in continuing operations. The debt related to properties held for sale (and expected to be sold in the next 12 months) of $27.1 million is not included in the table above.

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. The land leases reflected in the table above represent continuing operations. In addition, the Company has management agreements with Royco Hotels and HLC Hotels, providing for the management
and operation of the hotels, which is discussed further within this document. On April 21, 2011, the Company through TRS Lessee entered into separate management agreements with Hospitality Management Advisors, Inc. (HMA), Strand
Development Company LLC (Strand) and Kinseth Hotel Corporation (Kinseth) as eligible independent operators to manage 95 of the Companys hotels commencing June 1, 2011. These hotels are currently managed by Royco Hotels.

Fair Value of Financial Instruments

Disclosures about fair value of financial instruments are based on pertinent information available to management as of the valuation date. Considerable judgment is necessary to interpret market data and
develop estimated fair values. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold or settled. The use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts.



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



The Company estimates the fair value of its fixed rate debt and the credit spreads over
variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take
into consideration general market conditions and maturity. As of March 31, 2011, the carrying value and estimated fair value of the Companys debt, excluding debt related to hotel properties held for sale, was $148.4 million and $151.5
million, respectively. As of December 31, 2010, the carrying value and estimated fair value of the Companys debt, excluding debt related to hotel properties held for sale, was $146.8 million and $150.9 million, respectively. The carrying
value of the Companys other financial instruments approximates fair value due to the short-term nature of these financial instruments.

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

The Companys funds from operations (FFO) for the three months ended March 31, 2011 was $(1.4) million, representing a decrease of $1.1 million from FFO reported for the three months
ended March 31, 2010. FFO without impairment, a non-cash item, for the three months ended March 31, 2011, was $(1.0) million, representing a decrease of $0.8 million. FFO is reconciled to net loss as follows (in thousands):



|                                              |  |                             |        |   |      |   |        |  
|--------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                              |  | Three months endedMarch 31, |       
|                                              |  | 2011                        |        |   | 2010 |  
|Net loss attributable to common shareholders  |  | $                           | (4,068 | ) |      | $ | (3,378 | )
|Depreciation and amortization                 |  |                             | 2,621  |   |      |   | 3,040  |  
|Net loss on disposition of real estate assets |  |                             | 19     |   |      |   | 36     |  
|                                              |  |                             |        |   |      |   |        |  
|FFO available to common shareholders          |  | $                           | (1,428 | ) |      | $ | (302   | )
|                                              |  |                             |        |   |      |   |        |  
|Impairment                                    |  |                             | 449    |   |      |   | 120    |  
|                                              |  |                             |        |   |      |   |        |  
|FFO without impairment, a non-cash item       |  | $                           | (979   | ) |      | $ | (182   | )
|                                              |  |                             |        |   |      |   |        |  

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 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.



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



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.

FFO without impairment is a non-GAAP financial measure.
As a result of a significant downturn in hotel and lodging fundamentals that took place in 2008 and 2009 and the related decrease in hotel and real estate valuations, we decided that FFO available to common shareholders did not provide all of the
information that allows us to better evaluate our operating performance.

To arrive at FFO without impairment, we adjust FFO
available to common shareholders, to exclude the following items:

(i) impairment charges of hotel properties that we have
sold or expect to sell, included in discontinued operations; and

(ii) impairment charges of hotel properties classified as
held for use.

We believe that these items are driven by factors relating to the fundamental disruption in the global
financial and real estate markets, rather than factors specific to the company or the performance of our properties or investments.

The impairment charges of hotel properties that were recognized in 2009 and 2010 were primarily based on valuations of hotels, which had declined due to market conditions that we no longer expected to
hold for long-term investment, and/or for which we have reduced our prior expected holding periods. In order to enhance liquidity, we have declared certain properties as held for sale and may declare other properties held for sale. To the extent
these properties are expected to be sold at a loss, we record an impairment charge when the loss is known. We have recognized certain of these impairment charges in several quarters in 2009 and 2010 and in the first quarter of 2011, and we believe
it is reasonably likely that we will recognize similar charges and recovery in the near future.

However, we believe that as
the financial markets stabilize, the potential for impairment charges of our hotel properties will diminish. We believe FFO without impairment provides investors with an additional measure to evaluate our operating performance as we emerge from this
period of fundamental disruption in the global financial and real estate markets.

