##### 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 September 30, 2008
|- | -----------------------------------------------------------------------------------------------------------------------------------------

or



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

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



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

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

As of October 29, 2008, there were 20,924,022 shares of common stock, par value $.01 per share, outstanding.









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##### Table of Contents

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



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



2



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##### Table of Contents

Part I. FINANCIAL INFORMATION

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

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share and share data)



|                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                          |  | As of             |        
|                                                                                                                                                                                          |  | September 30,2008 |         |   | December 31,2007 |  
|                                                                                                                                                                                          |  | (unaudited)       |         |   |                  |  
|ASSETS                                                                                                                                                                                    |  |                   |         |   |                  |   |         |  
|Investments in hotel properties                                                                                                                                                           |  | $                 | 407,502 |   |                  | $ | 376,240 |  
|Less accumulated depreciation                                                                                                                                                             |  |                   | 86,110  |   |                  |   | 75,295  |  
|                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                          |  |                   | 321,392 |   |                  |   | 300,945 |  
|                                                                                                                                                                                          |  |                  
|Cash and cash equivalents                                                                                                                                                                 |  |                   | 1,368   |   |                  |   | 1,166   |  
|Accounts receivable                                                                                                                                                                       |  |                   | 2,609   |   |                  |   | 2,242   |  
|Prepaid expenses and other assets                                                                                                                                                         |  |                   | 3,398   |   |                  |   | 4,725   |  
|Deferred financing costs, net                                                                                                                                                             |  |                   | 1,703   |   |                  |   | 1,947   |  
|                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                          |  | $                 | 330,470 |   |                  | $ | 311,025 |  
|                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                          |  |                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                      |  |                   |         |   |                  |   |         |  
|LIABILITIES                                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Accounts payable, accrued expenses and other liabilities                                                                                                                                  |  | $                 | 16,618  |   |                  | $ | 12,401  |  
|Long-term debt                                                                                                                                                                            |  |                   | 210,096 |   |                  |   | 196,840 |  
|                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                          |  |                   | 226,714 |   |                  |   | 209,241 |  
|                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                          |  |                  
|Minority interest in consolidated partnerships, redemption value $7,011 and $9,544                                                                                                        |  |                   | 9,925   |   |                  |   | 10,178  |  
|Redeemable preferred stock Series B, 800,000 shares authorized; $.01 par value, 332,500 shares outstanding, liquidation preference of $8,312                                              |  |                   | 7,662   |   |                  |   |        |  
|                                                                                                                                                                                          |  |                  
|SHAREHOLDERS EQUITY                                                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Preferred stock, 40,000,000 shares authorized; Series A, 2,500,000 shares authorized, $.01 par value, 803,270 and 932,026 shares outstanding,
liquidation preference of $8,033 and $9,320 |  |                   | 8       |   |                  |   | 9       |  
|Common stock, $.01 par value, 100,000,000 shares authorized; 20,924,022 and 20,696,126 shares outstanding.                                                                                |  |                   | 209     |   |                  |   | 207     |  
|Additional paid-in capital                                                                                                                                                                |  |                   | 112,798 |   |                  |   | 112,792 |  
|Distributions in excess of retained earnings                                                                                                                                              |  |                   | (26,846 | ) |                  |   | (21,402 | )
|                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                          |  |                   | 86,169  |   |                  |   | 91,606  |  
|                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                          |  |                  
|                                                                                                                                                                                          |  | $                 | 330,470 |   |                  | $ | 311,025 |  
|                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  

See accompanying notes to consolidated financial statements.



3



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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



SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited  in thousands, except per share data)



|                                                                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                                       |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                                       |  | 2008                            |        |   | 2007                           |   |        | 2008 |  |   | 2007    |  
|REVENUES                                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Room rentals and other hotel services                                                                                  |  | $                               | 35,170 |   |                                | $ | 34,057 |      |  | $ | 97,790  |   |  | $ | 84,225 |  
|                                                                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|EXPENSES                                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Hotel and property operations                                                                                          |  |                                 | 24,606 |   |                                |   | 23,120 |      |  |   | 69,826  |   |  |   | 58,378 |  
|Depreciation and amortization                                                                                          |  |                                 | 3,826  |   |                                |   | 3,275  |      |  |   | 11,146  |   |  |   | 8,877  |  
|General and administrative                                                                                             |  |                                 | 954    |   |                                |   | 940    |      |  |   | 2,949   |   |  |   | 2,791  |  
|                                                                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                                       |  |                                 | 29,386 |   |                                |   | 27,335 |      |  |   | 83,921  |   |  |   | 70,046 |  
|                                                                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|EARNINGS BEFORE NET LOSS ON DISPOSITIONS OF ASSETS, OTHER INCOME, INTEREST EXPENSE, MINORITY INTEREST AND INCOME TAXES |  |                                 | 5,784  |   |                                |   | 6,722  |      |  |   | 13,869  |   |  |   | 14,179 |  
|                                                                                                                       |  |                                 |        |  
|Net loss on dispositions of assets                                                                                     |  |                                 | (3     | ) |                                |   | (13    | )    |  |   | (2      | ) |  |   | (13    | )
|Other income                                                                                                           |  |                                 | 28     |   |                                |   | 38     |      |  |   | 91      |   |  |   | 115    |  
|Interest expense                                                                                                       |  |                                 | (3,371 | ) |                                |   | (3,759 | )    |  |   | (10,472 | ) |  |   | (9,249 | )
|Minority interest                                                                                                      |  |                                 | (175   | ) |                                |   | (167   | )    |  |   | (356    | ) |  |   | (309   | )
|                                                                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                                  |  |                                 | 2,263  |   |                                |   | 2,821  |      |  |   | 3,130   |   |  |   | 4,723  |  
|                                                                                                                       |  |                                 |        |  
|Income tax (expense) benefit                                                                                           |  |                                 | (175   | ) |                                |   | (341   | )    |  |   | 189     |   |  |   | (230   | )
|                                                                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|NET INCOME                                                                                                             |  |                                 | 2,088  |   |                                |   | 2,480  |      |  |   | 3,319   |   |  |   | 4,493  |  
|                                                                                                                       |  |                                 |        |  
|Preferred stock dividends                                                                                              |  |                                 | (369   | ) |                                |   | (211   | )    |  |   | (792    | ) |  |   | (749   | )
|                                                                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                                                                            |  | $                               | 1,719  |   |                                | $ | 2,269  |      |  | $ | 2,527   |   |  | $ | 3,744  |  
|                                                                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|EPS Basic                                                                                                              |  | $                               | 0.08   |   |                                | $ | 0.11   |      |  | $ | 0.12    |   |  | $ | 0.19   |  
|                                                                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|EPS Diluted                                                                                                            |  | $                               | 0.08   |   |                                | $ | 0.11   |      |  | $ | 0.12    |   |  | $ | 0.19   |  
|                                                                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  

See accompanying notes to consolidated financial statements.



4



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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



SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited  in thousands)



