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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2010
|- | -----------------------------------------------------------------------------------------------------------------------------------------

or



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

Commission File Number: 001-34087





SUPERTEL
HOSPITALITY, INC.

(Exact name of registrant as specified in its charter)







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

309 N. 5thSt., Norfolk, NE 68701

(Address of principal executive offices)

Telephone number: (402) 371-2520





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

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

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



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

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

As of October 28, 2010, there were 22,917,509 shares of common stock, par value $.01 per share, outstanding.









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##### Table of Contents



SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|                              |  |                                                                                                                  |  |            |    | 
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ---------- | -- | 
|                              |  |                                                                                                                  |  | PageNumber |   
|Part I. FINANCIAL INFORMATION |  |                                                                                                                  |  |           
|                              |  |                                                                                                                 
|Item 1.                       |  | Financial Statements                                                                                             |  |            |    | 
|                              |  |                                                                                                                 
|                              |  | Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009                             |  |            | 3  | 
|                              |  |                                                                                                                 
|                              |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and
 2009 |  |            | 4  | 
|                              |  |                                                                                                                 
|                              |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009            |  |            | 5  | 
|                              |  |                                                                                                                 
|                              |  | Notes to Condensed Consolidated Financial Statements                                                             |  |            | 6  | 
|                              |  |                                                                                                                 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  |            | 18 | 
|                              |  |                                                                                                                 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  |            | 36 | 
|                              |  |                                                                                                                 
|Item 4.                       |  | Controls and Procedures                                                                                          |  |            | 36 | 
|                              | 
|Part II. OTHER INFORMATION    |  |                                                                                                                  |  |           
|                              |  |                                                                                                                 
|Item 1.                       |  | Legal Proceedings                                                                                                |  |            | 37 | 
|                              |  |                                                                                                                 
|Item 5.                       |  | Other Information                                                                                                |  |            | 38 | 
|                              |  |                                                                                                                 
|Item 6.                       |  | Exhibits                                                                                                         |  |            | 41 | 



2



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##### Table of Contents



Part I.
FINANCIAL INFORMATION

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

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share and share data)



|                                                                                                                    |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                    |  | As of             |        
|                                                                                                                    |  | September 30,2010 |         |   | December 31,2009 |  
|                                                                                                                    |  | (unaudited)       |         |   |                  |  
|ASSETS                                                                                                              |  |                   |         |   |                  |   |         |  
|Investments in hotel properties                                                                                     |  | $                 | 302,265 |   |                  | $ | 302,759 |  
|Less accumulated depreciation                                                                                       |  |                   | 87,823  |   |                  |   | 80,110  |  
|                                                                                                                    |  |                   |         |   |                  |   |         |  
|                                                                                                                    |  |                   | 214,442 |   |                  |   | 222,649 |  
|                                                                                                                    |  |                  
|Cash and cash equivalents                                                                                           |  |                   | 612     |   |                  |   | 428     |  
|Accounts receivable, net of allowance for doubtful accounts of $93 and $95                                          |  |                   | 2,292   |   |                  |   | 2,043   |  
|Prepaid expenses and other assets                                                                                   |  |                   | 7,628   |   |                  |   | 4,779   |  
|Deferred financing costs, net                                                                                       |  |                   | 1,100   |   |                  |   | 1,414   |  
|Investment in hotel properties, held for sale, net                                                                  |  |                   | 34,384  |   |                  |   | 43,082  |  
|                                                                                                                    |  |                   |         |   |                  |   |         |  
|                                                                                                                    |  | $                 | 260,458 |   |                  | $ | 274,395 |  
|                                                                                                                    |  |                   |         |   |                  |   |         |  
|LIABILITIES AND EQUITY                                                                                              |  |                   |         |   |                  |   |         |  
|LIABILITIES                                                                                                         |  |                   |         |   |                  |   |         |  
|Accounts payable, accrued expenses and other liabilities                                                            |  | $                 | 13,842  |   |                  | $ | 10,340  |  
|Debt related to hotel properties held for sale                                                                      |  |                   | 32,991  |   |                  |   | 35,575  |  
|Long-term debt                                                                                                      |  |                   | 145,526 |   |                  |   | 153,938 |  
|                                                                                                                    |  |                   |         |   |                  |   |         |  
|                                                                                                                    |  |                   | 192,359 |   |                  |   | 199,853 |  
|                                                                                                                    |  |                   |         |   |                  |   |         |  
|Redeemable noncontrolling interest in consolidated partnership, at redemption value                                 |  |                   | 511     |   |                  |   | 511     |  
|Redeemable preferred stock                                                                                          |  |                   |         |   |                  |   |         |  
|Series B, 800,000 shares authorized; $.01 par value, 332,500 shares outstanding, liquidation preference of $8,312   |  |                   | 7,662   |   |                  |   | 7,662   |  
|EQUITY                                                                                                              |  |                   |         |   |                  |   |         |  
|Shareholders equity                                                                                                |  |                   |         |   |                  |   |         |  
|Preferred stock, 40,000,000 shares authorized;                                                                      |  |                   |         |   |                  |   |         |  
|Series A, 2,500,000 shares authorized, $.01 par value, 803,270 shares outstanding, liquidation preference of
$8,033 |  |                   | 8       |   |                  |   | 8       |  
|Common stock, $.01 par value, 100,000,000 shares authorized;22,917,509 and 22,002,322 shares outstanding.           |  |                   | 229     |   |                  |   | 220     |  
|Common stock warrants                                                                                               |  |                   | 252     |   |                  |   |        |  
|Additional paid-in capital                                                                                          |  |                   | 121,379 |   |                  |   | 120,153 |  
|Distributions in excess of retained earnings                                                                        |  |                   | (62,303 | ) |                  |   | (54,420 | )
|                                                                                                                    |  |                   |         |   |                  |   |         |  
|Total shareholders equity                                                                                          |  |                   | 59,565  |   |                  |   | 65,961  |  
|Noncontrolling interest                                                                                             |  |                   |         |   |                  |   |         |  
|Noncontrolling interest in consolidated partnership, redemption value $201 and $237                                 |  |                   | 361     |   |                  |   | 408     |  
|                                                                                                                    |  |                   |         |   |                  |   |         |  
|Total equity                                                                                                        |  |                   | 59,926  |   |                  |   | 66,369  |  
|                                                                                                                    |  |                   |         |   |                  |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                       |  |                   |         |   |                  |   |         |  
|                                                                                                                    |  | $                 | 260,458 |   |                  | $ | 274,395 |  
|                                                                                                                    |  |                   |         |   |                  |   |         |  

See accompanying notes to condensed 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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited  in thousands, except per share data)



|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                                                                                    |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                    |  | 2010                            |        |   | 2009                           |   |        | 2010        |  |   | 2009   |  
|                                                                                                    |  | (unaudited)                     |        |   |                                |   |        | (unaudited) |  |   |        |  
|REVENUES                                                                                            |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|Room rentals and other hotel services                                                               |  | $                               | 24,878 |   |                                | $ | 23,364 |             |  | $ | 66,185 |   |  | $ | 64,781 |  
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|EXPENSES                                                                                            |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|Hotel and property operations                                                                       |  |                                 | 18,161 |   |                                |   | 17,157 |             |  |   | 50,214 |   |  |   | 47,797 |  
|Depreciation and amortization                                                                       |  |                                 | 2,850  |   |                                |   | 2,923  |             |  |   | 8,598  |   |  |   | 8,790  |  
|General and administrative                                                                          |  |                                 | 782    |   |                                |   | 1,120  |             |  |   | 2,582  |   |  |   | 3,138  |  
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|                                                                                                    |  |                                 | 21,793 |   |                                |   | 21,200 |             |  |   | 61,394 |   |  |   | 59,725 |  
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|EARNINGS BEFORE NET LOSS ON DISPOSITIONS OF ASSETS, OTHER INCOME, INTEREST EXPENSE AND INCOME TAXES |  |                                 | 3,085  |   |                                |   | 2,164  |             |  |   | 4,791  |   |  |   | 5,056  |  
|                                                                                                    |  |                                 |        |  
|Net loss on dispositions of assets                                                                  |  |                                 | (16    | ) |                                |   | (26    | )           |  |   | (57    | ) |  |   | (78    | )
|Other income                                                                                        |  |                                 | 31     |   |                                |   | 28     |             |  |   | 92     |   |  |   | 100    |  
|Interest expense                                                                                    |  |                                 | (2,425 | ) |                                |   | (2,467 | )           |  |   | (7,331 | ) |  |   | (7,324 | )
|Impairment                                                                                          |  |                                 |       |   |                                |   |       |             |  |   | (2,147 | ) |  |   |       |  
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                        |  |                                 | 675    |   |                                |   | (301   | )           |  |   | (4,652 | ) |  |   | (2,246 | )
|                                                                                                    |  |                                 |        |  
|Income tax (expense) benefit                                                                        |  |                                 | (98    | ) |                                |   | 231    |             |  |   | 578    |   |  |   | 858    |  
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                                                            |  |                                 | 577    |   |                                |   | (70    | )           |  |   | (4,074 | ) |  |   | (1,388 | )
|                                                                                                    |  |                                 |        |  
|Loss from discontinued operations, net of tax                                                       |  |                                 | (668   | ) |                                |   | (939   | )           |  |   | (2,709 | ) |  |   | (703   | )
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|NET LOSS                                                                                            |  |                                 | (91    | ) |                                |   | (1,009 | )           |  |   | (6,783 | ) |  |   | (2,091 | )
|                                                                                                    |  |                                 |        |  
|Noncontrolling interest                                                                             |  |                                 | (13    | ) |                                |   | (38    | )           |  |   | 5      |   |  |   | (21    | )
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|NET LOSS ATTRIBUTABLE TO CONTROLLING INTERESTS                                                      |  |                                 | (104   | ) |                                |   | (1,047 | )           |  |   | (6,778 | ) |  |   | (2,112 | )
|                                                                                                    |  |                                 |        |  
|Preferred stock dividends                                                                           |  |                                 | (368   | ) |                                |   | (368   | )           |  |   | (1,105 | ) |  |   | (1,105 | )
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                                                        |  | $                               | (472   | ) |                                | $ | (1,415 | )           |  | $ | (7,883 | ) |  | $ | (3,217 | )
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|                                                                                                    |  |                                 |        |  
|NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED                                              |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|EPS from continuing operations                                                                      |  | $                               | 0.01   |   |                                | $ | (0.02  | )           |  | $ | (0.23  | ) |  | $ | (0.12  | )
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|EPS from discontinued operations                                                                    |  | $                               | (0.03  | ) |                                | $ | (0.04  | )           |  | $ | (0.12  | ) |  | $ | (0.03  | )
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  
|EPS Basic and Diluted                                                                               |  | $                               | (0.02  | ) |                                | $ | (0.06  | )           |  | $ | (0.35  | ) |  | $ | (0.15  | )
|                                                                                                    |  |                                 |        |   |                                |   |        |             |  |   |        |   |  |   |        |  

See accompanying notes to condensed consolidated financial statements.