We analyze our operating performance
primarily by revenues from our hotel properties, net of operating, administrative and financing expenses which are not directly impacted by short term fluctuations in the market value of our hotel properties. As a result, although these non-cash
impairment charges have had a material impact on our financial results and are reflected in our financial statements, the removal of the effects of these items allows us to better understand the core operating performance of our properties.



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Part I. FINANCIAL INFORMATION, CONTINUED:

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



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 March 31, 2011 and
2010, respectively. The comparisons of same store operations (excluding Held For Sale hotels) are for 89 hotels owned as of January 1, 2010.



|                   |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|------------------ |  | ----- | ----- |  | --------------------------------- | - | ----- | --------- |  |  | --------------------------------- | - |  | ----- | ----- |  | ------ |  | ----- | --------- |  | - | ----- |  |  |  | ---- | - |  | - | ----- | 
|                   |  |       |       |  | Three months ended March 31, 2011 |   |       |           |  |  | Three months ended March 31, 2010 |  
|Same Store         |  | Room  |       |  |                                   |   |       |           |  |  |                                   |   |  | Room  |       |  |        |  |       |           |  |   |       | 
|Region             |  | Count |       |  | RevPAR                            |   |       | Occupancy |  |  | ADR                               |   |  | Count |       |  | RevPAR |  |       | Occupancy |  |   | ADR   | 
|Mountain           |  |       | 214   |  |                                   | $ | 23.35 |           |  |  | 52.3                              | % |  | $     | 44.66 |  |        |  | 214   |           |  | $ | 25.58 |  |  |  | 56.5 | % |  | $ | 45.30 | 
|West North Central |  |       | 2,511 |  |                                   |   | 23.06 |           |  |  | 50.2                              | % |  |       | 45.92 |  |        |  | 2,511 |           |  |   | 22.77 |  |  |  | 50.1 | % |  |   | 45.46 | 
|East North Central |  |       | 964   |  |                                   |   | 28.06 |           |  |  | 48.3                              | % |  |       | 58.12 |  |        |  | 964   |           |  |   | 28.01 |  |  |  | 48.9 | % |  |   | 57.29 | 
|Middle Atlantic    |  |       | 142   |  |                                   |   | 31.54 |           |  |  | 59.8                              | % |  |       | 52.76 |  |        |  | 142   |           |  |   | 27.66 |  |  |  | 46.9 | % |  |   | 59.02 | 
|South Atlantic     |  |       | 2,369 |  |                                   |   | 27.82 |           |  |  | 67.6                              | % |  |       | 41.18 |  |        |  | 2,369 |           |  |   | 25.55 |  |  |  | 64.1 | % |  |   | 39.84 | 
|East South Central |  |       | 822   |  |                                   |   | 26.47 |           |  |  | 44.9                              | % |  |       | 58.92 |  |        |  | 822   |           |  |   | 26.97 |  |  |  | 47.9 | % |  |   | 56.24 | 
|West South Central |  |       | 456   |  |                                   |   | 26.21 |           |  |  | 59.8                              | % |  |       | 43.83 |  |        |  | 456   |           |  |   | 29.77 |  |  |  | 72.0 | % |  |   | 41.33 | 
|                   |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Hotels       |  |       | 7,478 |  |                                   | $ | 25.95 |           |  |  | 55.7                              | % |  | $     | 46.58 |  |        |  | 7,478 |           |  | $ | 25.39 |  |  |  | 55.6 | % |  | $ | 45.65 | 
|                   |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 



|                               |  |                                                                                                 
|------------------------------ |  | ------------------------------------------------------------------------------------------------
|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                |  | Pennsylvania                                                                                    
|South Atlantic                 |  | Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
|East South Central             |  | Kentucky and Tennessee                                                                          
|West South Central             |  | Arkansas and Louisiana                                                                          