|                                                                                  |  |                                 |         |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                  |  | Nine Months Ended September 30, |        
|                                                                                  |  | 2008                            |         |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                                 |         |   |      |   |          |  
|Net income                                                                        |  | $                               | 3,319   |   |      | $ | 4,493    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |         |   |      |   |          |  
|Depreciation and amortization                                                     |  |                                 | 11,146  |   |      |   | 8,877    |  
|Amortization of intangible assets and deferred financing costs                    |  |                                 | 409     |   |      |   | 268      |  
|Loss on dispositions of assets                                                    |  |                                 | 2       |   |      |   | 13       |  
|Amortization of stock option expense                                              |  |                                 | 7       |   |      |   | 32       |  
|Minority interest                                                                 |  |                                 | 356     |   |      |   | 309      |  
|Deferred income taxes                                                             |  |                                 | (189    | ) |      |   | 230      |  
|Changes in operating assets and liabilities:                                      |  |                                 |         |   |      |   |          |  
|(Increase) decrease in assets                                                     |  |                                 | 1,200   |   |      |   | (2,956   | )
|Increase in liabilities                                                           |  |                                 | 4,199   |   |      |   | 6,704    |  
|                                                                                  |  |                                 |         |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                                 | 20,449  |   |      |   | 17,970   |  
|                                                                                  |  |                                 |         |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                                 |         |   |      |   |          |  
|Additions to hotel properties                                                     |  |                                 | (8,671  | ) |      |   | (7,685   | )
|Acquisition and development of hotel properties                                   |  |                                 | (22,903 | ) |      |   | (92,522  | )
|Proceeds from sale of hotel assets                                                |  |                                 | 7       |   |      |   | 7        |  
|                                                                                  |  |                                 |         |   |      |   |          |  
|Net cash used by investing activities                                             |  |                                 | (31,567 | ) |      |   | (100,200 | )
|                                                                                  |  |                                 |         |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                                 |         |   |      |   |          |  
|Deferred financing costs                                                          |  |                                 | (165    | ) |      |   | (607     | )
|Principal payments on long-term debt                                              |  |                                 | (16,544 | ) |      |   | (2,214   | )
|Proceeds from long-term debt, net                                                 |  |                                 | 29,800  |   |      |   | 84,936   |  
|Warrant conversion                                                                |  |                                 |        |   |      |   |         |  
|Stock option conversion                                                           |  |                                 |        |   |      |   | 17       |  
|Distributions to minority partners                                                |  |                                 | (635    | ) |      |   | (287     | )
|Common stock offering                                                             |  |                                 | (64     | ) |      |   | 3,359    |  
|Preferred stock offering                                                          |  |                                 | 7,662   |   |      |   |         |  
|Dividends paid to common shareholders                                             |  |                                 | (7,942  | ) |      |   | (5,910   | )
|Dividends paid to preferred shareholders                                          |  |                                 | (792    | ) |      |   | (749     | )
|                                                                                  |  |                                 |         |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                                 | 11,320  |   |      |   | 78,545   |  
|                                                                                  |  |                                 |         |   |      |   |          |  
|Increase (decrease) in cash and cash equivalents                                  |  |                                 | 202     |   |      |   | (3,685   | )
|                                                                                  |  |                                
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                    |  |                                 | 1,166   |   |      |   | 5,436    |  
|                                                                                  |  |                                
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                          |  | $                               | 1,368   |   |      | $ | 1,751    |  
|                                                                                  |  |                                 |         |   |      |   |          |  
|SUPPLEMENTAL CASH FLOW INFORMATION                                                |  |                                 |         |   |      |   |          |  
|Interest paid, net of amounts capitalized                                         |  | $                               | 10,173  |   |      | $ | 8,496    |  
|                                                                                  |  |                                
|SCHEDULE OF NONCASH FINANCING ACTIVITIES                                          |  |                                 |         |   |      |   |          |  
|Dividends declared common                                                         |  |                                 | 7,971   |   |      |   | 7,152    |  
|Dividends declared preferred                                                      |  |                                 | 792     |   |      |   | 749      |  
|Dividends declared common units                                                   |  |                                 | 473     |   |      |   | 239      |  
|Issuance of operating partnership units                                           |  |                                 |        |   |      |   | 6,950    |  
|Assumed debt for acquisitions                                                     |  |                                 |        |   |      |   | 11,356   |  
|Warrants exercised                                                                |  |                                 |        |   |      |   | 53       |  

See accompanying notes to consolidated financial statements.



5



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Nine Months Ended September 30, 2008 and 2007

(Unaudited)

General

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

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

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

The hotel management agreement, as amended, between TRS Lessee and Royco Hotels, the manager of 110 of the
Companys hotels, provides for Royco Hotel 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 May 16, 2007, Supertel Limited Partnership acquired 15 hotels which are operated under the Masters Inn name. In connection with the acquisition,
TRS entered into a management agreement with HLC, an affiliate of the sellers of the hotels. The management agreement, as amended, provides for HLC to operate and manage the 15 hotels through December 31, 2011 and receive management fees equal
to 5.0% of the gross revenues derived from the operation of the hotels and incentive fees equal to 10% of the annual operating income of the hotels in excess of 10.5% of the Companys investment in the hotels.

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



6



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Nine Months Ended September 30, 2008 and 2007

(Unaudited)



Consolidated Financial Statements

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

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

Hotel Acquisitions

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

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

Earnings Per Share

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



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
and Nine Months Ended September 30, 2008 and 2007

(Unaudited)



(dollars in thousands, except share data)



|                                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|-------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                                   |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                   |  | 2008                            |        | 2007                           |   | 2008   |  | 2007
|Numerator:                                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Net income available to common shareholders        |  | $                               | 1,719  |                                | $ | 2,269  |  | $    | 2,527  |  | $ | 3,744 
|                                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Denominator:                                       |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Weighted average number of common shares - basic   |  |                                 | 20,906 |                                |   | 20,448 |  |      | 20,811 |  |   | 20,062
|                                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Weighted average number of common shares - diluted |  |                                 | 20,906 |                                |   | 20,472 |  |      | 20,812 |  |   | 20,084
|                                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Earnings Per Common Share:                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Net income available to common shareholders:       |  |                                 |        |                                |   |        |  |      |        |  |   |       
|per weighted average common share - basic          |  | $                               | 0.08   |                                | $ | 0.11   |  | $    | 0.12   |  | $ | 0.19  
|                                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       
|per weighted average common share - diluted        |  | $                               | 0.08   |                                | $ | 0.11   |  | $    | 0.12   |  | $ | 0.19  
|                                                   |  |                                 |        |                                |   |        |  |      |        |  |   |       

Preferred and Common Limited Partnership Units in SLP

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

Preferred Stock of SHI

There were 803,270 and
1,010,585 shares, respectively, of Series A Convertible Preferred Stock that remained outstanding at September 30, 2008 and 2007. Series A Convertible Preferred Stock converted 22,819 and 108,866 shares, respectively, into 40,388 and 192,691
shares, respectively, of common stock during the three months ended September 30, 2008 and 2007. Series A Convertible Preferred Stock converted 128,756 and 527,906 shares, respectively, into 227,896 and 934,383 shares, respectively, of common
stock during the nine months ended September 30, 2008 and 2007. There were 126,311 Series A Convertible Preferred Stock Warrants outstanding as of June 30, 2007, these warrants were fully exercised during July 2007. The convertible
provision of the Series A Convertible Preferred Stock, after adjusting the numerator and denominator for the basic EPS computation, is antidilutive for the earnings per share computation for the three and nine months ended September 30, 2008
and 2007. The preferred stock warrants were excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2007, since the preferred stock is antidilutive.

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

Stock Options

The potential common shares represented by outstanding stock options for the three and nine months ended September 30, 2007 totaled 162,143. For the
nine months ended September 30, 2007, 65,000 shares are antidilutive and 74,599 shares are assumed to be purchased with proceeds from the exercise of stock options resulting in 22,544 shares that are dilutive. For the three months ended
September 30, 2007 137,408 shares are assumed to be purchased with proceeds from the exercise of stock options resulting in 24,735 shares that are dilutive.



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Nine Months Ended September 30, 2008 and 2007

(Unaudited)



The potential common shares represented by outstanding stock options for the three and nine months
ended September 30, 2008 totaled 192,143. For the nine months ended September 30, 2008, 95,000 shares are antidilutive and 96,656 shares are assumed to be purchased with proceeds from the exercise of stock options resulting in 487 shares
that are dilutive. For the three months ended September 30, 2008 all 192,143 shares are antidulitive.

Debt Financing

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

Effective May 1, 2008, the Company converted the variable interest rate on $64.6 million of long-term
debt to an average annual fixed rate equal to 5.9% for the remaining term of 8.5 years. The debt consists of four mortgage loans payable to General Electric Capital Corporation (GECC).

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

Stock-Based Compensation

Options

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

Share-Based Compensation Expense

The expense
recognized in the consolidated financial statements for the three months ended September 30, 2008 and 2007 for share-based compensation related to employees and directors was $4,900 and $22,600, respectively. The expense for the nine months
ended September 30, 2008 and 2007 was $7,000 and $31,600, respectively.

Income Taxes

For the three months ended September 30, 2008, the TRS reflected an income tax expense of $175,000 which is comprised of a net state and local tax
expense of $35,000 and a federal tax expense of $140,000. For the nine months ended September 30, 2008, the TRS reflected an income tax benefit of $189,000 which is comprised of a net state and local tax benefit of $21,000 and a federal tax
benefit of $168,000.