4



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Part I. FINANCIAL INFORMATION, CONTINUED:

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



SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited  in thousands)



|                                                                                |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                |  | Nine Months EndedSeptember 30, |        
|                                                                                |  | 2010                           |         |   | 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |  |                                |         |   |      |   |         |  
|Net loss                                                                        |  | $                              | (6,783  | ) |      | $ | (2,091  | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                   |  |                                | 8,959   |   |      |   | 10,870  |  
|Amortization of intangible assets and deferred financing costs                  |  |                                | 375     |   |      |   | 428     |  
|Gain on dispositions of assets                                                  |  |                                | (513    | ) |      |   | (1,047  | )
|Stock compensation expense                                                      |  |                                | 25      |   |      |   |        |  
|Provision for impairment loss                                                   |  |                                | 5,649   |   |      |   | 843     |  
|Deferred income taxes                                                           |  |                                | (1,201  | ) |      |   | (1,506  | )
|Changes in operating assets and liabilities:                                    |  |                                |         |   |      |   |         |  
|Increase in assets                                                              |  |                                | (1,900  | ) |      |   | (934    | )
|Increase in liabilities                                                         |  |                                | 3,507   |   |      |   | 301     |  
|                                                                                |  |                                |         |   |      |   |         |  
|Net cash provided by operating activities                                       |  |                                | 8,118   |   |      |   | 6,864   |  
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |  |                                |         |   |      |   |         |  
|Additions to hotel properties                                                   |  |                                | (2,870  | ) |      |   | (2,668  | )
|Proceeds from sale of hotel assets                                              |  |                                | 5,678   |   |      |   | 11,495  |  
|                                                                                |  |                                |         |   |      |   |         |  
|Net cash provided by investing activities                                       |  |                                | 2,808   |   |      |   | 8,827   |  
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |  |                                |         |   |      |   |         |  
|Deferred financing costs                                                        |  |                                | (61     | ) |      |   | (184    | )
|Principal payments on long-term debt                                            |  |                                | (13,286 | ) |      |   | (24,913 | )
|Proceeds from long-term debt, net                                               |  |                                | 2,290   |   |      |   | 12,132  |  
|Distributions to noncontrolling interest                                        |  |                                | (42     | ) |      |   | (246    | )
|Common stock offering                                                           |  |                                | 1,462   |   |      |   |        |  
|Dividends paid to common shareholders                                           |  |                                |        |   |      |   | (1,674  | )
|Dividends paid to preferred shareholders                                        |  |                                | (1,105  | ) |      |   | (1,105  | )
|                                                                                |  |                                |         |   |      |   |         |  
|Net cash used in financing activities                                           |  |                                | (10,742 | ) |      |   | (15,990 | )
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|Increase (decrease) in cash and cash equivalents                                |  |                                | 184     |   |      |   | (299    | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                  |  |                                | 428     |   |      |   | 712     |  
|                                                                                |  |                                |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                        |  | $                              | 612     |   |      | $ | 413     |  
|                                                                                |  |                                |         |   |      |   |         |  
|                                                                                |  |                               
|SUPPLEMENTAL CASH FLOW INFORMATION                                              |  |                                |         |   |      |   |         |  
|Interest paid                                                                   |  | $                              | 8,840   |   |      | $ | 9,486   |  
|                                                                                |  |                               
|SCHEDULE OF NONCASH FINANCING ACTIVITIES                                        |  |                                |         |   |      |   |         |  
|Dividends declared preferred                                                    |  |                                | 1,105   |   |      |   | 1,105   |  

See accompanying notes
to condensed consolidated financial statements.



5



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Part I. FINANCIAL INFORMATION, CONTINUED:

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





Supertel
Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(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 101
properties with the exception of furniture, fixtures and equipment on 76 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, 2010 owned approximately 99% of the partnership interests in Supertel Limited Partnership. Supertel Limited Partnership is the general
partner in SBILP. At September 30, 2010, Supertel Limited Partnership and SHI owned 99% and 1% interests in SBILP, respectively, and SHI owned 100% of Supertel Hospitality Management, Inc, SPPR Holdings, Inc. (SPPRHI), and SPPR-BMI Holdings,
Inc. (SBMIHI). Supertel Limited Partnership and SBMIHI owned 99% and 1% of SBMILLC, respectively. Supertel Limited Partnership and SPPRHI owned 99% and 1% of SHLLC, respectively, and Supertel Limited Partnership owned 100% of SSBLLC. References to
we, our, and us herein refer to Supertel Hospitality, Inc., including as the context requires, its direct and indirect subsidiaries.

As of September 30, 2010, the Company owned 111 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 99 of the Companys hotels, provides
for Royco Hotels to operate and manage the hotels through December 31, 2011, with extension to December 31, 2016 upon achievement of average annual net operating income of at least 10% of the Companys investment in the hotels. Under
the agreement, Royco Hotels receives a base management fee ranging from 4.25% to 3.0% of gross hotel revenues as revenues increase above thresholds that range from up to $75 million to over $100 million, and an annual incentive fee of 10% of up to
the first $1 million of annual net operating income in excess of 10% of the Companys investment in the hotels, and 20% of the excess above $1 million.

Supertel Limited Partnership owns 12 hotels which are operated under the Masters Inn name. TRS, the lessee of the hotels, entered into a management agreement with HLC, an affiliate of the sellers of the
12 hotels. The management agreement, as amended, provides for HLC to operate and manage the 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.

The hotel industry is seasonal in nature. Generally, occupancy rates, revenues and operating results for hotels operating in the geographic areas in which we operate are greater in the second and third



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 Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)



quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters of the
year.

Consolidated Financial Statements

The Company has prepared the consolidated balance sheet as of September 30, 2010, the consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009, and
the consolidated statements of cash flows for the nine months ended September 30, 2010 and 2009 without audit, in conformity with U. S. generally accepted accounting principles. In the opinion of management, all necessary adjustments (which
include only normal recurring adjustments) have been made to present fairly the financial position as of September 30, 2010 and the results of operations and cash flows for all periods presented. Balance sheet data as of December 31, 2009
has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could
differ from those estimates.

Certain information and footnote disclosures, normally included in financial statements prepared
in accordance with U.S. generally accepted accounting principles, have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the three and
nine months ended September 30, 2010 are not necessarily indicative of the operating results for the full year.

Fair Value
Measurements

We currently do not have any financial instruments that must be measured on a recurring basis under ASC
820-10: however, we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures  Overall  Subsequent Measurement, to our nonfinancial assets which include our held for sale and held for use hotels. We
measure these assets using inputs from Level 3 of the fair value hierarchy.

During the three months ending March 31,
2010, June 30, 2010 and September 30, 2010, Level 3 inputs were used to determine impairment losses of $120,000 on one held for sale hotel, $2.4 million on 12 held for sale hotels and $1.3 million on seven held for sale hotels,
respectively. An impairment loss of $2.1 million was also recorded on one held for use hotel during the second quarter of 2010. During the three months ended September 30, 2010 the Company also recorded recovery of $0.4 million of previously
recorded impairment on two held for sale assets for which fair value exceeded managements previous estimates.

During
the three months ended March 31, 2009, Level 3 inputs were also used to determine an impairment loss of $150,000 for two hotels held for sale. When these properties were sold in the third quarter of 2009, approximately $67,000 of the impairment
loss was recovered. During the three months ended September 30, 2009, we recorded impairment charges of approximately $760,000 on assets sold and held for sale.

The fair value of an asset held for sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling
price using a market approach. The estimated selling costs are based on our experience with similar asset sales.



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 Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)





The Company
estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the
maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. As of September 30, 2010, the carrying value and estimated fair value of the Companys debt,
excluding debt related to hotel properties held for sale, was $145.5 million and $151.9 million, respectively. As of December 31, 2009, the carrying value and estimated fair value of the Companys debt, excluding debt related to hotel
properties held for sale, was $153.9 million and $157.9 million, respectively. The carrying value of the Companys other financial instruments approximates fair value due to the short-term nature of these financial instruments.

Hotel Properties Held for Sale and Sold, and Discontinued Operations

At December 31, 2009, the Company had nineteen hotels identified that it intends to sell and that met the Companys criteria to be classified as held for sale (the Sale Hotels).
During the nine months ending September 30, 2010 four of the Sale Hotels were sold for aggregate net gain of $0.6 million. Sales for the quarters ended March, June and September 2010 were one, two and one, respectively. During the three months
ended June and September 30, 2010, the Company also declared two and five additional hotels as classified as held for sale, respectively, bringing the total number of hotels classified as held for sale to 22 as of September 30, 2010.

During the three months ended September 30, 2010, the Company recorded impairment of $1.0 million on five hotels
previously classified as held for sale and $0.3 million on two of the new held for sale hotels. During the three months ended September 30, 2010, the Company also recorded recovery of $0.4 million of previously recorded impairment on two of the
held for sale hotels for which fair value exceeded managements previous estimates. During the three months ended June 30, 2010 we recorded aggregate impairment of $2.4 million on twelve hotels previously classified as held for sale. For
the first three months of 2010 and 2009, respectively, an impairment loss of $120,000 was recognized on one held for sale hotel, and impairment of $150,000 was recorded on two hotels which were sold in the third quarter of 2009. At the time of the
sale, $67,000 of impairment was recovered. During the three months ending September 30, 2009, we also recorded impairment charges of approximately $760,000 on assets sold and held for sale. The fair value of an asset held for sale is based on
the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar
asset sales. We record impairment charges and write down the carrying value of an asset if the carrying value exceeds the estimated selling price less costs to sell.

In accordance with FASB ASC 205-20 Presentation of Financial Statements  Discontinued Operations, gains, losses and impairment losses on hotel properties sold or classified as held for sale
are presented in discontinued operations. The operating results of the hotels held for sale and sold are included in discontinued operations and are summarized below. The operating results for the three months ended September 30, 2010 include
22 hotels held for sale and one hotel that was sold. The operating results for the three months ended September 30, 2009 include 22 hotels held for sale, four hotels that were sold in 2010, and six hotels that were sold in 2009 (in thousands):



8



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)





|                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                       |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                       |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|Revenues                               |  | $                               | 4,582  |   |                                | $ | 5,995  |      |  | $ | 13,318  |   |  | $ | 18,198  |  
|Hotel and property operations expenses |  |                                 | (3,839 | ) |                                |   | (5,021 | )    |  |   | (11,498 | ) |  |   | (15,292 | )
|Interest expense                       |  |                                 | (586   | ) |                                |   | (910   | )    |  |   | (1,810  | ) |  |   | (2,459  | )
|Depreciation expense                   |  |                                 | (58    | ) |                                |   | (636   | )    |  |   | (361    | ) |  |   | (2,080  | )
|Net gain on disposition of assets      |  |                                 | 62     |   |                                |   | 109    |      |  |   | 570     |   |  |   | 1,125   |  
|General and administrative expense     |  |                                 | (27    | ) |                                |   |       |      |  |   | (49     | ) |  |   |        |  
|Impairment loss                        |  |                                 | (933   | ) |                                |   | (693   | )    |  |   | (3,502  | ) |  |   | (843    | )
|Income tax benefit                     |  |                                 | 131    |   |                                |   | 217    |      |  |   | 623     |   |  |   | 648     |  
|                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                       |  | $                               | (668   | ) |                                | $ | (939   | )    |  | $ | (2,709  | ) |  | $ | (703    | )
|                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