Our RevPAR, ADR,
and Occupancy, by franchise affiliation, for the three months ended March 31, 2011 and 2010, were as follows:



|                            |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|--------------------------- |  | ----- | ----- |  | --------------------------------- | - | ----- | --------- |  |  | --------------------------------- | - |  | ----- | ----- |  | ------ |  | ----- | --------- |  | - | ----- |  |  |  | ---- | - |  | - | ----- | 
|                            |  |       |       |  | Three months ended March 31, 2011 |   |       |           |  |  | Three months ended March 31, 2010 |  
|Same Store                  |  | Room  |       |  |                                   |   |       |           |  |  |                                   |   |  | Room  |       |  |        |  |       |           |  |   |       | 
|Brand                       |  | Count |       |  | RevPAR                            |   |       | Occupancy |  |  | ADR                               |   |  | Count |       |  | RevPAR |  |       | Occupancy |  |   | ADR   | 
|Limited Service             |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Midscale                    |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Comfort Inn/ Comfort Suites |  |       | 1,669 |  |                                   | $ | 31.97 |           |  |  | 51.2                              | % |  | $     | 62.45 |  |        |  | 1,669 |           |  | $ | 31.10 |  |  |  | 51.1 | % |  | $ | 60.90 | 
|Hampton Inn                 |  |       | 135   |  |                                   |   | 45.88 |           |  |  | 60.6                              | % |  |       | 75.69 |  |        |  | 135   |           |  |   | 42.95 |  |  |  | 60.1 | % |  |   | 71.44 | 
|Sleep Inn                   |  |       | 153   |  |                                   |   | 30.91 |           |  |  | 53.0                              | % |  |       | 58.30 |  |        |  | 153   |           |  |   | 36.55 |  |  |  | 55.8 | % |  |   | 65.52 | 
|Guesthouse Inn              |  |       | 177   |  |                                   |   | 20.04 |           |  |  | 43.6                              | % |  |       | 45.94 |  |        |  | 177   |           |  |   | 19.85 |  |  |  | 44.9 | % |  |   | 44.25 | 
|Other Midscale (1)          |  |       | 263   |  |                                   |   | 34.07 |           |  |  | 53.5                              | % |  |       | 63.68 |  |        |  | 263   |           |  |   | 36.36 |  |  |  | 61.3 | % |  |   | 59.36 | 
|                            |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Midscale              |  |       | 2,397 |  |                                   | $ | 32.04 |           |  |  | 51.5                              | % |  | $     | 62.16 |  |        |  | 2,397 |           |  | $ | 31.86 |  |  |  | 52.5 | % |  | $ | 60.64 | 
|                            |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Economy                     |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Days Inn                    |  |       | 870   |  |                                   |   | 28.64 |           |  |  | 58.8                              | % |  |       | 48.70 |  |        |  | 870   |           |  |   | 27.84 |  |  |  | 60.0 | % |  |   | 46.43 | 
|Super 8                     |  |       | 3,032 |  |                                   |   | 22.34 |           |  |  | 50.1                              | % |  |       | 44.58 |  |        |  | 3,032 |           |  |   | 21.90 |  |  |  | 49.9 | % |  |   | 43.89 | 
|Other Economy (2)           |  |       | 81    |  |                                   |   | 59.47 |           |  |  | 69.9                              | % |  |       | 85.09 |  |        |  | 81    |           |  |   | 49.08 |  |  |  | 59.9 | % |  |   | 81.93 | 
|                            |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Economy               |  |       | 3,983 |  |                                   | $ | 24.47 |           |  |  | 52.4                              | % |  | $     | 46.69 |  |        |  | 3,983 |           |  | $ | 23.75 |  |  |  | 52.3 | % |  | $ | 45.41 | 
|                            |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Midscale/Economy      |  |       | 6,380 |  |                                   | $ | 27.32 |           |  |  | 52.1                              | % |  | $     | 52.44 |  |        |  | 6,380 |           |  | $ | 26.80 |  |  |  | 52.4 | % |  | $ | 51.15 | 
|                            |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|                            |  |       |       |  |                                   |   |       |          
|Economy Extended Stay (3)   |  |       | 1,098 |  |                                   |   | 18.02 |           |  |  | 76.7                              | % |  |       | 23.48 |  |        |  | 1,098 |           |  |   | 17.19 |  |  |  | 74.3 | % |  |   | 23.14 | 
|                            |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|                            |  |       |       |  |                                   |   |       |          
|Total Hotels                |  |       | 7,478 |  |                                   | $ | 25.95 |           |  |  | 55.7                              | % |  | $     | 46.58 |  |        |  | 7,478 |           |  | $ | 25.39 |  |  |  | 55.6 | % |  | $ | 45.65 | 
|                            |  |       |       |  |                                   |   |       |           |  |  |                                   |   |  |       |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 



|1 | Includes Ramada Limited, Baymont Inn, Quality Inn, and Holiday Inn Express brands
|- | ---------------------------------------------------------------------------------

|2 | Includes Key West Inns and non franchised independent hotels
|- | ------------------------------------------------------------

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



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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, 2010.