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

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Nine Months Ended September 30, 2008 and 2007

(Unaudited)



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



|                                   |  |                                         |      |   |                                        |   |      |      |  |      |     |  |   |      |  
|---------------------------------- |  | --------------------------------------- | ---- | - | -------------------------------------- | - | ---- | ---- |  | ---- | --- |  | - | ---- | -
|                                   |  | For the three months endedSeptember 30, |      |   | For the nine months endedSeptember 30, |  
|                                   |  | 2008                                    |      |   | 2007                                   |   |      | 2008 |  | 2007 |    
|Federal                            |  |                                         |      |   |                                        |   |      |      |  |      |     |  |   |      |  
|Deferred                           |  | $                                       | (140 | ) |                                        | $ | (281 | )    |  | $    | 168 |  | $ | (190 | )
|State & Local                      |  |                                         |      |   |                                        |   |      |      |  |      |     |  |   |      |  
|Deferred                           |  |                                         | (35  | ) |                                        |   | (60  | )    |  |      | 21  |  |   | (40  | )
|                                   |  |                                         |      |   |                                        |   |      |      |  |      |     |  |   |      |  
|Total income tax (expense) benefit |  | $                                       | (175 | ) |                                        | $ | (341 | )    |  | $    | 189 |  | $ | (230 | )
|                                   |  |                                         |      |   |                                        |   |      |      |  |      |     |  |   |      |  

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



|                                                                     |  |                                         |      |   |                                        |   |      |      |  |      |     |  |   |      |  
|-------------------------------------------------------------------- |  | --------------------------------------- | ---- | - | -------------------------------------- | - | ---- | ---- |  | ---- | --- |  | - | ---- | -
|                                                                     |  | For the three months endedSeptember 30, |      |   | For the nine months endedSeptember 30, |  
|                                                                     |  | 2008                                    |      |   | 2007                                   |   |      | 2008 |  | 2007 |    
|Expected federal tax (expense) benefit at 34%                      |  | $                                       | (153 | ) |                                        | $ | (290 | )    |  | $    | 149 |  | $ | (196 | )
|State income tax (expense) benefit, net of federal income tax effect |  |                                         | (23  | ) |                                        |   | (39  | )    |  |      | 14  |  |   | (26  | )
|Other (expense) benefit, net                                         |  |                                         | 1    |   |                                        |   | (12  | )    |  |      | 26  |  |   | (8   | )
|                                                                     |  |                                         |      |   |                                        |   |      |      |  |      |     |  |   |      |  
|Total income tax (expense) benefit                                   |  | $                                       | (175 | ) |                                        | $ | (341 | )    |  | $    | 189 |  | $ | (230 | )
|                                                                     |  |                                         |      |   |                                        |   |      |      |  |      |     |  |   |      |  

The TRS has estimated its income tax (expense) benefit using a combined federal and state rate of
39%. As of September 30, 2008, TRS had a deferred tax asset of $1.4 million primarily due to current and past years tax net operating losses. These loss carryforwards will expire in 2023. Management believes that it is more likely than
not that the results of future operations will generate sufficient taxable income to realize the deferred tax asset and has determined that no valuation allowance is required. Reversal of the deferred tax asset in the subsequent year cannot be
reasonably estimated.

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



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Part I. FINANCIAL INFORMATION, CONTINUED:

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

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Nine Months Ended September 30, 2008 and 2007

(Unaudited)



Preferred Stock Offering

At September 30, 2008 there were 332,500 shares of 10.0% Series B Cumulative Preferred Stock outstanding. The shares were sold for $25.00 per share and bear a liquidation preference of $25.00 per share.
Underwriting and other costs of the offering totaled approximately $0.6 million to the Company. The net proceeds plus additional cash were used by the Company to pay an $8.5 million bridge loan with General Electric Capital Corporation.

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

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

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

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

Adoption of New Accounting Pronouncements

In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair



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

Supertel Hospitality, Inc., and
Subsidiaries

Notes to Consolidated Financial Statements

Three
and Nine Months Ended September 30, 2008 and 2007

(Unaudited)



value measurements, the FASB having previously concluded in the those accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements. This guidance was issued to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. FAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007. Adoption on January 1, 2008 did not have a material effect on the Company. The Company has deferred the application of FAS 157 related to non-financial
assets and liabilities.

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

Recently Issued Accounting Pronouncements

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

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



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

Forward-Looking Statements

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

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

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

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

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

Overview

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

Our significant events for the nine months ended September 30, 2008
include:



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



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



| |  |  | Effective May 1, 2008, the Company converted the variable interest rate on four mortgage loans payable to GECC totaling $64.6 million to an average annual
fixed rate of 5.9% for the remaining term of 8.5 years.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | On September 12, 2008, the Company filed with the Security and Exchange Commission a Dividend Reinvestment Plan (Plan). The Plan provides investors
with the opportunity to reinvest all or a portion of the cash dividends paid on shares of our common stock and preferred stock in additional shares of our common stock.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We declared dividends on our common stock for the third quarter ended September 30, 2008 of $0.1275 per share, an increase of $0.0025 from the dividend
declared for the third quarter ended September 30, 2007 of $0.1250 per share.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



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



General

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

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

Results of Operations

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

Operating results are summarized as follows (in thousands):



|                                       |  |      |         |   |      |   |         |          |  |   |        |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -------- |  | - | ------ | -
|                                       |  | 2008 |         |   | 2007 |   |         | Variance | 
|Revenues                               |  | $    | 35,170  |   |      | $ | 34,057  |          |  | $ | 1,113  |  
|Hotel and property operations expenses |  |      | (24,606 | ) |      |   | (23,120 | )        |  |   | (1,486 | )
|Interest expense                       |  |      | (3,371  | ) |      |   | (3,759  | )        |  |   | 388    |  
|Depreciation and amortization expense  |  |      | (3,826  | ) |      |   | (3,275  | )        |  |   | (551   | )
|General and administrative expenses    |  |      | (954    | ) |      |   | (940    | )        |  |   | (14    | )
|Net loss on dispositions of assets     |  |      | (3      | ) |      |   | (13     | )        |  |   | 10     |  
|Other income                           |  |      | 28      |   |      |   | 38      |          |  |   | (10    | )
|Minority interest                      |  |      | (175    | ) |      |   | (167    | )        |  |   | (8     | )
|Income tax expense                     |  |      | (175    | ) |      |   | (341    | )        |  |   | 166    |  
|                                       |  |      |         |   |      |   |         |          |  |   |        |  
|Net income                             |  | $    | 2,088   |   |      | $ | 2,480   |          |  | $ | (392   | )
|                                       |  |      |         |   |      |   |         |          |  |   |        |  

Revenues and Operating Expenses

Revenues for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, increased $1.1 million or 3.3%. Of
this, $2.5 million was due to the increase in revenue from 10 hotels which were acquired in the first quarter 2008. The offsetting ($1.4) million was due to a decrease in revenue from the same store portfolio. We refer to our entire portfolio as
limited service hotels which we further describe as midscale without food and beverage hotels, economy hotels and extended stay hotels. The same store portfolio used for comparison of the third quarter of 2008 over the same period of 2007 consists
of the 113 hotels owned by the Company as of April 1, 2007 and two hotels leased through July 30, 2007 and purchased July 31, 2007. Our 76 same store economy hotels reflected an average daily rate (ADR) increase of 0.4% to
$46.93, a decrease in occupancy of 2.2% and a revenue per available room (RevPAR) decrease of 1.9% to $30.83 for the third quarter of 2008 over the same period of 2007. Our 31 same store midscale without food and beverage hotels
reflected an ADR decrease of 1.4% to $76.59, a 3.8% decrease in occupancy and a RevPAR decrease of 5.2% to $52.29 for the third quarter of 2008 over the same period of 2007. Our eight same store extended stay properties reflected an ADR decrease of
3.6% to $25.09, a decrease in occupancy of 11.7% and a RevPAR decrease of 14.9% to $15.78. During the third quarter of 2008 compared to the year ago period, ADR for the entire 115 same store hotel portfolio decreased 0.1% to $51.67 and RevPAR
decreased 3.9% to $34.08. The occupancy for all same store hotels for the three months ended September 30, 2008 decreased 3.8% from that of the year ago period.

During the third quarter of 2008, hotel and property operations expenses increased $1.5 million. Of this, $1.7 million was from hotels added after the second quarter of 2007. The offsetting ($0.2) million was due to a
decrease from the same store portfolio.



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



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

Interest expense decreased $0.4 million compared to the year ago period. The reduction was primarily due to the payoff of a bridge loan using the proceeds
from an offering of Preferred B stock. Lower interest rates on the revolving lines of credit also contributed to the decrease. The depreciation and amortization expense increased $0.6 million for the three months ended September 30, 2008
compared to the year ago period. This is primarily related to hotel acquisitions as well as asset additions for the other hotels outpacing the amount of assets exceeding their useful life. The general and administrative expense for the same period
did not experience a material change.