Earnings Per Share

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



|                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|(dollars in thousands, except share data)                                       |  | Three monthsended September 30, |            |   | Nine monthsended September 30, |  
|                                                                                |  | 2010                            |            |   | 2009                           |   |            | 2010 |  |   | 2009       |  
|Basic and Diluted Earnings per Share Calculation:                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Numerator:                                                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) attributable to common shareholders:                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Continuing operations                                                           |  | $                               | 195        |   |                                | $ | (483       | )    |  | $ | (5,190     | ) |  | $ | (2,540     | )
|Discontinued operations                                                         |  |                                 | (667       | ) |                                |   | (932       | )    |  |   | (2,693     | ) |  |   | (677       | )
|                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss attributable to common shareholders - total                            |  | $                               | (472       | ) |                                | $ | (1,415     | )    |  | $ | (7,883     | ) |  | $ | (3,217     | )
|Denominator:                                                                    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Weighted average number of common shares - basic and diluted                    |  |                                 | 22,879,615 |   |                                |   | 21,880,017 |      |  |   | 22,434,684 |   |  |   | 21,542,418 |  
|Basic and Diluted Earnings Per Common Share:                                    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss attributable to common shareholders per weighted average common share: |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Continuing operations                                                           |  | $                               | 0.01       |   |                                | $ | (0.02      | )    |  | $ | (0.23      | ) |  | $ | (0.12      | )
|Discontinued operations                                                         |  |                                 | (0.03      | ) |                                |   | (0.04      | )    |  |   | (0.12      | ) |  |   | (0.03      | )
|                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total - Basic and Diluted                                                       |  | $                               | (0.02      | ) |                                | $ | (0.06      | )    |  | $ | (0.35      | ) |  | $ | (0.15      | )
|                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

Noncontrolling Interest of Common and Preferred Units in SLP

At September 30, 2010 and 2009 there were 158,161 and 280,466, respectively, of SLP common operating units outstanding held by the
limited partners. These units have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts allocated to the limited partners holding common operating units (whose units are convertible on a one-to-one
basis to common shares)



9



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)



since their share of income (loss) would be added back to income (loss). In addition, the 51,035 and 177,786 shares of SLP preferred operating units held by the limited partners, as of
September 30, 2010 and 2009, respectively, are antidilutive.

Preferred Stock of SHI

There were 803,270 shares of Series A Preferred Stock that remained outstanding at September 30, 2010 and 2009. The Series A is no
longer convertible, and there is no dilutive effect on earnings per share.

At September 30, 2010 and 2009 there were
332,500 shares of Series B 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, 2010 and 2009 totaled 166,786 and 192,143, respectively, all of which are antidilutive.

Warrants

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

Debt Financing

A summary of the Companys long term debt as of September 30, 2010 is as follows (in thousands):



|                                                          |  |         |         |  |              |  |      |          |  |  |                | 
|--------------------------------------------------------- |  | ------- | ------- |  | ------------ |  | ---- | -------- |  |  | -------------- | 
|                                                          |  | Balance |         |  | InterestRate |  |      | Maturity | 
|Fixed Rate Debt                                           |  |         |         |  |              |  |      |          |  |  |                | 
|Lender                                                    |  |         |         |  |              |  |      |          |  |  |                | 
|First National Bank                                       |  | $       | 840     |  |              |  | 5.00 | %        |  |  | 2/2011         | 
|Great Western Bank                                        |  |         | 13,308  |  |              |  | 5.50 | %        |  |  | 12/2011        | 
|Great Western Bank                                        |  |         | 9,627   |  |              |  | 5.50 | %        |  |  | 5/2012         | 
|Greenwich Capital Financial Products                      |  |         | 31,347  |  |              |  | 7.50 | %        |  |  | 12/2012        | 
|Elkhorn Valley Bank                                       |  |         | 891     |  |              |  | 6.50 | %        |  |  | 4/2014         | 
|Citigroup Global Markets Realty Corp                      |  |         | 13,456  |  |              |  | 5.97 | %        |  |  | 11/2015        | 
|GE Capital                                                |  |         | 33,217  |  |              |  | 7.17 | %        |  |  | 9/2016 -3/2017 | 
|GE Capital                                                |  |         | 21,985  |  |              |  | 7.69 | %        |  |  | 6/2017         | 
|Wachovia Bank                                             |  |         | 9,445   |  |              |  | 7.38 | %        |  |  | 3/2020         | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                | 
|Total Fixed Rate Debt                                     |  | $       | 134,116 |  |              |  |      |          |  |  |                | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                | 
|                                                          |  |         |        
|Variable Rate Debt                                        |  |         |         |  |              |  |      |          |  |  |                | 
|                                                          |  |         |        
|Lender                                                    |  |         |         |  |              |  |      |          |  |  |                | 
|Wells Fargo                                               |  |         | 6,139   |  |              |  | 5.50 | %        |  |  | 3/2011         | 
|Great Western Bank                                        |  |         | 15,015  |  |              |  | 5.50 | %        |  |  | 2/2012         | 
|GE Capital                                                |  |         | 20,791  |  |              |  | 3.80 | %        |  |  | 2/2018         | 
|GE Capital                                                |  |         | 2,456   |  |              |  | 4.36 | %        |  |  | 2/2018         | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                | 
|Total Variable Rate Debt                                  |  | $       | 44,401  |  |              |  |      |          |  |  |                | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                | 
|Subtotal debt                                             |  |         | 178,517 |  |              |  |      |          |  |  |                | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                | 
|Less: debt associated with hotel properties held for sale |  |         | 32,991  |  |              |  |      |          |  |  |                | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                | 
|Total Long-Term Debt                                      |  | $       | 145,526 |  |              |  |      |          |  |  |                | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                | 

In January 2010, we sold our Comfort Inn located in Dublin, VA (99 rooms) for approximately $2.75
million with a negligible gain. A portion of these funds were used to pay off the Companys borrowings from Village Bank, with the remaining $1.7 million of funds used to reduce the revolving line of credit with Great Western Bank.

In January 2010, the Company borrowed $0.8 million from First National Bank of Omaha. The note has a maturity date of February 1,
2011. The note bears interest at 4% over the one month LIBOR with a floor of 5%. The borrowings were used to fund operations.

In March 2010, covenant modifications and other amendments were obtained for our credit facilities with Great Western Bank, General
Electric Capital Corporation and Wells Fargo Bank. These changes were reflected in the notes to our financial statements included in our Form 10-K for year ended December 31, 2009.

In June 2010, we sold our Super 8 in Kingdom City, MO (60 rooms) for approximately $1.2 million, with a $0.5 million gain. The funds were
used to reduce the balance of our revolving line of credit with Great Western Bank.



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)





In June 2010, we
sold our Masters Inn in Cave City, KY (97 rooms) for approximately $0.8 million, with a nominal net gain. The funds were used to reduce the balance of our revolving line of credit with Great Western Bank.

In June 2010, we paid off the $1.95 million note from Elkhorn Valley Bank, using funds from the revolving line of credit with Great
Western Bank.

In July 2010, we sold our Super 8 hotel in Parsons, KS (48 rooms) for approximately $1.1 million, with a $0.1
million gain. The funds were used to reduce the balance of our revolving line of credit with Great Western Bank.

In August
2010, our credit facility with Wells Fargo Bank was amended to require maintenance of a consolidated loan to value ratio that does not exceed 85% and a minimum tangible net worth which exceeds $65 million, in each case, through the maturity of the
credit facility. The amendment also: (a) extended the maturity date from August 12, 2010 to March 12, 2011; (b) required a $1.8 million principal payment (which we funded from the revolving line of credit with Great Western Bank)
in exchange for a release of the deeds of trust securing the Super 8 and Supertel Inn hotels located in Neosho, Missouri; and (c) increased the interest rate from LIBOR plus 3.5% (subject to a 4.0% floor) to LIBOR plus 5.0% (subject to a 5.5%
floor).

We are required to comply with financial covenants for certain of our loan agreements. As of September 30, 2010,
we were either in compliance with the financial covenants or obtained waivers for non-compliance (as discussed below). As a result, we are not in default of any of our loans.

The key financial covenants for certain of our loan agreements and compliance calculations as of September 30, 2010 are discussed below (each such covenant is calculated pursuant to the applicable
loan agreement):



|                                          |  |                               |  |                              
|----------------------------------------- |  | ----------------------------- |  | -----------------------------
|Great Western Bank Covenants              |  | September 30, 2010Requirement |  | September 30, 2010Calculation
|Consolidated debt service coverage ratio  |  | 31.05:1                       |  | 1.21:1                       
|Loan-specific debt service coverage ratio |  | 31.20:1                       |  | 1.14:1                       

The Great Western
Bank credit facilities also require maintenance of consolidated and loan-specific loan to value ratios that do not exceed 70%, tested annually, and that we not pay dividends in excess of 75% of our funds from operations per year. The debt service
coverage ratios for the credit facilities increase to 1.50:1 on July 1, 2011 through the maturity of the credit facilities. The loans available to us under the credit facilities may not exceed the lesser of (a) an amount equal to 70% of
the total appraised value of the hotels securing the credit facilities and (b) an amount that would result in a loan-specific debt service coverage ratio of less than 1.20:1 through June 30, 2011 and 1.50:1 from July 1, 2011 through
the maturity of the credit facilities. In addition, the interest rate on the revolving credit portion of the credit facilities is 5.50% from March 29, 2010 through June 30, 2011 and prime (subject to a 5.50% floor rate) from July 1,
2011 through the maturity of the credit facilities. Great Western Bank has the option to increase the interest rates of the credit facilities up to 4.00% any time after June 30, 2011. On November 8, 2010, the Company received a waiver from
Great Western Bank for non-compliance with the loan-specific debt service coverage ratio covenant set forth in the table above as of September 30, 2010. Due to the weakness in the economy, the Company is uncertain whether it will need
to seek a waiver for non-compliance with this covenant in future quarters.



11



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)





|                                         |  |                                   |  |                              
|---------------------------------------- |  | --------------------------------- |  | -----------------------------
|Wells Fargo Bank Covenants               |  | September 30, 2010Requirement     |  | September 30, 2010Calculation
|Consolidated loan to value ratio         |  | £85.0%                            |  | 79.1%                        
|Consolidated tangible net worth          |  | >$65 million                      |  | $68.1 million                
|Consolidated fixed charge coverage ratio |  | 30.75:1 afterpreferred dividends  |  | 0.94 :1                      
|                                         |  | 30.80:1 beforepreferred dividends |  | 1.01 :1                      

Our credit
facility with Wells Fargo Bank was amended on August 12, 2010 to require maintenance of a consolidated loan to value ratio that does not exceed 85% and a minimum tangible net worth which exceeds $65 million, in each case, through the maturity
of the credit facility. The amendment also: (a) extended the maturity date from August 12, 2010 to March 12, 2011; (b) required a $1.8 million principal payment (which we funded from the revolving line of credit with Great
Western Bank) in exchange for a release of the deeds of trust securing the Super 8 and Supertel Inn hotels located in Neosho, Missouri; and (c) increased the interest rate from LIBOR plus 3.5% (subject to a 4.0% floor) to LIBOR plus 5.0%
(subject to a 5.5% floor).



|                                         |  |                               |  |                              
|---------------------------------------- |  | ----------------------------- |  | -----------------------------
|GE Covenants                             |  | September 30, 2010Requirement |  | September 30, 2010Calculation
|Loan-specific total adjusted EBITDA      |  | 3$3.9 million                 |  | $5.5 million                 
|Consolidated debt service coverage ratio |  | 31.05:1                       |  | 1.39 :1                      

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

Stock-Based Compensation

Options

The Company has a 2006 Stock Plan (the Plan) which has been approved by the Companys shareholders. The
Plan authorized the grant of stock options, stock appreciation rights, restricted stock and stock bonuses for up to 200,000 shares of common stock. At the annual shareholders meeting on May 28, 2009, the shareholders of Supertel Hospitality,
Inc. approved an amendment to the Supertel 2006 Stock Plan. The amendment increases the maximum number of shares reserved for issuance under the plan from 200,000 to 300,000 and changes the definition of fair market value to mean the closing price
of Supertel common stock with respect to future awards under the plan.