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 control 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.



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##### Table of Contents

Part II. OTHER INFORMATION:

Item 1. Legal Proceedings

Litigation

Various claims and legal proceedings arise in the ordinary
course of business and may be pending against the Company and its properties. Based upon the information available, the Company believes that the resolution of any of these claims and legal proceedings should not have a material adverse affect on
its consolidated financial position, results of operations or cash flows. Three separate lawsuits have been filed against the Company in Jefferson Circuit Court, Louisville, Kentucky; one lawsuit filed by a plaintiff on June 26, 2008, a second
lawsuit filed by fourteen plaintiffs on December 15, 2008 and a third lawsuit filed by six plaintiffs on January 16, 2009. The plaintiffs in the three cases, now consolidated as one action, allege that as guests at the Companys hotel
in Louisville, Kentucky, they were exposed to carbon monoxide as a consequence of a faulty water heater at the hotel.

Plaintiffs are seeking to recover for damages arising out of physical and mental injury, lost wages, pain and suffering, past and future
medical expenses and punitive or exemplary damages. At this time, the company has reached agreement to settle the claims, subject to court approval for certain minor plaintiffs, and one settlement has been paid. The settlements were made with
authorization from the insurers and the Company has recorded a liability for the amount of the unpaid claims and a receivable reflecting recoverability of the claim from the insurers.

On March 25, 2011, Royco Hotels and the Company settled a lawsuit filed by Royco Hotels against the Company. The settlement
agreement between the parties provides that (a) the Company will pay an aggregate of $590,000 in varying amounts of installments through July 1, 2013 to Royco Hotels as financial settlement of the lawsuit and fees owed to Royco Hotels as
termination fees for hotels that have been sold, (b) Royco Hotels will permit the Company and new managers access to certain Royco Hotels employees and waive any prohibitions under the management agreement with respect to such access, and
(c) the management agreement will be terminated effective May 31, 2011.

Item 1A. Risk Factors

The following risk factors are in addition to the Companys risk factors set forth in Item 1A of its Annual
Report on Form 10-K for the year ended December 31, 2010.

We will likely seek to sell equity and/or debt securities to meet our
need for additional cash, and we cannot assure you that such financing will be available and further, in connection with such sales our current shareholders will experience a material amount of dilution.

We will require additional cash resources due to current business conditions and any acquisitions we may decide to pursue. We will likely
seek to sell additional equity and/or debt securities. We cannot assure you that the sale of such securities will be available in amounts or on terms acceptable to us, if at all. If our board determines to sell additional shares of common stock or
other debt or equity securities, a material amount of dilution can be expected to cause the market price of the common stock to decline.

The engagement of multiple new management companies could adversely affect our operating results.

Our management agreement with the independent operator of 95 of our hotels will terminate on May 31, 2011 pursuant to
the settlement of a lawsuit with that operator. We have engaged three new management companies to operate these 95 hotels commencing June 1, 2011. If the integration of the new independent operators in the management of our hotels is not
accomplished efficiently as planned, we will experience a decrease in our operating results from decreased occupancy, revenue per available room and average daily rates and other significant disruptions at our hotels and in our operations generally.



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Part II. OTHER INFORMATION, CONTINUED:



Item 5. Other Information

Summary Financial Data

The following sets forth summary financial data that has been prepared by the Company without audit. The Company believes the following
data should be used as a supplement to the condensed consolidated statements of operations and should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2010.