Income Tax Expense

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

The income tax expense decreased by approximately $166,000 during the three months ended September 30, 2008 compared to the year ago period, due to
a reduction in taxable income by the TRS.

Comparison of the nine months ended September 30, 2008 to the nine months ended September 30, 2007

Operating results are summarized as follows (in thousands):



|                                       |  |      |         |   |      |   |         |          |  |   |         |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -------- |  | - | ------- | -
|                                       |  | 2008 |         |   | 2007 |   |         | Variance | 
|Revenues                               |  | $    | 97,790  |   |      | $ | 84,225  |          |  | $ | 13,565  |  
|Hotel and property operations expenses |  |      | (69,826 | ) |      |   | (58,378 | )        |  |   | (11,448 | )
|Interest expense                       |  |      | (10,472 | ) |      |   | (9,249  | )        |  |   | (1,223  | )
|Depreciation and amortization expense  |  |      | (11,146 | ) |      |   | (8,877  | )        |  |   | (2,269  | )
|General and administrative expenses    |  |      | (2,949  | ) |      |   | (2,791  | )        |  |   | (158    | )
|Net loss on dispositions of assets     |  |      | (2      | ) |      |   | (13     | )        |  |   | 11      |  
|Other income                           |  |      | 91      |   |      |   | 115     |          |  |   | (24     | )
|Minority interest                      |  |      | (356    | ) |      |   | (309    | )        |  |   | (47     | )
|Income tax (expense) benefit           |  |      | 189     |   |      |   | (230    | )        |  |   | 419     |  
|                                       |  |      |         |   |      |   |         |          |  |   |         |  
|Net income                             |  | $    | 3,319   |   |      | $ | 4,493   |          |  | $ | (1,174  | )
|                                       |  |      |         |   |      |   |         |          |  |   |         |  

Revenues and Operating Expenses

Revenues for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, increased $13.6 million or 16.1%, of
which $14.4 million was due to the increase in revenue from 37 hotels which were acquired after the end of year 2006, and the offsetting ($0.8) million decrease in revenue from the same store hotels. The same store portfolio used for comparison of
the nine months of 2008 over the same period of 2007 consists of the 88 hotels owned by the Company as of January 1, 2007. Our 52 same store economy hotels reflected an average daily rate (ADR) increase of 0.7% to $48.82, an
increase in occupancy of 2.8% and a revenue per available room (RevPAR) increase of 3.6% to $31.78. Our 29 same store midscale without food and beverage hotels reflected an ADR decrease of 1.8% to $72.78, a 3.7% decrease in occupancy and
a RevPAR decrease of 5.5% to $46.87 for the first nine months of 2008 over the same period of 2007. Our seven same store extended stay properties reflected an ADR decrease of 4.7% to $25.00, a decrease in occupancy of 1.6% and a RevPAR decrease of



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6.3% to $16.80. During the first nine months of 2008 compared to the year ago period, ADR for the entire 88 same store hotel portfolio decreased 1.3% to
$52.47 and RevPAR decreased 1.4% to $34.22. The occupancy for all same store hotels for the nine months ended September 30, 2008 decreased 0.2% from that of the year ago period.

During the nine months ended September 30, 2008, hotel and property operations expenses increased $11.4 million, of which $11.7 million was from
hotels added after January 1, 2007 and the offsetting ($0.3) million was from the same store portfolio.

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

Interest expense increased by $1.2 million for the nine months ended
September 30, 2008 compared to the year ago period, due primarily to increased debt used for hotel acquisitions. The depreciation and amortization expense increased $2.3 million for the nine months ended September 30, 2008 compared to the
year ago period. This is primarily related to hotel acquisitions as well as asset additions for the other hotels outpacing the amount of assets exceeding their useful life. The general and administrative expense for the same period increased $0.2
million compared to the year ago period. This is primarily related to increases in salaries and professional fees.

Income Tax Benefit

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

The income tax benefit for the nine months ended September 30, 2008 represents an increase of $419,000 over the income tax expense for the year ago
period, due to the taxable loss by the TRS Lessee for the nine months ended September 30, 2008 compared to the taxable income by the TRS Lessee for the nine months ended September 30, 2007.

Liquidity and Capital Resources

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

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

Financing

At September 30, 2008, the Company had long-term debt of $210.1 million, consisting of notes and mortgages payable, with a weighted average term to
maturity of 5.9 years and a weighted average interest rate of 6.0%. Aggregate annual principal payments for the remainder of 2008 and thereafter are as follows (in thousands):



|                  |  |   |        
|----------------- |  | - | -------
|Remainder of 2008 |  | $ | 1,318  
|2009              |  |   | 60,863 
|2010              |  |   | 5,091  
|2011              |  |   | 6,117  
|2012              |  |   | 34,341 
|Thereafter        |  |   | 102,366
|                  |  |   |        
|                  |  | $ | 210,096
|                  |  |   |        



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The $1.3 million of the maturities in 2008 consist of principal amortization on mortgage loans, which
we expect to fund through cash flows from operations.

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

A summary of the
Companys long term debt as of September 30, 2008 is as follows:



|                                     |  |         |         |              |           |   |          |                
|------------------------------------ |  | ------- | ------- | ------------ | --------- | - | -------- | ---------------
|Unaudited-Dollars in thousands:      |  |         |         |              |           |   |          |                
|                                     |  |         |         |              |           |   |         
|Fixed Rate Debt                      |  | Balance |         | InterestRate |           |   | Maturity
|                                     |  |         |        
|Lender                               |  |         |         |              |           |   |          |                
|Susquehanna Bank                     |  | $       | 4,189   |              | 7.75      | % |          | 3/2009         
|First National Bank of Omaha         |  |         | 9,425   |              | 8.40      | % |          | 11/2009        
|Greenwich Capital Financial Products |  |         | 34,091  |              | 7.50      | % |          | 12/2012        
|Small Business Administration        |  |         | 116     |              | 6.71      | % |          | 6/2013         
|Citigroup Global Markets Realty Corp |  |         | 14,074  |              | 5.97      | % |          | 11/2015        
|GE Capital                           |  |         | 36,528  |              | 5.67      | % |          | 9/2016 - 3/2017
|GE Capital                           |  |         | 27,507  |              | 6.19      | % |          | 6/2017         
|Regions Bank                         |  |         | 1,942   |              | 4.88      | % |          | 8/2018         
|Wachovia Bank                        |  |         | 10,625  |              | 7.38      | % |          | 3/2020         
|Village Bank                         |  |         | 2,400   |              | 7.57      | % |          | 11/2024        
|                                     |  |         |         |              |           |   |          |                
|Total Fixed Rate Debt                |  |         | 140,897 |              |           |   |          |                
|                                     |  |         |         |              |           |   |          |                
|                                     |  |         |        
|Variable Rate Debt                   |  |         |         |              |           |   |         
|                                     |  |         |        
|Lender                               |  |         |         |              |           |   |          |                
|Great Western Bank                   |  |         | 30,644  |              | 4.25      | % |          | 2/2009         
|Bank First                           |  |         | 2,100   |              | 4.75      | % |          | 4/2009         
|Wells Fargo                          |  |         | 10,188  |              | 4.63-6.25 | % |          | 9/2009         
|First Citizens National Bank         |  |         | 322     |              | 6.54      | % |          | 7/2012         
|GE Capital                           |  |         | 23,475  |              | 4.81      | % |          | 2/2018         
|GE Capital                           |  |         | 2,470   |              | 5.37      | % |          | 2/2018         
|                                     |  |         |         |              |           |   |          |                
|Total Variable Rate Debt             |  |         | 69,199  |              |           |   |          |                
|                                     |  |         |         |              |           |   |          |                
|                                     |  |         |        
|Total Long-Term Debt                 |  | $       | 210,096 |              |           |   |          |                
|                                     |  |         |         |              |           |   |          |                

Management communicates regularly with our lenders, and we are currently in negotiations to renew
on what we believe will be reasonable terms on the $34 million debt facility which matures in February 2009. We expect to conclude that transaction within the next several weeks. We also expect to retire, renew or replace all of the other mortgage
and credit facilities which mature in 2009.

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

Effective May 1, 2008, the Company converted the variable interest rate on $64.6 million of long-term debt to a fixed rate equal to the seven-year weekly U.S. dollar interest rate swap plus 1.98%. The debt
consists of four mortgage loans payable to GECC. The interest rate on these loans prior to May 1, 2008, bore interest at a three-month LIBOR plus 1.70% (reset monthly). Effective May 1, 2008 the average annual fixed rate is 5.9% for the
remaining term of 8.5 years. The average amortization on this debt is 18.7 years.