12



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##### Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

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

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)





Share-Based
Compensation Expense

The expense recognized in the consolidated financial statements for the nine months ended
September 30, 2010 and 2009 for share-based compensation related to employees and directors was $24,960 and $0, respectively.

Impairment Losses

In accordance with FASB ASC 360-10-35 Property Plant
and Equipment  Overall  Subsequent Measurement, the Company analyzes its assets for impairment when events or circumstances occur that indicate the carrying amount may not be recoverable. As part of this process, the Company utilizes
a two-step analysis to determine whether a trigger event (within the meaning of ASC 360-10-35) has occurred with respect to cash flow of, or a significant adverse change in business climate for, its hotel properties. Quarterly and annually the
Company reviews all of its held for use hotels to determine any property whose cash flow or operating performance significantly underperformed from budget or prior year, which the Company has set as a shortfall against budget or prior year as 15% or
greater. For an in depth discussion of the impairment process, see Impairment Losses at Note 5 in the December 31, 2009 10K.

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



| |  |  | Holding periods range from one year for noncore assets to be classified as held for sale in 2010, to ten years for those assets considered as core.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | A revenue multiplier for the terminal value based on an average of the past two years sales from leading industry broker of like properties.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

During the three months ended September 30, 2010, no trigger events as described in ASC 360-10-35
occurred for any of our held for use hotels. During the three months ended June 30, 2010, the analysis above was used to determine a trigger event had occurred for one held for use property in which the carrying value of the hotel exceeded the
sum of the undiscounted cash flows expected over its remaining anticipated holding period and from its disposition. The property was then tested to determine if the carrying amount was recoverable. When testing the recoverability for a property, in
accordance with FASB ASC 360-10-35 35-29 Property Plant and Equipment  Overall  Subsequent Measurement, Estimates of Future Cash Flows Used to Test a Long-Lived Asset for Recoverability,the Company uses estimates of future cash
flows associated with the individual properties over their expected holding period and eventual disposition. In estimating these future cash flows, the Company incorporates its own assumptions about its use of the hotel property and expected hotel
performance. Assumptions used for the individual hotel were determined by management, based on discussions with our asset management group and our third party management companies. The expected revenues were decreased over the prior quarter analysis
to reflect the deteriorating market. The property was then subjected to a probability-weighted cash flow analysis as described in FASB ASC 360-10-55 Property Plant and Equipment  Overall  Implementation. In this analysis, the
Company completed a detailed review of the hotels market conditions and future prospects, which incorporated specific detailed cash flow and revenue multiplier assumptions over the remaining expected holding periods, including the probability
that the property will be sold.



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

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)





To determine the amount of impairment on the property identified above, in accordance with FASB ASC 360-10-55, the
Company calculated the excess of the carrying value of the property in comparison to its fair market value as of June 30, 2010. Based on this calculation, the Company determined total impairment of $2.1 million existed as of the three months
ended June 30, 2010 on the held for use asset previously noted. Fair market value was determined by multiplying trailing 12 months revenue for the property by a revenue multiplier that was determined based on the Companys experience
with hotel sales in the current year as well as available industry information. As the fair market value of the property impaired for the quarter ended June 30, 2010 was determined in part by management estimates, a reasonable possibility
exists that future changes to inputs and assumptions could affect the accuracy of managements estimates and such future changes could lead to further possible impairment in the future. No held for use hotels were determined to be further
impaired during the three months ended September 30, 2010.

Income Taxes

The TRS income tax benefit (expense) from continuing operations for the three months ended September 30, 2010 and 2009 was ($98,000)
and $231,000, respectively. The TRS income tax benefit from continuing operations from the nine months ended September 30, 2010 and 2009 was $578,000 and $858,000, respectively. The TRS has estimated its income tax (expense) benefit using a
combined federal and state rate of 38%. As of September 30, 2010, TRS had a deferred tax asset of $3.7 million primarily due to current and past years tax net operating losses. These loss carryforwards will begin to expire in 2022.
Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax asset and has determined that no valuation allowance is required.

Income taxes are accounted for under the asset and liability method. 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.

Noncontrolling Interest in Redeemable Preferred Units

At
September 30, 2010, 51,035 of SLPs preferred operating partnership units (Preferred OP Units) were outstanding. The redemption value for the Preferred OP Units is $0.5 million for September 30, 2010. Each limited partner
of SLP may, subject to certain limitations, require that SLP redeem all or a portion of his or her Preferred OP Units, at any time after a specified period following the date the units were acquired, by delivering a redemption notice to SLP. The
Preferred OP Units are convertible by the holders into Common operating units (Common OP Units) on a one-for-one basis or, pursuant to an extension agreement by the holders, may be redeemed for cash at the option of the holder at $10 per
unit on October 24, 2010.

Supertel offered to each of the Preferred OP Unit holders the option to further extend until
October 24, 2011 their right to have units redeemed at $10 per unit. The holders of the 51,035 units elected to



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

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)



extend to October 24, 2011, their right to have units redeemed at $10 per unit. The 51,035 units will continue to be carried outside of permanent equity at redemption value. The Preferred OP
Units receive a preferred dividend distribution of $1.10 per preferred unit annually, payable on a monthly basis and do not participate in the allocations of profits and losses of SLP. Distributions to holders of Preferred OP Units have priority
over distributions to holders of Common OP Units. There were no Preferred OP Units redeemed during the three months ending September 30, 2010.

Noncontrolling Interest Reconciliation of Common and Preferred Units



|                                                      |  |                                           |     |   |                              |   |     |                             |  |   |     |  
|----------------------------------------------------- |  | ----------------------------------------- | --- | - | ---------------------------- | - | --- | --------------------------- |  | - | --- | -
|(in thousands)                                        |  | PreferredRedeemableNoncontrollingInterest |     |   | CommonNoncontrollingInterest |   |     | TotalNoncontrollingInterest | 
|Balance @ 6/30/10                                     |  | $                                         | 511 |   |                              | $ | 362 |                             |  | $ | 873 |  
|                                                      |  |                                           |     |   |                              |   |     |                             |  |   |     |  
|Partner distribution                                  |  |                                           | (14 | ) |                              |   |    |                             |  |   | (14 | )
|Income (loss) attributable to noncontrolling interest |  |                                           | 14  |   |                              |   | (1  | )                           |  |   | 13  |  
|                                                      |  |                                           |     |   |                              |   |     |                             |  |   |     |  
|Balance @ 9/30/10                                     |  | $                                         | 511 |   |                              | $ | 361 |                             |  | $ | 872 |  
|                                                      |  |                                           |     |   |                              |   |     |                             |  |   |     |  

Equity Reconciliation of Parent and Noncontrolling Interest



|                       |  |                          |   |  |                     |   |     |                       |  |   |                          |  |  |                                          |         |  |                       |   |         |                                                   |  |   |             |   |  |   |     |   |  |   |        |  
|---------------------- |  | ------------------------ | - |  | ------------------- | - | --- | --------------------- |  | - | ------------------------ |  |  | ---------------------------------------- | ------- |  | --------------------- | - | ------- | ------------------------------------------------- |  | - | ----------- | - |  | - | --- | - |  | - | ------ | -
|(in thousands)         |  | PreferredSharesPar Value |   |  | CommonStockWarrants |   |     | CommonSharesPar Value |  |   | AdditionalPaid-inCapital |  |  | Distributionin ExcessAccumulatedEarnings |         |  | NetShareholdersEquity |   |         | NoncontrollingInterest inConsolidatedPartnerships |  |   | TotalEquity |  
|Balance @6/30/10       |  | $                        | 8 |  |                     | $ | 252 |                       |  | $ | 229                      |  |  | $                                        | 121,320 |  |                       | $ | (61,831 | )                                                 |  | $ | 59,978      |   |  | $ | 362 |   |  | $ | 60,340 |  
|                       |  |                          |   |  |                     |   |     |                       |  |   |                          |  |  |                                          |         |  |                       |   |         |                                                   |  |   |             |   |  |   |     |   |  |   |        |  
|Common Stock offerings |  |                          |  |  |                     |   |    |                       |  |   |                         |  |  |                                          | 59      |  |                       |   |        |                                                   |  |   | 59          |   |  |   |    |   |  |   | 59     |  
|Preferred dividends    |  |                          |  |  |                     |   |    |                       |  |   |                         |  |  |                                          |        |  |                       |   | (368    | )                                                 |  |   | (368        | ) |  |   |    |   |  |   | (368   | )
|Net loss               |  |                          |  |  |                     |   |    |                       |  |   |                         |  |  |                                          |        |  |                       |   | (104    | )                                                 |  |   | (104        | ) |  |   | (1  | ) |  |   | (105   | )
|                       |  |                          |   |  |                     |   |     |                       |  |   |                          |  |  |                                          |         |  |                       |   |         |                                                   |  |   |             |   |  |   |     |   |  |   |        |  
|Balance @9/30/10       |  | $                        | 8 |  |                     | $ | 252 |                       |  | $ | 229                      |  |  | $                                        | 121,379 |  |                       | $ | (62,303 | )                                                 |  | $ | 59,565      |   |  | $ | 361 |   |  | $ | 59,926 |  
|                       |  |                          |   |  |                     |   |     |                       |  |   |                          |  |  |                                          |         |  |                       |   |         |                                                   |  |   |             |   |  |   |     |   |  |   |        |  

Series B Redeemable Preferred Stock

At September 30, 2010 there were 332,500 shares of 10.0% Series B preferred stock outstanding. The shares were sold on June 3, 2008 for $25.00 per share and bear a liquidation preference of
$25.00 per share.

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



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|Item 1. | FINANCIAL STATEMENTS, CONTINUED:
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Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)





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

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

The Series B preferred stock is not
redeemable prior to June 3, 2013, except in certain limited circumstances relating to the maintenance of the Companys ability to qualify as a REIT as provided in the Companys articles of incorporation or a change of control (as
defined in the Companys amendment to its articles of incorporation establishing the Series B preferred stock). The Company may redeem the Series B preferred stock, in whole or in part, at any time or from time to time on or after June 3,
2013 for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. Also, upon a change of control, each outstanding share of the Companys Series B preferred stock will be redeemed for cash at a redemption price of
$25.00 per share, plus all accrued and unpaid dividends. At September 30, 2010, 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.