|                                                                        |  |                             |        |   |      |   |        |  
|----------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|(In thousands, except per share and statistical data)                   |  |                             |        |   |      |  
|                                                                        |  | Three months endedMarch 31, |       
|                                                                        |  | 2011                        |        |   | 2010 |  
|Loss from continuing operations before income taxes                     |  | $                           | (4,113 | ) |      | $ | (3,384 | )
|                                                                        |  |                             |        |   |      |   |        |  
|Net loss attributable to common shareholders                            |  | $                           | (4,068 | ) |      | $ | (3,378 | )
|                                                                        |  |                             |        |   |      |   |        |  
|                                                                        |  |                            
|Earnings per share from continuing operations - basic                   |  | $                           | (0.16  | ) |      | $ | (0.14  | )
|                                                                        |  |                             |        |   |      |   |        |  
|Earnings per share from discontinued operations - basic                 |  | $                           | (0.02  | ) |      | $ | (0.01  | )
|                                                                        |  |                             |        |   |      |   |        |  
|Earnings per share - basic                                              |  | $                           | (0.18  | ) |      | $ | (0.15  | )
|                                                                        |  |                             |        |   |      |   |        |  
|Earnings per share - diluted                                            |  | $                           | (0.18  | ) |      | $ | (0.15  | )
|                                                                        |  |                             |        |   |      |   |        |  
|                                                                        |  |                            
|Adjusted EBITDA (1)                                                     |  | $                           | 940    |   |      | $ | 1,972  |  
|                                                                        |  |                             |        |   |      |   |        |  
|                                                                        |  |                            
|FFO attributable to common shareholders (2)                             |  | $                           | (1,428 | ) |      | $ | (302   | )
|                                                                        |  |                             |        |   |      |   |        |  
|                                                                        |  |                            
|FFO per share - basic                                                   |  | $                           | (0.06  | ) |      | $ | (0.01  | )
|                                                                        |  |                             |        |   |      |   |        |  
|FFO without impairment, a non-cash item, per share - basic              |  | $                           | (0.04  | ) |      | $ | (0.01  | )
|                                                                        |  |                             |        |   |      |   |        |  
|FFO per share - diluted                                                 |  | $                           | (0.06  | ) |      | $ | (0.01  | )
|                                                                        |  |                             |        |   |      |   |        |  
|FFO without impairment, a non-cash item, per share - diluted            |  | $                           | (0.04  | ) |      | $ | (0.01  | )
|                                                                        |  |                             |        |   |      |   |        |  
|                                                                        |  |                            
|Net cash flow:                                                          |  |                             |        |   |      |   |        |  
|Provided by (used in) operating activities                              |  | $                           | (1,302 | ) |      | $ | 90     |  
|Provided by investing activities                                        |  | $                           | 1,247  |   |      | $ | 2,139  |  
|Provided by (used in) financing activities                              |  | $                           | 41     |   |      | $ | (2,237 | )
|                                                                        |  |                            
|Weighted average number of shares outstanding for:                      |  |                             |        |   |      |   |        |  
|calculation of earnings per share and FFO per share - basic and diluted |  |                             | 22,918 |   |      |   | 22,002 |  
|                                                                        |  |                             |        |   |      |   |        |  



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Part II. OTHER INFORMATION, CONTINUED:



Item 5. Other Information, continued:



|                                                                 |  |                             |        |   |      |   |        |  
|---------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|(In thousands, except per share and statistical data)            |  |                             |        |   |      |  
|                                                                 |  | Three months endedMarch 31, |       
|                                                                 |  | 2011                        |        |   | 2010 |  
|RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA                    |  |                             |        |   |      |   |        |  
|Net loss attributable to common shareholders                     |  | $                           | (4,068 | ) |      | $ | (3,378 | )
|Interest, including discontinued operations                      |  |                             | 3,103  |   |      |   | 3,055  |  
|Income tax benefit, including discontinued operations            |  |                             | (1,073 | ) |      |   | (1,106 | )
|Depreciation and amortization, including discontinued operations |  |                             | 2,621  |   |      |   | 3,040  |  
|                                                                 |  |                             |        |   |      |   |        |  
|EBITDA                                                           |  |                             | 583    |   |      |   | 1,611  |  
|Noncontrolling interest                                          |  |                             | (11    | ) |      |   | (7     | )
|Preferred stock dividends                                        |  |                             | 368    |   |      |   | 368    |  
|                                                                 |  |                             |        |   |      |   |        |  
|Adjusted EBITDA (1)                                              |  | $                           | 940    |   |      | $ | 1,972  |  
|                                                                 |  |                             |        |   |      |   |        |  
|                                                                 |  |                            
|RECONCILIATION OF NET LOSS TO FFO                                |  |                             |        |   |      |   |        |  
|Net loss attributable to common shareholders                     |  | $                           | (4,068 | ) |      | $ | (3,378 | )
|Depreciation and amortization                                    |  |                             | 2,621  |   |      |   | 3,040  |  
|Net loss on disposition of assets                                |  |                             | 19     |   |      |   | 36     |  
|                                                                 |  |                             |        |   |      |   |        |  
|FFO available to common shareholders (2)                         |  | $                           | (1,428 | ) |      | $ | (302   | )
|                                                                 |  |                             |        |   |      |   |        |  
|Impairment                                                       |  |                             | 449    |   |      |   | 120    |  
|                                                                 |  |                             |        |   |      |   |        |  
|FFO without impairment, a non-cash item (3)                      |  | $                           | (979   | ) |      | $ | (182   | )
|                                                                 |  |                             |        |   |      |   |        |  
|                                                                 |  |                            
|ADDITIONAL INFORMATION  SAME STORE                              |  |                             |        |   |      |   |        |  
|Average Daily Rate                                               |  | $                           | 46.58  |   |      | $ | 45.65  |  
|Revenue Per Available Room                                       |  | $                           | 25.95  |   |      | $ | 25.39  |  
|Occupancy                                                        |  |                             | 55.7   | % |      |   | 55.6   | %