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

Redemption of Preferred and Common Operating Partnership Units

As of September 30, 2008 we owned, through our subsidiary, Supertel Hospitality REIT Trust, an approximate 94% general partnership interest in Supertel Limited Partnership, through which we directly or indirectly
own 108 of our hotels. We are the sole general partner of the limited partnership, and the remaining approximate 6% is held by limited partners. Limited partners hold, as of September 30, 2008, 1,235,806 common operating partnership units. A
limited partner may, subject to certain limitations, require that Supertel Limited Partnership redeem all or a portion of his or her common units, at any time after a specified period following the date he or she acquired the common units, by
delivering a redemption notice to Supertel Limited Partnership. When a limited partner tenders his or her common units to the partnership for redemption, we can, at our sole discretion, choose to purchase the units for either (1) a number of
our shares of common stock equal to the number of units redeemed (subject to certain adjustments) or (2) cash in an amount equal to the market value of the number of our shares of common stock the limited partner would have received if we chose
to purchase the units for common stock. We anticipate that we generally will elect to purchase the common units for common stock. Limited partners also held 195,610 preferred operating partnership units as of September 30, 2008. The preferred
units are convertible by the holders into common units on a one-for-one basis or may be redeemed for cash at $10 per unit until October 2009. The preferred units receive a preferred dividend distribution of $1.10 per preferred unit annually, payable
on a monthly basis and do not participate in the allocations of profits and losses of Supertel Limited Partnership. There were no common operating partnership units or preferred operating partnership units converted during the three and nine months
ended September 30, 2008.



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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 |  | $     | 274,041 |                        | $ | 4,500     |  | $         | 85,965 |                  | $ | 57,604 |  | $ | 125,972
|Land leases                       |  |       | 7,678   |                        |   | 51        |  |           | 425    |                  |   | 429    |  |   | 6,773  
|                                  |  |       |         |                        |   |           |  |           |        |                  |   |        |  |   |        
|Total contractual obligations     |  | $     | 281,719 |                        | $ | 4,551     |  | $         | 86,390 |                  | $ | 58,033 |  | $ | 132,745
|                                  |  |       |         |                        |   |           |  |           |        |                  |   |        |  |   |        

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

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

Other

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

Off Balance
Sheet Financing Transactions

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



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Funds from Operations

Our funds from operations available to common shareholders (FFO) for the three months and nine months ended September 30, 2008 were $5.5 million and $13.7 million, respectively, representing no
material change and an increase of $1.1 million from FFO reported for the three and nine months ended September 30, 2007, respectively. FFO is reconciled to net income available to common shareholders as follows (in thousands):



|                                              |  |                                 |       |                                |   |       |  |      |        |  |   |       
|--------------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ------ |  | - | ------
|                                              |  | Three months endedSeptember 30, |       | Nine months endedSeptember 30,
|                                              |  | 2008                            |       | 2007                           |   | 2008  |  | 2007
|Net income available to common shareholders   |  | $                               | 1,719 |                                | $ | 2,269 |  | $    | 2,527  |  | $ | 3,744 
|Depreciation and amortization                 |  |                                 | 3,826 |                                |   | 3,275 |  |      | 11,146 |  |   | 8,877 
|Net loss on disposition of real estate assets |  |                                 | 3     |                                |   | 13    |  |      | 2      |  |   | 13    
|                                              |  |                                 |       |                                |   |       |  |      |        |  |   |       
|FFO available to common shareholders          |  | $                               | 5,548 |                                | $ | 5,557 |  | $    | 13,675 |  | $ | 12,634
|                                              |  |                                 |       |                                |   |       |  |      |        |  |   |       

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

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



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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 September 30, 2008 and 2007, respectively. The
comparisons of same store operations are for 115 hotels owned as of July 1, 2007. Hotel acquisitions which were excluded from same store calculations for the three months ended September 30, 2008 and 2007 were 10 hotels acquired during
2008. The excluded properties were not owned by the Company throughout each of the periods presented and therefore are excluded from the same store calculations.



|                               |  |                                                                                                  |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|------------------------------ |  | ------------------------------------------------------------------------------------------------ |  | ------------------------------------- | ----- | --------- | ---- | ------------------------------------- | --- | ------ | --------- | --------- | ------ |  | --------- | ----- |  | ---- | - |  | - | -----
|Same Store Region              |  | RoomCount                                                                                        |  | Three months ended September 30, 2008 |       | RoomCount |      | Three months ended September 30, 2007
|                               |  | RevPAR                                                                                           |  | Occupancy                             |       |           | ADR  |                                       |     | RevPAR |           | Occupancy |        |  | ADR      
|Mountain                       |  | 214                                                                                              |  | $                                     | 48.76 |           | 84.9 | %                                     |     | $      | 57.41     |           | 214    |  | $         | 49.59 |  | 89.8 | % |  | $ | 55.24
|West North Central             |  | 2,844                                                                                            |  |                                       | 35.87 |           | 73.1 | %                                     |     |        | 49.07     |           | 2,844  |  |           | 35.04 |  | 72.4 | % |  |   | 48.36
|East North Central             |  | 998                                                                                              |  |                                       | 52.33 |           | 76.9 | %                                     |     |        | 68.03     |           | 998    |  |           | 53.82 |  | 78.5 | % |  |   | 68.57
|Middle Atlantic/New England    |  | 336                                                                                              |  |                                       | 62.93 |           | 73.9 | %                                     |     |        | 85.21     |           | 336    |  |           | 61.76 |  | 72.7 | % |  |   | 84.92
|South Atlantic                 |  | 4,701                                                                                            |  |                                       | 26.59 |           | 58.2 | %                                     |     |        | 45.66     |           | 4,701  |  |           | 29.89 |  | 63.5 | % |  |   | 47.06
|East South Central             |  | 601                                                                                              |  |                                       | 35.21 |           | 64.9 | %                                     |     |        | 54.25     |           | 601    |  |           | 36.83 |  | 66.2 | % |  |   | 55.63
|West South Central             |  | 456                                                                                              |  |                                       | 30.54 |           | 63.6 | %                                     |     |        | 48.02     |           | 456    |  |           | 27.78 |  | 65.8 | % |  |   | 42.22
|                               |  |                                                                                                  |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Same Store               |  | 10,150                                                                                           |  | $                                     | 34.08 |           | 66.0 | %                                     |     | $      | 51.67     |           | 10,150 |  | $         | 35.47 |  | 68.6 | % |  | $ | 51.70
|                               |  |                                                                                                  |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|                               |  |                                                                                                  |  |                                       |       |           |      |                                      
|Acquisitions Region            |  | RoomCount                                                                                        |  | RevPAR                                |       | Occupancy |      |                                       | ADR |        | RoomCount |           | RevPAR |  | Occupancy |       |  | ADR 
|West North Central             |  | 167                                                                                              |  | $                                     | 42.59 |           | 70.2 | %                                     |     | $      | 60.70     |           |       |  | $         |      |  |     |   |  | $ |     
|East North Central             |  | 83                                                                                               |  |                                       | 47.68 |           | 70.0 | %                                     |     |        | 68.07     |           |       |  |           |      |  |     |   |  |   |     
|East South Central             |  | 486                                                                                              |  |                                       | 31.57 |           | 53.3 | %                                     |     |        | 59.20     |           |       |  |           |      |  |     |   |  |   |     
|                               |  |                                                                                                  |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Acquisitions             |  | 736                                                                                              |  | $                                     | 35.88 |           | 59.0 | %                                     |     | $      | 60.79     |           |       |  | $         |      |  |     |   |  | $ |     
|                               |  |                                                                                                  |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Hotel Portfolio          |  | 10,886                                                                                           |  | $                                     | 34.20 |           | 65.5 | %                                     |     | $      | 52.22     |           | 10,150 |  | $         | 35.47 |  | 68.6 | % |  | $ | 51.70
|                               |  |                                                                                                  |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|                               |  |                                                                                                  |  |                                       |       |           |      |                                      
|States included in the Regions |  |                                                                                                  |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|                               | 
|Mountain                       |  | Idaho and Montana                                                                               
|West North Central             |  | Iowa, Kansas, Missouri, Nebraska and South Dakota                                               
|East North Central             |  | Indiana and Wisconsin                                                                           
|Middle Atlantic/New England    |  | Maine and Pennsylvania                                                                          
|South Atlantic                 |  | Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
|East South Central             |  | Alabama, Kentucky and Tennessee                                                                 
|West South Central             |  | Arkansas and Louisiana                                                                          