Common Stock and Warrants

On March 26, 2010, the Company entered into a Standby Equity Distribution Agreement (the SEDA) with YA Global Master SPV Ltd. (YA Global), a fund managed by Yorkville
Advisors, LLC. Pursuant to the SEDA, YA Global has agreed to purchase up to $10.0 million (which may be increased to $20.0 million upon written notice from the Company to YA Global prior to March 26, 2011) (the Commitment Amount) of
newly issued Company common stock, par value $0.01 per share (Common Stock), if notified to do so by the Company in accordance with the terms and conditions of the SEDA. Unless terminated earlier, the SEDA will automatically terminate on
the earlier of April 1, 2012 or the date on which the aggregate purchases by YA Global under the SEDA total the Commitment Amount. The amount of Common Stock issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 4,400,464
shares of Common Stock, which is less than 20% of the aggregate number of outstanding shares of Common Stock. The Common Stock is sold pursuant to the Companys registration statement on Form S-3 (333-147310). The Company sold 48,024 and
316,384 shares for an aggregate purchase price of $60,000 and $480,000 pursuant to the SEDA during the three months and nine months ended September 30, 2010 respectively.

As previously reported on Form 8-K, on May 10, 2010, the Company consummated the sale of 598,803 shares of its common stock and 299,403 warrants to purchase up to an additional 299,403 shares of the
Companys common stock for aggregate gross proceeds of $1.0 million pursuant to the terms of a Private Placement Memorandum with accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as
amended. The warrants are exercisable for a period of three years from the date of issuance at an exercise price of $2.50.



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Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)





Pursuant to the
Private Placement Memorandum and the Common Stock Purchase and the Common Stock Purchase Warrants Agreements, the Company and the investors have made other covenants and representations and warranties regarding matters that are customarily included
in financings of this nature.

At the time of the grant, the fair value of the 299,403 warrants was $379,173 using the
Black-Scholes Option Pricing Model with the following weighted average assumptions: dividend yield of 2.5%, expected volatility of 1.37, risk-free interest rates of 1.4%, and expected lives of 3 years. The proceeds received pursuant to the private
placement which were allocated to the warrants were $251,955, using the relative fair value method.

Commitments and Contingencies

Litigation

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

Plaintiffs are seeking to recover for damages
arising out of physical and mental injury, lost wages, pain and suffering, past and future medical expenses and punitive or exemplary damages. At this time, the company has settled two claims with authorization from the insurers and has recorded a
liability for the amount of the claims and a receivable reflecting recoverability of the claim from the insurers.

The Company
has not recorded a liability for the remaining unsettled claims as the amount of the loss contingency is not reasonably estimable. The Company will continue to evaluate the estimability of loss contingency amounts. The damages claimed by plaintiffs
for the unsettled claims are in excess of $40 million. The company retains three tranches of commercial general liability insurance with aggregate limits of $51 million. There are no deductibles on two of the tranches; the third tranche has a
deductible of ten thousand dollars. The company believes it has adequate coverage.

Subsequent Events

On October 12, 2010, we sold a Super 8 (58 rooms) and a Supertel Inn (47 rooms) located in Neosho, Missouri for
approximately $2.0 million in the aggregate. The funds were used to reduce the balance of our revolving line of credit with Great Western Bank. On October 12, 2010 we also sold a Supertel Inn (45 rooms) in Jane, Missouri for approximately $0.6
million, and used the funds to reduce the principal outstanding under our credit facility with Wells Fargo Bank. On October 22, 2010, we sold a Super 8 (101 rooms) located in Lenexa, Kansas for approximately $2.1 million. The funds were used to
reduce the balance of our revolving line of credit and a term loan with Great Western Bank. On November 5, 2010, we sold a Masters Inn (120 rooms) located in Augusta, Georgia for approximately $1.1 million. The net proceeds were used to reduce the
balance of a loan with General Electric Capital Corporation.



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

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, 2009. Results for the three and nine months ended September 30, 2010 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, 2009.

Overview

We are a self-administered real estate investment trust, and through our subsidiaries, as of September 30, 2010 we owned 111 hotels
in 23 states. Our hotels operate under several national and independent brands.



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Our significant
events for the nine months ended September 30, 2010 include:



| |  |  | In January 2010, we sold our Comfort Inn located in Dublin, VA (99 rooms) for approximately $2.75 million with a negligible gain. A portion of these
funds were used to pay off the Companys borrowings from Village Bank, with the remaining $1.7 million of funds used to reduce the revolving line of credit with Great Western Bank.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In January 2010, the Company borrowed $0.8 million from First National Bank of Omaha. The note has a maturity date of February 1, 2011. The note
bears interest at 4% over the one month LIBOR with a floor of 5%. The borrowings were used to fund operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In March 2010, covenant modifications and other amendments were obtained for our credit facilities with Great Western Bank, General Electric Capital
Corporation and Wells Fargo Bank. These changes were reflected in the notes to our financial statements included in our Form 10-K for year ended December 31, 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In May 2010, the company issued an aggregate of 598,803 shares of Supertel common stock and 299,403 warrants in a private offering for a total purchase
price of $1.0 million in cash.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In June 2010, we sold our Super 8 in Kingdom City, MO (60 rooms) for approximately $1.2 million, with a $0.5 million gain. These funds were used to
reduce the balance of our revolving line of credit with Great Western Bank.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In June 2010, we sold our Masters Inn in Cave City, KY (97 rooms) for approximately $0.8 million, with a nominal net gain. The funds were used to
reduce the balance of our revolving line of credit with Great Western Bank.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In June 2010, we paid off the $1.95 million note from Elkhorn Valley Bank, using funds from the revolving line of credit with Great Western Bank.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the third quarter, the company raised $60,000 from a standby equity distribution agreement and an aggregate of $480,000 for the nine months
ended September 30, 2010.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July 2010, we sold our Super 8 hotel in Parsons, KS (48 rooms) for $1.1 million, with a $0.1 million gain. The funds were used to reduce the balance
of our revolving line of credit with Great Western Bank.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In August 2010, our credit facility with Wells Fargo Bank was amended to require maintenance of a consolidated loan to value ratio that does not exceed
85% and a minimum tangible net worth which exceeds $65 million, in each case, through the maturity of the credit facility. The amendment also: (a) extended the maturity date from August 12, 2010 to March 12, 2011; (b) required a
$1.8 million principal payment (which we funded from the revolving line of credit with Great Western Bank) in exchange for a release of the deeds of trust securing the Super 8 and Supertel Inn hotels located in Neosho, Missouri; and
(c) increased the interest rate from LIBOR plus 3.5% (subject to a 4.0% floor) to LIBOR plus 5.0% (subject to a 5.5% floor).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, in October and November 2010, we sold five hotels with an aggregate 371 rooms for $5.8 million. Net proceeds were used to reduce the balance of our revolving line of credit and a term loan
with Great Western Bank, reduce the balance of a loan with General Electric Capital Corporation and reduce the principal outstanding under our credit facility with Wells Fargo Bank.

The Companys management agreement with Royco, the manager of a majority of the Companys hotels, terminates on
December 31, 2011, and is subject to an automatic five year extension thereafter if



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certain conditions are met. In addition, provisions in the management agreement permit either party to terminate the management agreement on 60 days notice if a net operating income
(NOI) target of 8.5% of total investment in hotels is not achieved for a fiscal year. In 2009, NOI as a percentage of total hotel investment was less than 8.5% and is expected to be less than 8.5% for 2010. Additionally, one of the
conditions for an automatic extension of the management agreement is that an average annual NOI target of at least 10% is achieved during the four years ending December 31, 2010. Annual NOI as a percentage of total hotel investment has not
exceeded 10% in 2007, 2008 and 2009, and is not expected to exceed 10% in 2010.

During the fourth quarter of 2010, the
Company solicited bids from hotel management companies to manage the Companys hotels. The Company expects to complete its review process, and make its decision, if any, on a manager or managers for its hotels late in the last quarter
of 2010 or during the first quarter of 2011.

The Company has been advised by Royco that it believes the Companys
potential termination / nonrenewal of Royco is a breach of the management agreement between the Company and Royco. Royco has not met the NOI conditions of the agreement and consequently the Company does not believe that it has breached the
management agreement with Royco.

We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which
our hotel properties are owned by our operating partnerships, Supertel Limited Partnership and E & P Financing Limited Partnership, limited partnerships, limited liability companies or other subsidiaries of our operating partnerships. We
currently own, indirectly, an approximate 99% general partnership interest in Supertel Limited Partnership and a 100% partnership interest in E & P Financing Limited Partnership.

As of September 30, 2010, we owned 111 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 99 of our hotels and HLC
is the manager of 12 of our hotels.

Overview of Discontinued Operations

The condensed consolidated statements of operations for discontinued operations for the three and nine months ended September 30,
2010 and 2009 include the results of operations for the 22 hotels classified as held for sale at September 30, 2010, as well as all properties that have been sold during 2010 and 2009 in accordance with FASB ASC 205-20 Presentation of
Financial Statements  Discontinued Operations.

The assets held for sale at September 30, 2010 and 2009 are
separately disclosed in the Condensed Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a
reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot
provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that all our held for sale assets as of September 30, 2010 remain properly classified in accordance with ASC 205-20.

Where the carrying value of an asset held for sale exceeded the estimated fair value, net of selling costs, we reduced the
carrying value and recorded an impairment charge. Level 3 inputs were used during the three months ended March 31, 2010 to determine an impairment loss of $120,000 for one hotel held for sale and a $2.4 million impairment loss on 12 of the 18
hotels held for sale during the three months ended June 30, 2010. During the three months ended September 30, 2010, we recorded additional impairment of



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approximately $1.0 million on five hotels previously classified as held for sale and approximately $0.3 million on two assets declared held for sale in third quarter. During the three months
ended September 30, 2010 the Company also recorded recovery of approximately $0.4 million of previously recorded impairment on two assets for which fair value exceeded managements previous estimates, resulting in net impairment of
approximately $0.9 million for the three months ended September 30, 2010. Total impairment loss net of recovery on held for sale properties for the nine months ending September 30, 2010 was $3.5 million. The fair value of an asset held for
sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our
experience with similar asset sales.

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

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

General

The discussion that follows is based primarily on the consolidated financial statements of the three and nine months ended
September 30, 2010 and 2009, and should be read along with the consolidated financial statements and notes.

The
comparisons below reflect revenues and expenses of the companys 111 and 117 hotels as of September 30, 2010 and 2009, respectively.