|(1) | Adjusted EBITDA is a financial measure that is not calculated in accordance with accounting principles generally accepted in the United States of America
(GAAP). 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 and noncontrolling interests, which are cash
charges.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 does the measurement reflect cash expenditures for longterm 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.



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Part II. OTHER INFORMATION, CONTINUED:



|(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 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.



|(3) | FFO without impairment, a non-cash item (FFO without impairment)
|--- | ------------------------------------------------------------------

FFO without impairment is a non-GAAP financial measure. As a result of a significant downturn in hotel and lodging fundamentals that took place in 2008 and 2009 and the related decrease in hotel and real
estate valuations, we decided that FFO available to common shareholders did not provide all of the information that allows us to better evaluate our operating performance.

To arrive at FFO without impairment, we adjust FFO available to common shareholders, to exclude the following items:

(i) impairment charges of hotel properties that we have sold or expect to sell, included in discontinued operations; and

(ii) impairment charges of hotel properties classified as held for use.

We
believe that these items are driven by factors relating to the fundamental disruption in the global financial and real estate markets, rather than factors specific to the company or the performance of our properties or investments.

The impairment charges of hotel properties that were recognized in 2009 and 2010 were primarily based on valuations of hotels, which had
declined due to market conditions that we no longer expected to hold for long-term investment, and/or for which we have reduced our prior expected holding periods. In order to enhance liquidity, we have declared certain properties as held for sale
and may declare other properties held for sale. To the extent these properties are expected to be sold at a loss, we record an impairment charge when the loss is known. We have recognized certain of these impairment charges over several quarters in
2009 and 2010 and in the first quarter of 2011, and we believe it is reasonably likely that we will recognize similar charges and gains in the near future.

However, we believe that as the financial markets stabilize, the potential for impairment charges of our hotel properties will diminish. We believe FFO without impairment provides investors with an
additional measure to evaluate our operating performance as we emerge from this period of fundamental disruption in the global financial and real estate markets.



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Part II. OTHER INFORMATION, CONTINUED:



We analyze our operating performance primarily by revenues from our hotel properties,
net of operating, administrative and financing expenses which are not directly impacted by short term fluctuations in the market value of our hotel properties. As a result, although these non-cash impairment charges have had a material impact on our
financial results and are reflected in our financial statements, the removal of the effects of these items allows us to better understand the core operating performance of our properties.

Item 6. Exhibits



|           |  |                                                                                                                                     
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                         
|           | 
|10.1       |  | Third Amendment to Amended and Restated Loan Agreement dated as of March 15, 2011 by and between the Company and Great Western Bank.
|           | 
|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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Supertel Hospitality, Inc., and Subsidiaries

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/ Kelly A. Walters                  |  | 
| |  |                            |  | Kelly A. Walters                      |  | 
| |  |                            |  | President and Chief Executive Officer |  | 

Dated this 10thday of May, 2011



| |  |     |  |                                       |  | 
| |  | --- |  | ------------------------------------- |  | 
| |  | By: |  | /s/ Corrine L. Scarpello              |  | 
| |  |     |  | Corrine L. Scarpello                  |  | 
| |  |     |  | Chief Financial Officer and Secretary |  | 

Dated this 10thday of May, 2011



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Supertel Hospitality, Inc., and Subsidiaries

Exhibits



|           |  |                                                                                                                                     
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                         
|           | 
|10.1       |  | Third Amendment to Amended and Restated Loan Agreement dated as of March 15, 2011 by and between the Company and Great Western Bank.
|           | 
|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                                                   



42