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



|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|----------------------------------- |  | --------- |  | ------------------------------------- | ----- | --------- | ---- | ------------------------------------- | --- | ------ | --------- | --------- | ------ |  | --------- | ----- |  | ---- | - |  | - | -----
|Same Store Brand                    |  | RoomCount |  | Three months ended September 30, 2008 |       | RoomCount |      | Three months ended September 30, 2007
|                                    |  | RevPAR    |  | Occupancy                             |       |           | ADR  |                                       |     | RevPAR |           | Occupancy |        |  | ADR      
|Limited Service                     |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Midscale w/o F&B                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Comfort Inn/ Comfort Suites         |  | 1,841     |  | $                                     | 52.68 |           | 68.8 | %                                     |     | $      | 76.57     |           | 1,841  |  | $         | 55.18 |  | 70.5 | % |  | $ | 78.29
|Hampton Inn                         |  | 216       |  |                                       | 53.46 |           | 64.9 | %                                     |     |        | 82.33     |           | 216    |  |           | 60.11 |  | 70.6 | % |  |   | 85.17
|Holiday Inn Express                 |  | 176       |  |                                       | 57.25 |           | 74.3 | %                                     |     |        | 77.01     |           | 176    |  |           | 58.70 |  | 79.3 | % |  |   | 74.01
|Other Midscale (1)                  |  | 163       |  |                                       | 40.91 |           | 60.1 | %                                     |     |        | 68.03     |           | 163    |  |           | 44.42 |  | 68.1 | % |  |   | 65.18
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Midscale w/o F&B              |  | 2,396     |  |                                       | 52.29 |           | 68.3 | %                                     |     |        | 76.59     |           | 2,396  |  |           | 55.15 |  | 71.0 | % |  |   | 77.70
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Economy                             |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Days Inn                            |  | 858       |  |                                       | 30.77 |           | 58.9 | %                                     |     |        | 52.20     |           | 858    |  |           | 28.75 |  | 55.3 | % |  |   | 51.99
|Super 8                             |  | 3,472     |  |                                       | 36.94 |           | 75.2 | %                                     |     |        | 49.10     |           | 3,472  |  |           | 36.03 |  | 74.6 | % |  |   | 48.30
|Other Economy (2)                   |  | 357       |  |                                       | 25.20 |           | 43.2 | %                                     |     |        | 58.36     |           | 357    |  |           | 30.85 |  | 52.3 | % |  |   | 58.97
|Masters Inn                         |  | 1,842     |  |                                       | 20.42 |           | 55.2 | %                                     |     |        | 37.02     |           | 1,842  |  |           | 24.10 |  | 61.8 | % |  |   | 38.96
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Economy                       |  | 6,529     |  |                                       | 30.83 |           | 65.7 | %                                     |     |        | 46.93     |           | 6,529  |  |           | 31.42 |  | 67.2 | % |  |   | 46.73
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Midscale/Economy              |  | 8,925     |  |                                       | 36.59 |           | 66.4 | %                                     |     |        | 55.13     |           | 8,925  |  |           | 37.79 |  | 68.2 | % |  |   | 55.38
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Extended Stay (3)                   |  | 1,225     |  |                                       | 15.78 |           | 62.9 | %                                     |     |        | 25.09     |           | 1,225  |  |           | 18.55 |  | 71.2 | % |  |   | 26.04
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Same Store                    |  | 10,150    |  | $                                     | 34.08 |           | 66.0 | %                                     |     | $      | 51.67     |           | 10,150 |  | $         | 35.47 |  | 68.6 | % |  | $ | 51.70
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|                                    |  |           |  |                                       |       |           |      |                                      
|Acquisitions Brand                  |  | RoomCount |  | RevPAR                                |       | Occupancy |      |                                       | ADR |        | RoomCount |           | RevPAR |  | Occupancy |       |  | ADR 
|Limited Service                     |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Midscale w/o F&B                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Comfort Inn/ Comfort Suites         |  | 130       |  | $                                     | 41.48 |           | 59.9 | %                                     |     | $      | 69.29     |           |       |  | $         |      |  |     |   |  | $ |     
|Other Midscale (4)                  |  | 129       |  |                                       | 30.19 |           | 55.0 | %                                     |     |        | 54.90     |           |       |  |           |      |  |     |   |  |   |     
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Midscale w/o F&B              |  | 259       |  |                                       | 35.86 |           | 57.4 | %                                     |     |        | 62.43     |           |       |  |           |      |  |     |   |  |   |     
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Economy                             |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Days Inn                            |  | 289       |  |                                       | 41.92 |           | 69.3 | %                                     |     |        | 60.49     |           |       |  |           |      |  |     |   |  |   |     
|Masters Inn                         |  | 105       |  |                                       | 9.47  |           | 25.3 | %                                     |     |        | 37.39     |           |       |  |           |      |  |     |   |  |   |     
|Super 8                             |  | 83        |  |                                       | 47.68 |           | 70.0 | %                                     |     |        | 68.07     |           |       |  |           |      |  |     |   |  |   |     
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Economy                       |  | 477       |  |                                       | 35.90 |           | 59.9 | %                                     |     |        | 59.93     |           |       |  |           |      |  |     |   |  |   |     
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Midscale/Economy Acquisitions |  | 736       |  |                                       | 35.88 |           | 59.0 | %                                     |     |        | 60.79     |           |       |  |           |      |  |     |   |  |   |     
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Hotel Portfolio               |  | 10,886    |  | $                                     | 34.20 |           | 65.5 | %                                     |     | $      | 52.22     |           | 10,150 |  | $         | 35.47 |  | 68.6 | % |  | $ | 51.70
|                                    |  |           |  |                                       |       |           |      |                                       |     |        |           |           |        |  |           |       |  |      |   |  |   |      



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

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

|3 | Includes Savannah Suites and Tara Inn
|- | -------------------------------------

|4 | Includes Sleep Inn and Baymont Inn brands
|- | -----------------------------------------



22



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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