Results of Operations

Comparison of the three months ended September 30, 2010 to the three months ended September 30, 2009

Operating results are summarized as follows (in thousands)



|                                          |  |                                      |         |   |                                      |   |        |                              |  |   |                      |   |  |                        |         |   |       |   |        |   |  |   |         |   |  |   |        |  
|----------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------ | ---------------------------- |  | - | -------------------- | - |  | ---------------------- | ------- | - | ----- | - | ------ | - |  | - | ------- | - |  | - | ------ | -
|                                          |  | Three months endedSeptember 30, 2010 |         |   | Three months endedSeptember 30, 2009 |   |        | ContinuingOperationsVariance | 
|                                          |  | ContinuingOperations                 |         |   | DiscontinuedOperations               |   |        | Total                        |  |   | ContinuingOperations |   |  | DiscontinuedOperations |         |   | Total |   |       
|Revenues                                  |  | $                                    | 24,878  |   |                                      | $ | 4,582  |                              |  | $ | 29,460               |   |  | $                      | 23,364  |   |       | $ | 5,995  |   |  | $ | 29,359  |   |  | $ | 1,514  |  
|Hotel and property operations expenses    |  |                                      | (18,161 | ) |                                      |   | (3,839 | )                            |  |   | (22,000              | ) |  |                        | (17,157 | ) |       |   | (5,021 | ) |  |   | (22,178 | ) |  |   | (1,004 | )
|Interest expense                          |  |                                      | (2,425  | ) |                                      |   | (586   | )                            |  |   | (3,011               | ) |  |                        | (2,467  | ) |       |   | (910   | ) |  |   | (3,377  | ) |  |   | 42     |  
|Depreciation and amortization expense     |  |                                      | (2,850  | ) |                                      |   | (58    | )                            |  |   | (2,908               | ) |  |                        | (2,923  | ) |       |   | (636   | ) |  |   | (3,559  | ) |  |   | 73     |  
|General and administrative expenses       |  |                                      | (782    | ) |                                      |   | (27    | )                            |  |   | (809                 | ) |  |                        | (1,120  | ) |       |   |       |   |  |   | (1,120  | ) |  |   | 338    |  
|Net gain (loss) on dispositions of assets |  |                                      | (16     | ) |                                      |   | 62     |                              |  |   | 46                   |   |  |                        | (26     | ) |       |   | 109    |   |  |   | 83      |   |  |   | 10     |  
|Other income                              |  |                                      | 31      |   |                                      |   |       |                              |  |   | 31                   |   |  |                        | 28      |   |       |   |       |   |  |   | 28      |   |  |   | 3      |  
|Impairment loss                           |  |                                      |        |   |                                      |   | (933   | )                            |  |   | (933                 | ) |  |                        |        |   |       |   | (693   | ) |  |   | (693    | ) |  |   |       |  
|Income tax (expense) benefit              |  |                                      | (98     | ) |                                      |   | 131    |                              |  |   | 33                   |   |  |                        | 231     |   |       |   | 217    |   |  |   | 448     |   |  |   | (329   | )
|                                          |  |                                      |         |   |                                      |   |        |                              |  |   |                      |   |  |                        |         |   |       |   |        |   |  |   |         |   |  |   |        |  
|Net income (loss)                         |  | $                                    | 577     |   |                                      | $ | (668   | )                            |  | $ | (91                  | ) |  | $                      | (70     | ) |       | $ | (939   | ) |  | $ | (1,009  | ) |  | $ | 647    |  
|                                          |  |                                      |         |   |                                      |   |        |                              |  |   |                      |   |  |                        |         |   |       |   |        |   |  |   |         |   |  |   |        |  

Revenues and Operating Expenses

Revenues from continuing operations for the three months ended September 30, 2010 compared to the three months ended
September 30, 2009, increased $1.5 million or 6.5%, which was primarily due to



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higher occupancy. 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 2010 over the same period of 2009 consists of the 89 hotels in continuing operations that were owned by the Company as of July 1, 2009. Compared to the year ago period, average
daily rate (ADR) for the entire 89 same store hotel portfolio decreased 1.7% to $50.66 and revenue per available room (RevPAR) increased 6.6% to $34.81. The occupancy for all same store hotels for the three months ended
September 30, 2010 increased 8.4% from that of the year ago period. Our 28 same store midscale without food and beverage hotels reflected an ADR decrease of 0.2% to $69.78, an increase in occupancy of 9.7% and a RevPAR increase of 9.5% to
$47.93 for the third quarter of 2010 over the same period of 2009. Our 54 same store economy hotels reflected an ADR decrease of 1.0% to $49.20, a 4.7% increase in occupancy and a RevPAR increase of 3.7% to $32.91 for the third quarter of 2010 over
the same period of 2009. Occupancy for the seven same store extended stay properties rose 20.8% to 76.0%, and RevPAR was up 14.9% to $17.58.

During the third quarter of 2010, hotel and property operations expenses from continuing operations increased $1.0 million. The majority of the increase was payroll-related, with increases in utilities,
franchise fees, breakfast costs, room supplies, management fees, and advertising making up the remainder of the variance.

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

Interest expense from continuing operations remained flat at $2.4 million for the quarter. Depreciation and amortization expense from
continuing operations declined $0.1 million from the third quarter of 2009 to $2.9 million. The general and administrative expense for the 2010 third quarter dropped $0.3 million compared to the prior period. The primary cause of the decrease was
lower salary expense, due to management changes and retirement.

Impairment loss

For the third quarter of 2010, we recorded impairment charges of $1.3 million on seven of the 22 hotels classified as held for sale at
September 30, 2010, offset by $0.4 million of impairment recovered on two held for sale properties for a net impairment of $0.9 million. During the three months ended September 30, 2009, we recorded a total net impairment charge of
$693,000.

Dispositions

In the third quarter of 2010, we recognized a $0.1 million gain on the disposition of assets related to the sale of a Super 8 in Parsons, Kansas, offset by losses incurred on the disposition of furniture,
fixtures, and equipment in the normal course of operations. In the third quarter of 2009, we recognized an approximate $126,000 gain from the sale of a Masters Inn in Orlando, Florida, offset by a $17,000 loss related to assets sold and held for
sale.

Income Tax Benefit

The income tax expense from continuing operations is related to the taxable income from our taxable subsidiary, the TRS Lessee. Management believes the combined federal and state income tax rate for the
TRS Lessee will be approximately 38%. The tax expense is a result of TRS Lessees income for the three months ended September 30, 2010. The income tax will vary based on the taxable earnings or loss of the TRS Lessee.



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The income tax
expense from continuing operations was ($98,000) compared with a tax benefit of $231,000 in the year ago period, due to increased income by the TRS Lessee.

Comparison of the nine months ended September 30, 2010 to the nine months ended September 30, 2009

Operating results are summarized as follows (in thousands):



|                                          |  |            |         |   |              |   |         |                               |  |   |            |   |  |              |         |   |       |   |         |   |  |   |         |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------- | - | ------------ | - | ------- | ----------------------------- |  | - | ---------- | - |  | ------------ | ------- | - | ----- | - | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                          |  | 2010       |         |   | 2009         |   |         | ContinuingOperations
Variance | 
|                                          |  | Continuing |         |   | Discontinued |   |         |                               |  |   | Continuing |   |  | Discontinued |         |   |       |   |        
|                                          |  | Operations |         |   | Operations   |   |         | Total                         |  |   | Operations |   |  | Operations   |         |   | Total |   |        
|Revenues                                  |  | $          | 66,185  |   |              | $ | 13,318  |                               |  | $ | 79,503     |   |  | $            | 64,781  |   |       | $ | 18,198  |   |  | $ | 82,979  |   |  | $ | 1,404  |  
|Hotel and property operations expenses    |  |            | (50,214 | ) |              |   | (11,498 | )                             |  |   | (61,712    | ) |  |              | (47,797 | ) |       |   | (15,292 | ) |  |   | (63,089 | ) |  |   | (2,417 | )
|Interest expense                          |  |            | (7,331  | ) |              |   | (1,810  | )                             |  |   | (9,141     | ) |  |              | (7,324  | ) |       |   | (2,459  | ) |  |   | (9,783  | ) |  |   | (7     | )
|Depreciation and amortization expense     |  |            | (8,598  | ) |              |   | (361    | )                             |  |   | (8,959     | ) |  |              | (8,790  | ) |       |   | (2,080  | ) |  |   | (10,870 | ) |  |   | 192    |  
|General and administrative expenses       |  |            | (2,582  | ) |              |   | (49     | )                             |  |   | (2,631     | ) |  |              | (3,138  | ) |       |   |        |   |  |   | (3,138  | ) |  |   | 556    |  
|Net gain (loss) on dispositions of assets |  |            | (57     | ) |              |   | 570     |                               |  |   | 513        |   |  |              | (78     | ) |       |   | 1,125   |   |  |   | 1,047   |   |  |   | 21     |  
|Other income                              |  |            | 92      |   |              |   |        |                               |  |   | 92         |   |  |              | 100     |   |       |   |        |   |  |   | 100     |   |  |   | (8     | )
|Impairment loss                           |  |            | (2,147  | ) |              |   | (3,502  | )                             |  |   | (5,649     | ) |  |              |        |   |       |   | (843    | ) |  |   | (843    | ) |  |   | (2,147 | )
|Income tax benefit                        |  |            | 578     |   |              |   | 623     |                               |  |   | 1,201      |   |  |              | 858     |   |       |   | 648     |   |  |   | 1,506   |   |  |   | (280   | )
|                                          |  |            |         |   |              |   |         |                               |  |   |            |   |  |              |         |   |       |   |         |   |  |   |         |   |  |   |        |  
|Net income (loss)                         |  | $          | (4,074  | ) |              | $ | (2,709  | )                             |  | $ | (6,783     | ) |  | $            | (1,388  | ) |       | $ | (703    | ) |  | $ | (2,091  | ) |  | $ | (2,686 | )
|                                          |  |            |         |   |              |   |         |                               |  |   |            |   |  |              |         |   |       |   |         |   |  |   |         |   |  |   |        |  

Revenues and Operating Expenses

Revenues from continuing operations for the nine months ended September 30, 2010 compared to the nine months ended September 30,
2009, increased $1.4 million or 2.2%, reflecting an overall raise in revenue per available room (RevPAR) caused primarily by higher occupancy. The same store portfolio used for comparison of the nine months of 2010 over the same period
of 2009 consists of the 89 hotels in continuing operations that were owned by the Company as of January 1, 2009. Our 28 same store midscale without food and beverage hotels reflected an average daily rate (ADR) decrease of 3.8% to
$66.87, an increase in occupancy of 8.5% and RevPAR increase of 4.3% to $42.58. Our 54 same store economy hotels reflected an ADR decrease of 4.4% to $47.28, a 4.0% increase in occupancy and a RevPAR decrease of 0.5% to $29.16 for the first nine
months of 2010 over the same period of 2009. Our seven same store extended stay properties reflected an ADR decrease of 5.6% to $23.31, a raise in occupancy of 19.2% and a RevPAR increase of 12.5% to $17.52. During the first nine months of 2010
compared to the year ago period, ADR for the entire 89 same store hotel portfolio decreased 5.0% to $48.54 and RevPAR increased 2.2% to $31.16. The occupancy for all same store hotels for the nine months ended September 30, 2010 increased 7.5%
from that of the year ago period.

During the nine months ended September 30, 2010, hotel and property operations
expenses from continuing operations increased $2.4 million. The drivers of the increase include payroll related expenses, utilities, room and office supplies, breakfast costs, and franchise management fees.

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

Interest expense from continuing operations remained essentially flat at $7.3 million for the nine months ended September 30, 2010
compared to the year ago period. The depreciation and amortization expense from continuing operations decreased $0.2 million for the nine months ended September 30, 2010 compared to the year ago period. The general and administrative expense
from continuing operations for the same period decreased $0.6 million. The variance was mainly caused by a decrease in payroll due to management changes and retirement.