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



|                               |  |                                                                                                  |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|------------------------------ |  | ------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ----- | --------- | ---- | ------------------------------------ | --- | ------ | --------- | --------- | ------ |  | --------- | ----- |  | ---- | - |  | - | -----
|Same Store Region              |  | RoomCount                                                                                        |  | Nine months ended September 30, 2008 |       | RoomCount |      | Nine months ended September 30, 2007
|                               |  | RevPAR                                                                                           |  | Occupancy                            |       |           | ADR  |                                      |     | RevPAR |           | Occupancy |        |  | ADR      
|West North Central             |  | 2,844                                                                                            |  | $                                    | 32.06 |           | 66.4 | %                                    |     | $      | 48.27     |           | 2,844  |  | $         | 30.95 |  | 65.0 | % |  | $ | 47.64
|East North Central             |  | 881                                                                                              |  |                                      | 45.44 |           | 66.9 | %                                    |     |        | 67.88     |           | 881    |  |           | 46.44 |  | 67.0 | % |  |   | 69.32
|Middle Atlantic/New England    |  | 273                                                                                              |  |                                      | 47.72 |           | 62.6 | %                                    |     |        | 76.27     |           | 273    |  |           | 48.21 |  | 63.2 | % |  |   | 76.32
|South Atlantic                 |  | 2,183                                                                                            |  |                                      | 30.75 |           | 64.8 | %                                    |     |        | 47.42     |           | 2,183  |  |           | 33.49 |  | 67.2 | % |  |   | 49.86
|East South Central             |  | 450                                                                                              |  |                                      | 35.87 |           | 58.7 | %                                    |     |        | 61.13     |           | 450    |  |           | 35.19 |  | 58.0 | % |  |   | 60.68
|West South Central             |  | 132                                                                                              |  |                                      | 29.50 |           | 61.2 | %                                    |     |        | 48.22     |           | 132    |  |           | 28.07 |  | 58.4 | % |  |   | 48.09
|                               |  |                                                                                                  |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Same Store               |  | 6,763                                                                                            |  | $                                    | 34.22 |           | 65.2 | %                                    |     | $      | 52.47     |           | 6,763  |  | $         | 34.71 |  | 65.3 | % |  | $ | 53.17
|                               |  |                                                                                                  |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|                               |  |                                                                                                  |  |                                      |       |           |      |                                     
|Acquisitions Region            |  | RoomCount                                                                                        |  | RevPAR                               |       | Occupancy |      |                                      | ADR |        | RoomCount |           | RevPAR |  | Occupancy |       |  | ADR 
|Mountain                       |  | 214                                                                                              |  | $                                    | 40.57 |           | 77.2 | %                                    |     | $      | 52.54     |           | 214    |  | $         | 42.08 |  | 83.1 | % |  | $ | 50.64
|West North Central             |  | 167                                                                                              |  |                                      | 33.19 |           | 59.9 | %                                    |     |        | 55.38     |           |       |  |           |      |  |     |   |  |   |     
|East North Central             |  | 200                                                                                              |  |                                      | 34.36 |           | 70.5 | %                                    |     |        | 48.72     |           | 117    |  |           | 32.75 |  | 80.2 | % |  |   | 40.84
|Middle Atlantic/New England    |  | 63                                                                                               |  |                                      | 41.24 |           | 53.5 | %                                    |     |        | 77.14     |           | 63     |  |           | 42.61 |  | 62.1 | % |  |   | 68.66
|South Atlantic                 |  | 2,518                                                                                            |  |                                      | 25.83 |           | 57.6 | %                                    |     |        | 44.85     |           | 2,518  |  |           | 29.00 |  | 61.6 | % |  |   | 47.05
|East South Central             |  | 637                                                                                              |  |                                      | 27.83 |           | 53.9 | %                                    |     |        | 51.60     |           | 151    |  |           | 26.22 |  | 71.4 | % |  |   | 36.72
|West South Central             |  | 324                                                                                              |  |                                      | 28.54 |           | 61.9 | %                                    |     |        | 46.09     |           | 324    |  |           | 29.88 |  | 72.8 | % |  |   | 41.06
|                               |  |                                                                                                  |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Acquisitions             |  | 4,123                                                                                            |  | $                                    | 28.06 |           | 59.0 | %                                    |     | $      | 47.53     |           | 3,387  |  | $         | 30.91 |  | 66.3 | % |  | $ | 46.61
|                               |  |                                                                                                  |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Hotel Portfolio          |  | 10,886                                                                                           |  | $                                    | 31.89 |           | 62.9 | %                                    |     | $      | 50.71     |           | 10,150 |  | $         | 33.81 |  | 65.5 | % |  | $ | 51.60
|                               |  |                                                                                                  |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|                               |  |                                                                                                  |  |                                      |       |           |      |                                     
|States included in the Regions |  |                                                                                                  |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|                               | 
|Mountain                       |  | Idaho and Montana                                                                               
|West North Central             |  | Iowa, Kansas, Missouri, Nebraska and South Dakota                                               
|East North Central             |  | Indiana and Wisconsin                                                                           
|Middle Atlantic/New England    |  | Maine and Pennsylvania                                                                          
|South Atlantic                 |  | Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
|East South Central             |  | Alabama, Kentucky and Tennessee                                                                 
|West South Central             |  | Arkansas and Louisiana                                                                          



23



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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



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



|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|--------------------------- |  | --------- |  | ------------------------------------ | ----- | --------- | ---- | ------------------------------------ | --- | ------ | --------- | --------- | ------ |  | --------- | ----- |  | ---- | - |  | - | -----
|Same Store Brand            |  | RoomCount |  | Nine months ended September 30, 2008 |       | RoomCount |      | Nine months ended September 30, 2007
|                            |  | RevPAR    |  | Occupancy                            |       |           | ADR  |                                      |     | RevPAR |           | Occupancy |        |  | ADR      
|Limited Service             |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Midscale w/o F&B            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Comfort Inn/ Comfort Suites |  | 1,628     |  | $                                    | 44.98 |           | 63.2 | %                                    |     | $      | 71.18     |           | 1,628  |  | $         | 47.89 |  | 65.5 | % |  | $ | 73.10
|Hampton Inn                 |  | 216       |  |                                      | 59.23 |           | 68.4 | %                                    |     |        | 86.58     |           | 216    |  |           | 63.38 |  | 73.1 | % |  |   | 86.73
|Holiday Inn Express         |  | 176       |  |                                      | 49.13 |           | 67.1 | %                                    |     |        | 73.26     |           | 176    |  |           | 48.14 |  | 68.0 | % |  |   | 70.84
|Other Midscale (1)          |  | 163       |  |                                      | 46.85 |           | 68.2 | %                                    |     |        | 68.70     |           | 163    |  |           | 49.87 |  | 71.4 | % |  |   | 69.89
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Midscale w/o F&B      |  | 2,183     |  |                                      | 46.87 |           | 64.4 | %                                    |     |        | 72.78     |           | 2,183  |  |           | 49.59 |  | 66.9 | % |  |   | 74.13
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Economy                     |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Days Inn                    |  | 58        |  |                                      | 39.64 |           | 60.7 | %                                    |     |        | 65.27     |           | 58     |  |           | 34.68 |  | 57.6 | % |  |   | 60.18
|Super 8                     |  | 3,067     |  |                                      | 31.85 |           | 67.0 | %                                    |     |        | 47.51     |           | 3,067  |  |           | 30.63 |  | 65.2 | % |  |   | 47.00
|Other Economy (2)           |  | 357       |  |                                      | 29.87 |           | 49.0 | %                                    |     |        | 60.90     |           | 357    |  |           | 30.39 |  | 48.1 | % |  |   | 63.16
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Economy               |  | 3,482     |  |                                      | 31.78 |           | 65.1 | %                                    |     |        | 48.82     |           | 3,482  |  |           | 30.67 |  | 63.3 | % |  |   | 48.46
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Midscale/Economy      |  | 5,665     |  |                                      | 37.59 |           | 64.8 | %                                    |     |        | 57.99     |           | 5,665  |  |           | 37.96 |  | 64.7 | % |  |   | 58.68
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Extended Stay (3)           |  | 1,098     |  |                                      | 16.80 |           | 67.2 | %                                    |     |        | 25.00     |           | 1,098  |  |           | 17.92 |  | 68.3 | % |  |   | 26.23
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Same Store            |  | 6,763     |  | $                                    | 34.22 |           | 65.2 | %                                    |     | $      | 52.47     |           | 6,763  |  | $         | 34.71 |  | 65.3 | % |  | $ | 53.17
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|                            |  |           |  |                                      |       |           |      |                                     
|Acquisitions Brand          |  | RoomCount |  | RevPAR                               |       | Occupancy |      |                                      | ADR |        | RoomCount |           | RevPAR |  | Occupancy |       |  | ADR 
|Limited Service             |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Midscale w/o F&B            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Comfort Inn/ Comfort Suites |  | 343       |  | $                                    | 47.45 |           | 58.0 | %                                    |     | $      | 81.85     |           | 213    |  | $         | 50.36 |  | 62.7 | % |  | $ | 80.30
|Other Midscale (4)          |  | 129       |  |                                      | 28.85 |           | 52.2 | %                                    |     |        | 55.26     |           |       |  |           |      |  |     |   |  |   |     
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Midscale w/o F&B      |  | 472       |  |                                      | 42.37 |           | 56.4 | %                                    |     |        | 75.12     |           | 213    |  |           | 50.36 |  | 62.7 | % |  |   | 80.30
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Days Inn                    |  | 1,089     |  |                                      | 30.43 |           | 58.3 | %                                    |     |        | 52.23     |           | 800    |  |           | 31.62 |  | 62.3 | % |  |   | 50.74
|Masters Inn                 |  | 1,947     |  |                                      | 21.75 |           | 56.6 | %                                    |     |        | 38.41     |           | 1,842  |  |           | 24.79 |  | 63.6 | % |  |   | 38.98
|Super 8                     |  | 488       |  |                                      | 37.36 |           | 73.3 | %                                    |     |        | 50.96     |           | 405    |  |           | 39.20 |  | 81.6 | % |  |   | 48.06
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Economy               |  | 3,524     |  |                                      | 26.59 |           | 59.4 | %                                    |     |        | 44.74     |           | 3,047  |  |           | 29.83 |  | 67.1 | % |  |   | 44.45
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Midscale/Economy      |  | 3,996     |  |                                      | 28.46 |           | 59.1 | %                                    |     |        | 48.17     |           | 3,260  |  |           | 31.47 |  | 66.8 | % |  |   | 47.14
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Extended Stay (5)           |  | 127       |  |                                      | 15.68 |           | 58.2 | %                                    |     |        | 26.96     |           | 127    |  |           | 17.10 |  | 55.4 | % |  |   | 30.86
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Acquisitions          |  | 4,123     |  | $                                    | 28.06 |           | 59.0 | %                                    |     | $      | 47.53     |           | 3,387  |  | $         | 30.91 |  | 66.3 | % |  | $ | 46.61
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      
|Total Hotel Portfolio       |  | 10,886    |  | $                                    | 31.89 |           | 62.9 | %                                    |     | $      | 50.71     |           | 10,150 |  | $         | 33.81 |  | 65.5 | % |  | $ | 51.60
|                            |  |           |  |                                      |       |           |      |                                      |     |        |           |           |        |  |           |       |  |      |   |  |   |      



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

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

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

|4 | Includes Sleep Inn and Baymont Inn brands
|- | -----------------------------------------

|5 | Includes Tara Inn & Suites
|- | --------------------------



24



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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



Adoption of New Accounting Pronouncements

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

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

Recently Issued Accounting Pronouncements

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

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



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Part I. FINANCIAL INFORMATION, CONTINUED:



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

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



|Item 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

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



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Part II. OTHER INFORMATION:



|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, 2007.

The current economy has negatively impacted the hotel industry.

The current difficulties in the credit markets, a
softening economy and a growing apprehension among consumers has negatively impacted the hotel industry. The slowing economy has caused a softening in business travel, especially construction-related workers, a particularly strong guest group at our
hotels. Accordingly, our financial results and growth could be harmed if the economic slowdown continues for a significant period or becomes worse.

The impact of the weakening economy on lenders may impact our future borrowings.

The weakening of the national
economy increases the financial instability of some lenders. As a result, we expect lenders may tighten their lending standards, which could make it more difficult for us to obtain future revolving credit facilities on terms similar to the
terms of our current revolving credit facilities or to obtain long-term financing on favorable terms or at all. Our financial condition and results of operations would be adversely affected if we were unable to obtain cost-effective
financing.



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

Summary Financial Data

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



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Supertel Hospitality, Inc., and Subsidiaries



|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | -------- | -
|                                                                                              |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|(In thousands, except per share and statistical data)                                         |  | 2008                            |        |   | 2007                           |   |        | 2008 |  |   | 2007    |  
|Income from continuing operations before income taxes                                         |  | $                               | 2,263  |   |                                | $ | 2,821  |      |  | $ | 3,130   |   |  | $ | 4,723    |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Net income available to common shareholders                                                   |  | $                               | 1,719  |   |                                | $ | 2,269  |      |  | $ | 2,527   |   |  | $ | 3,744    |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Earnings per share - basic                                                                    |  | $                               | 0.08   |   |                                | $ | 0.11   |      |  | $ | 0.12    |   |  | $ | 0.19     |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Earnings per share - diluted                                                                  |  | $                               | 0.08   |   |                                | $ | 0.11   |      |  | $ | 0.12    |   |  | $ | 0.19     |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Adjusted EBITDA (1)                                                                           |  | $                               | 9,635  |   |                                | $ | 10,022 |      |  | $ | 25,104  |   |  | $ | 23,158   |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|FFO available to common shareholders (2)                                                      |  | $                               | 5,548  |   |                                | $ | 5,557  |      |  | $ | 13,675  |   |  | $ | 12,634   |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|FFO per share - basic                                                                         |  |                                 | 0.27   |   |                                |   | 0.27   |      |  |   | 0.66    |   |  |   | 0.63     |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|FFO per share - diluted                                                                       |  |                                 | 0.26   |   |                                |   | 0.26   |      |  |   | 0.64    |   |  |   | 0.60     |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Net cash flow:                                                                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Provided by operating activities                                                              |  | $                               | 6,915  |   |                                | $ | 7,831  |      |  | $ | 20,449  |   |  | $ | 17,970   |  
|Used by investing activities                                                                  |  | $                               | (2,783 | ) |                                | $ | (3,269 | )    |  | $ | (31,567 | ) |  | $ | (100,200 | )
|Provided (used) by financing activities                                                       |  | $                               | (4,196 | ) |                                | $ | (5,851 | )    |  | $ | 11,320  |   |  | $ | 78,545   |  
|Weighted average number of shares outstanding for:                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|calculation of earnings per share - basic                                                     |  |                                 | 20,906 |   |                                |   | 20,448 |      |  |   | 20,811  |   |  |   | 20,062   |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|calculation of earnings per share - diluted                                                   |  |                                 | 20,906 |   |                                |   | 20,472 |      |  |   | 20,812  |   |  |   | 20,084   |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Weighted average number of shares outstanding for:                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|calculation of FFO per share - basic                                                          |  |                                 | 20,906 |   |                                |   | 20,448 |      |  |   | 20,811  |   |  |   | 20,062   |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|calculation of FFO per share - diluted                                                        |  |                                 | 22,346 |   |                                |   | 22,360 |      |  |   | 22,346  |   |  |   | 22,327   |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|RECONCILIATION OF WEIGHTED AVERAGE NUMBER OF SHARES FOR EPS DILUTED TO FFO PER SHARE DILUTED: |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|EPS diluted shares                                                                            |  |                                 | 20,906 |   |                                |   | 20,472 |      |  |   | 20,812  |   |  |   | 20,084   |  
|Common stock issuable upon exercise or conversion of:                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Series A Preferred Stock                                                                      |  |                                 | 1,440  |   |                                |   | 1,888  |      |  |   | 1,534   |   |  |   | 2,243    |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|FFO per share diluted shares                                                                  |  |                                 | 22,346 |   |                                |   | 22,360 |      |  |   | 22,346  |   |  |   | 22,327   |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Net income available to common shareholders                                                   |  | $                               | 1,719  |   |                                | $ | 2,269  |      |  | $ | 2,527   |   |  | $ | 3,744    |  
|Interest                                                                                      |  |                                 | 3,371  |   |                                |   | 3,759  |      |  |   | 10,472  |   |  |   | 9,249    |  
|Income tax (benefit) expense                                                                  |  |                                 | 175    |   |                                |   | 341    |      |  |   | (189    | ) |  |   | 230      |  
|Depreciation and amortization                                                                 |  |                                 | 3,826  |   |                                |   | 3,275  |      |  |   | 11,146  |   |  |   | 8,877    |  
|Minority interest                                                                             |  |                                 | 175    |   |                                |   | 167    |      |  |   | 356     |   |  |   | 309      |  
|Preferred stock dividends                                                                     |  |                                 | 369    |   |                                |   | 211    |      |  |   | 792     |   |  |   | 749      |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Adjusted EBITDA (1)                                                                           |  | $                               | 9,635  |   |                                | $ | 10,022 |      |  | $ | 25,104  |   |  | $ | 23,158   |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|RECONCILIATION OF NET INCOME TO FFO                                                           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Net income available to common shareholders                                                   |  | $                               | 1,719  |   |                                | $ | 2,269  |      |  | $ | 2,527   |   |  | $ | 3,744    |  
|Depreciation and amortization                                                                 |  |                                 | 3,826  |   |                                |   | 3,275  |      |  |   | 11,146  |   |  |   | 8,877    |  
|Net loss on disposition of assets                                                             |  |                                 | 3      |   |                                |   | 13     |      |  |   | 2       |   |  |   | 13       |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|FFO available to common shareholders (2)                                                      |  | $                               | 5,548  |   |                                | $ | 5,557  |      |  | $ | 13,675  |   |  | $ | 12,634   |  
|                                                                                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|ADDITIONAL INFORMATION                                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |          |  
|Average Daily Rate                                                                            |  | $                               | 52.22  |   |                                | $ | 51.70  |      |  | $ | 50.71   |   |  | $ | 51.60    |  
|Revenue Per Available Room                                                                    |  | $                               | 34.20  |   |                                | $ | 35.47  |      |  | $ | 31.89   |   |  | $ | 33.81    |  
|Occupancy                                                                                     |  |                                 | 65.5   | % |                                |   | 68.6   | %    |  |   | 62.9    | % |  |   | 65.5     | %



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|(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, which are a cash charge.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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

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



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



|            |  |                                                                                  
|----------- |  | ---------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                      
|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/ Paul J. Schulte                  
|                           |  | Paul J. Schulte                      
|                           |  | President and Chief Executive Officer

Dated this 5th day of November, 2008



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

Dated this 5th day of November, 2008



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Exhibits



|            |  |                                                                                  
|----------- |  | ---------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                      
|31.1        |  | Section 302 Certificate of Chief Executive Officer                               
|            | 
|31.2        |  | Section 302 Certificate of Chief Financial Officer                               
|            | 
|32.1        |  | Section 906 Certifications of Chief Executive Officer and Chief Financial Officer



32