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Impairment loss

The table below shows impairment expense for the nine months ending September 2010 and 2009. In 2010 impairment was taken
on 15 held for sale hotels and one hotel held for use, and recovered on two held for sale hotels. In 2009 impairment was taken on three hotels sold and one held for sale property that was sold in 2010. Impairment was recovered on two of the sold
properties.



|                    |  |                                  |       |   |                                  |   |       |                        |  |   |                      |   |  |   |   | 
|------------------- |  | -------------------------------- | ----- | - | -------------------------------- | - | ----- | ---------------------- |  | - | -------------------- | - |  | - | - | 
|                    |  | Nine months endingSeptember 2010 |       |   | Nine months endingSeptember 2009 |  
|                    |  | DiscontinuedOperations           |       |   | ContinuingOperations             |   |       | DiscontinuedOperations |  |   | ContinuingOperations |  
|Impairment charges  |  | $                                | 3,855 |   |                                  | $ | 2,147 |                        |  | $ | 910                  |   |  | $ |  | 
|Impairment recovery |  |                                  | (353  | ) |                                  |   |      |                        |  |   | (67                  | ) |  |   |  | 
|                    |  |                                  |       |   |                                  |   |       |                        |  |   |                      |   |  |   |   | 
|Net impairment      |  | $                                | 3,502 |   |                                  | $ | 2,147 |                        |  | $ | 843                  |   |  | $ |  | 
|                    |  |                                  |       |   |                                  |   |       |                        |  |   |                      |   |  |   |   | 

Dispositions

During the nine months ended September 30, 2010, the Company sold its interests in four hotels, recognizing gains of approximately $620,000 on the properties partially offset by $50,000 of losses
incurred on the disposition of furniture, fixtures, and equipment in the normal course of operations, for a net gain of $570,000. In the same period of 2009, the Company recognized gains of approximately $1.2 million on the sale of six hotels,
offset by approximately $80,000 of losses on assets related to held for sale properties.

Income Tax Benefit

The income tax benefit from continuing operations is related to the taxable loss from the TRS Lessee. The tax benefit is a
result of TRS Lessees losses for the nine months ended September 30, 2010 and the year ago period. The income tax benefit will vary based on the taxable earnings of the TRS Lessee.

The income tax benefit from continuing operations decreased by approximately $0.3 million during the nine months ended September 30,
2010 compared to the year ago period, due to a reduced loss by the TRS Lessee for the same period.

Liquidity and Capital Resources

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

The Companys operating performance, as well as its liquidity position, has been and continues to be negatively affected by recent economic conditions, many of which are beyond our control. The
Company does not believe it is likely that these adverse economic conditions, and their effect on the hospitality industry, will improve significantly in the next two quarters.

Our business requires continued access to adequate capital to fund our liquidity needs. In 2009, the Company reviewed its entire
portfolio, identified properties considered non-core and developed timetables for disposal of those assets deemed non-core. We focused on improving our liquidity through cash generating asset sales and disposition of assets that are not generating
cash at levels consistent with our investment principles. In 2010, our foremost priorities are preserving and generating capital sufficient to fund our liquidity needs. Given the deterioration and uncertainty in the economy and financial markets,
management believes that access to conventional sources of capital will be challenging and management



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has planned accordingly. We are also working to proactively address challenges to our short-term and long-term liquidity position.

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



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



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



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



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



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

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

In the near-term, the Companys cash flow from operations is not projected to be sufficient to meet all of our liquidity needs. In
response, management has identified non-core assets in our portfolio to be liquidated over a one to ten year period. Among the criteria for determining properties to be sold was potential upside when hotel fundamentals return to stabilized levels.
The 22 properties held for sale as of September 30, 2010 were determined to be less likely to participate in increased cash flow levels when markets do improve. As such, we expect these dispositions to help us (1) preserve cash, through
potential disposition of properties with current or projected negative cash flow and/or other potential near-term cash outlay requirements (including debt maturities) and (2) generate cash, through the potential disposition of strategically
identified non-core assets that we believe have equity value above debt.

In January 2010, the Company sold a Comfort Inn
located in Dublin, Virginia, for approximately $2.75 million. These funds were used to pay off the Village Bank loan with the remaining $1.7 million used to reduce the revolving line of credit with Great Western Bank. In June and July 2010, the
Company sold a Super 8 in Kingdom City, Missouri for $1.2 million, a Masters Inn in Cave City, Kentucky for $0.8 million, and a Super 8 in Parsons, Kansas for approximately $1.1 million. These properties were unencumbered and the net proceeds of
approximately $3.0 million were used to pay down the revolving line of credit with Great Western Bank. On October 12, 2010, we sold a Super 8 (58 rooms) and Supertel Inn (47 rooms) located in Neosho, Missouri for approximately $2.0 million in
the aggregate. The funds were used to reduce the balance of our revolving line of credit with Great Western Bank. On October 12, 2010 we sold a Supertel Inn (45 rooms) in Jane, Missouri for approximately $0.6 million, and used the funds to
reduce the principal outstanding under our credit facility with Wells Fargo Bank. On October 22, 2010, we sold a Super 8 (101 rooms) located in Lenexa, Kansas for approximately $2.1 million. The funds were used to reduce the balance of our
revolving line of credit and a term loan with Great Western Bank. As of November 1, 2010, our revolver with Great Western Bank has an available balance of $5.6 million.

We are actively marketing the properties held for sale, which we anticipate will result in the elimination of $33.0 million of debt and generate an expected $3.1 million of net proceeds for operations. In
October and November 2010, we sold five of the 22 hotels held for sale as of September 30, 2010 for $5.8 million, the net proceeds of which were used to reduce our debt. We have continued to receive interest in our held for sale properties. The
marketing process has been affected by deteriorating economic conditions and we have experienced some decreases in expected pricing. If this trend continues to worsen, we may be unable to complete the disposition of the expected identified
properties in a manner that would generate cash flow



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in line with managements estimates as noted above. Our ability to dispose of these assets is impacted by a number of factors. Many of these factors are beyond our control, including general
economic conditions, availability of financing and interest rates. In light of the current economic conditions, we cannot predict:



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



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



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

On March 26, 2010 we entered into a Standby Equity Distribution Agreement (SEDA) with Yorkville Advisors and as of
September 30, 2010 we have sold 316,384 shares resulting in net proceeds of $480,000 which were used for corporate purposes.

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

The Company is required to meet various financial covenants required
by its existing lenders. If the Companys future financial performance fails to meet these financial covenants, then its lenders also have the ability to take control of its encumbered hotel assets. Defaults with lenders due to failure to repay
or refinance debt when due or failure to comply with financial covenants could also result in defaults under our credit facilities with Great Western Bank and Wells Fargo Bank. Our Great Western Bank and Wells Fargo Bank credit facilities contain
cross-default provisions which would allow Great Western Bank and Wells Fargo Bank to declare a default and accelerate our indebtedness to them if we default on our other loans, and such default would permit that lender to accelerate our
indebtedness under any such loan. If this were to happen, whether due to failure to repay or refinance debt when due or failure to comply with financial covenants, the Companys ability to conduct business could be severely impacted as there
can be no assurance that the adequacy and timeliness of cash flow would be available to meet the Companys liquidity requirements. The Company believes it has the ability to repay its indebtedness when due with cash generated from operations,
sales of hotels, refinancings or the issuance of securities, while at the same time continuing to be a substantial owner of limited service and economy hotels. If the economic environment does not improve in 2010, the Companys plans and
actions may not be sufficient and could lead to possibly failing financial debt covenant requirements.

The Companys
credit facility with Wells Fargo Bank ($6.1 million balance at September 30, 2010), previously due on August 12, 2010, has been extended to March 12, 2011. The Supertel Inn located in Jane, Missouri and encumbered by Wells Fargo Bank
was sold October 12, 2010 for approximately $0.6 million, which was applied to reduce the principal outstanding under our credit facility with Wells Fargo Bank to $5.5 million. The Company intends to refinance or repay the credit facility with
Wells Fargo Bank using other financing, funds from operations or proceeds from the sale of hotels.

The Company did not
declare a common stock dividend for the nine months ended September 30, 2010. The Company will monitor requirements to maintain its REIT status and will routinely evaluate the



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+dividend policy. The Company intends to continue to meet its dividend requirements to retain its REIT status.

Financing

At September 30, 2010, the Company had long-term debt of
$145.5 million associated with assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 4.4 years and a weighted average interest rate of 6.2%. The weighted average fixed rate was 6.9%, and the
weighted average variable rate was 4.6%. Debt is classified as held for sale if the properties collateralizing it are included in discontinued operations. Debt held on properties in continuing operations is classified as held for use. Aggregate
annual principal payments for the remainder of 2010 and thereafter are as follows (in thousands):



|                  |  |              |        |  |             |   |         |       |  |   |         | 
|----------------- |  | ------------ | ------ |  | ----------- | - | ------- | ----- |  | - | ------- | 
|                  |  | HeldFor Sale |        |  | HeldFor Use |   |         | TOTAL | 
|Remainder of 2010 |  | $            | 4,708  |  |             | $ | 1,523   |       |  | $ | 6,231   | 
|2011              |  |              | 28,283 |  |             |   | 13,841  |       |  |   | 42,124  | 
|2012              |  |              |       |  |             |   | 57,081  |       |  |   | 57,081  | 
|2013              |  |              |       |  |             |   | 3,643   |       |  |   | 3,643   | 
|2014              |  |              |       |  |             |   | 4,383   |       |  |   | 4,383   | 
|Thereafter        |  |              |       |  |             |   | 65,055  |       |  |   | 65,055  | 
|                  |  |              |        |  |             |   |         |       |  |   |         | 
|                  |  | $            | 32,991 |  |             | $ | 145,526 |       |  | $ | 178,517 | 
|                  |  |              |        |  |             |   |         |       |  |   |         | 

The remaining maturities associated with assets held for use in 2010 consist of $1.5 million of principal
amortization on mortgage loans, which we expect to fund through cash flows from operations and the sale of hotels. In August 2010, the maturity date of our credit facility with Wells Fargo Bank was extended from August 12, 2010 to
March 12, 2011.

We are required to comply with financial covenants for certain of our loan agreements. As of
September 30, 2010, we were either in compliance with the financial covenants or obtained waivers for non-compliance (as discussed below). As a result, we are not in default of any of our loans.

The key financial covenants for certain of our loan agreements and compliance calculations as of September 30, 2010 are discussed
below (each such covenant is calculated pursuant to the applicable loan agreement):



|                                          |  |                               |         |  |                               |  |        | 
|----------------------------------------- |  | ----------------------------- | ------- |  | ----------------------------- |  | ------ | 
|Great Western Bank Covenants              |  | September 30, 2010Requirement |         |  | September 30, 2010Calculation | 
|Consolidated debt service coverage ratio  |  |                               | 31.05:1 |  |                               |  | 1.21:1 | 
|Loan-specific debt service coverage ratio |  |                               | 31.20:1 |  |                               |  | 1.14:1 | 

The Great Western
Bank credit facilities also require maintenance of consolidated and loan-specific loan to value ratios that do not exceed 70%, tested annually, and that we not pay dividends in excess of 75% of our funds from operations per year. The debt service
coverage ratios for the credit facilities increase to 1.50:1 on July 1, 2011 through the maturity of the credit facilities. The loans available to us under the credit facilities may not exceed the lesser of (a) an amount equal to 70% of
the total appraised value of the hotels securing the credit facilities and (b) an amount that would result in a loan-specific debt service coverage ratio of less than 1.20:1 through June 30, 2011 and 1.50:1 from July 1, 2011 through
the maturity of the credit facilities. In addition, the interest rate on the revolving credit portion of the credit facilities is 5.50% from March 29, 2010 through June 30, 2011 and prime (subject to a 5.50% floor rate) from July 1,
2011 through the maturity of the credit facilities. Great Western Bank has the option to increase the interest rates of the credit facilities up to 4.00% any time after June 30, 2011. On November 8, 2010, the Company received a waiver from
Great Western Bank for non-compliance with the loan-specific debt service coverage ratio covenant set forth in the table above as of September 30, 2010. Due to the weakness in the economy, the Company is uncertain whether it will need to
seek a waiver for non-compliance with this covenant in future quarters.



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|                                         |  |                                   |  |                              
|---------------------------------------- |  | --------------------------------- |  | -----------------------------
|Wells Fargo Bank Covenants               |  | September 30, 2010Requirement     |  | September 30, 2010Calculation
|Consolidated loan to value ratio         |  | £85.0%                            |  | 79.1%                        
|Consolidated tangible net worth          |  | >$65 million                      |  | $68.1 million                
|Consolidated fixed charge coverage ratio |  | 30.75:1 afterpreferred dividends  |  | 0.94:1                       
|                                         |  | 30.80:1 beforepreferred dividends |  | 1.01:1                       

Our credit facility
with Wells Fargo Bank was amended on August 12, 2010 to require maintenance of a consolidated loan to value ratio that does not exceed 85% and a minimum tangible net worth which exceeds $65 million, in each case, through the maturity of the
credit facility. The amendment also: (a) extended the maturity date from August 12, 2010 to March 12, 2011; (b) required a $1.8 million principal payment (which we funded from the revolving line of credit with Great Western Bank)
in exchange for a release of the deeds of trust securing the Super 8 and Supertel Inn hotels located in Neosho, Missouri; and (c) increased the interest rate from LIBOR plus 3.5% (subject to a 4.0% floor) to LIBOR plus 5.0% (subject to a 5.5%
floor).



|                                         |  |                               |  |                              
|---------------------------------------- |  | ----------------------------- |  | -----------------------------
|GE Covenants                             |  | September 30, 2010Requirement |  | September 30, 2010Calculation
|Loan-specific total adjusted EBITDA      |  | 3$3.9 million                 |  | $5.5 million                 
|Consolidated debt service coverage ratio |  | 31.05:1                       |  | 1.39:1                       

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

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

A summary of the Companys
long term debt as of September 30, 2010 is as follows (in thousands):



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|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|--------------------------------------------------------- |  | ------- | ------- |  | ------------ |  | ---- | -------- |  |  | --------------- | 
|                                                          |  | Balance |         |  | InterestRate |  |      | Maturity | 
|Fixed Rate Debt                                           |  |         |         |  |              |  |      |          |  |  |                 | 
|Lender                                                    |  |         |         |  |              |  |      |          |  |  |                 | 
|First National Bank                                       |  | $       | 840     |  |              |  | 5.00 | %        |  |  | 2/2011          | 
|Great Western Bank                                        |  |         | 13,308  |  |              |  | 5.50 | %        |  |  | 12/2011         | 
|Great Western Bank                                        |  |         | 9,627   |  |              |  | 5.50 | %        |  |  | 5/2012          | 
|Greenwich Capital Financial Products                      |  |         | 31,347  |  |              |  | 7.50 | %        |  |  | 12/2012         | 
|Elkhorn Valley Bank                                       |  |         | 891     |  |              |  | 6.50 | %        |  |  | 4/2014          | 
|Citigroup Global Markets Realty Corp                      |  |         | 13,456  |  |              |  | 5.97 | %        |  |  | 11/2015         | 
|GE Capital                                                |  |         | 33,217  |  |              |  | 7.17 | %        |  |  | 9/2016 - 3/2017 | 
|GE Capital                                                |  |         | 21,985  |  |              |  | 7.69 | %        |  |  | 6/2017          | 
|Wachovia Bank                                             |  |         | 9,445   |  |              |  | 7.38 | %        |  |  | 3/2020          | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|Total Fixed Rate Debt                                     |  | $       | 134,116 |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |        
|Variable Rate Debt                                        |  |         |         |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |        
|Lender                                                    |  |         |         |  |              |  |      |          |  |  |                 | 
|Wells Fargo                                               |  |         | 6,139   |  |              |  | 5.50 | %        |  |  | 3/2011          | 
|Great Western Bank                                        |  |         | 15,015  |  |              |  | 5.50 | %        |  |  | 2/2012          | 
|GE Capital                                                |  |         | 20,791  |  |              |  | 3.80 | %        |  |  | 2/2018          | 
|GE Capital                                                |  |         | 2,456   |  |              |  | 4.36 | %        |  |  | 2/2018          | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|Total Variable Rate Debt                                  |  | $       | 44,401  |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|Subtotal debt                                             |  |         | 178,517 |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|Less: debt associated with hotel properties held for sale |  |         | 32,991  |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 
|Total Long-Term Debt                                      |  | $       | 145,526 |  |              |  |      |          |  |  |                 | 
|                                                          |  |         |         |  |              |  |      |          |  |  |                 | 

In January 2010, we sold our Comfort Inn located in Dublin, VA (99 rooms) for approximately $2.75
million with a negligible gain. A portion of these funds were used to pay off the Companys borrowings from Village Bank, with the remaining $1.7 million of funds used to reduce the revolving line of credit with Great Western Bank.

In January 2010, the Company borrowed $0.8 million from First National Bank of Omaha. The note has a maturity date of February 1,
2011. The note bears interest at 4% over the one month LIBOR with a floor of 5%. The borrowings were used to fund operations.

In March 2010, covenant modifications and other amendments were obtained for our credit facilities with Great Western Bank, General
Electric Capital Corporation and Wells Fargo Bank. These changes were reflected in the notes to our financial statements included in our Form 10-K for year ended December 31, 2009.

In June 2010, we sold our Super 8 located in Kingdom City, MO, (60 rooms) for approximately $1.2 million, with a $0.5 million gain. The
funds were used to reduce the balance of our revolving line of credit with Great Western Bank.



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In June 2010, we
sold our Masters Inn in Cave City, KY (97 rooms) for approximately $0.8 million, with a nominal net gain. The funds were used to reduce the balance of our revolving line of credit with Great Western Bank.

In June 2010, we paid off the $1.95 million note from Elkhorn Valley Bank, using funds from the revolving line of credit with Great
Western Bank.

In July 2010, we sold our Super 8 hotel in Parsons, KS (48 rooms) for approximately $1.1 million, with a $0.1
million gain. The funds were used to reduce the balance of our revolving line of credit with Great Western Bank.

In August
2010, our credit facility with Wells Fargo Bank was amended to require maintenance of a consolidated loan to value ratio that does not exceed 85% and a minimum tangible net worth which exceeds $65 million, in each case, through the maturity of the
credit facility. The amendment also: (a) extended the maturity date from August 12, 2010 to March 12, 2011; (b) required a $1.8 million principal payment (which we funded from the revolving line of credit with Great Western Bank)
in exchange for a release of the deeds of trust securing the Super 8 and Supertel Inn hotels located in Neosho, Missouri; and (c) increased the interest rate from LIBOR plus 3.5% (subject to a 4.0% floor) to LIBOR plus 5.0% (subject to a 5.5%
floor).

Additionally, in October and November 2010, we sold five hotels with an aggregate 371 rooms for $5.8 million.
Proceeds were used to reduce the balance of our revolving line of credit and a term loan with Great Western Bank, reduce the balance of a loan with General Electric Capital Corporation and reduce the principal outstanding under our credit facility
with Wells Fargo Bank.

Redemption of Noncontrolling Preferred Operating Partnership Units

At September 30, 2010, 51,035 of SLPs preferred operating partnership units (Preferred OP Units) were outstanding.
The redemption value for the Preferred OP Units is $0.5 million for September 30, 2010. Each limited partner of SLP may, subject to certain limitations, require that SLP redeem all or a portion of his or her Preferred OP Units, at any time
after a specified period following the date the units were acquired, by delivering a redemption notice to SLP. The Preferred OP Units are convertible by the holders into Common operating units (Common OP Units) on a one-for-one basis or,
pursuant to an extension agreement by the holders, may be redeemed for cash at the option of the holder at $10 per unit on October 24, 2010.

Supertel offered to each of the Preferred OP Unit holders the option to further extend until October 24, 2011 their right to have units redeemed at $10 per unit. The holders of the 51,035 units
elected to extend to October 24, 2011, their right to have units redeemed at $10 per unit. The 51,035 units will continue to be carried outside of permanent equity at redemption value. The Preferred OP Units receive a preferred dividend
distribution of $1.10 per preferred unit annually, payable on a monthly basis and do not participate in the allocations of profits and losses of SLP. Distributions to holders of Preferred OP Units have priority over distributions to holders of
Common OP Units. There were no Preferred OP Units redeemed during the three months ending September 30, 2010.

Capital Commitments

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



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|                                                               |  |       |         |  |                        |   |       |           |  |   |           |  |  |                  |        |  |  |   |        | 
|-------------------------------------------------------------- |  | ----- | ------- |  | ---------------------- | - | ----- | --------- |  | - | --------- |  |  | ---------------- | ------ |  |  | - | ------ | 
|                                                               |  |       |         |  | Payments Due by Period |  
|Contractual Obligations                                        |  | Total |         |  | Less than1 Year        |   |       | 1-3 Years |  |   | 4-5 Years |  |  | More than5 years |       
|Long-term debt including interest (continuing operations only) |  | $     | 181,284 |  |                        | $ | 4,420 |           |  | $ | 86,633    |  |  | $                | 16,474 |  |  | $ | 73,757 | 
|Land leases                                                    |  |       | 5,090   |  |                        |   | 17    |           |  |   | 143       |  |  |                  | 148    |  |  |   | 4,782  | 
|                                                               |  |       |         |  |                        |   |       |           |  |   |           |  |  |                  |        |  |  |   |        | 
|Total contractual obligations                                  |  | $     | 186,374 |  |                        | $ | 4,437 |           |  | $ | 86,776    |  |  | $                | 16,622 |  |  | $ | 78,539 | 
|                                                               |  |       |         |  |                        |   |       |           |  |   |           |  |  |                  |        |  |  |   |        | 

The column titled Less than 1 Year represents payments due for the balance of 2010. Long-term debt includes
debt on properties classified in continuing operations. The debt related to properties held for sale (and expected to be sold in the next 12 months) of $32,991 is not included in the table above.

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

Fair Value of Financial Instruments

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

The Company estimates the fair value of its fixed rate debt
and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit
policies. Credit spreads take into consideration general market conditions and maturity. As of September 30, 2010, the carrying value and estimated fair value of the Companys debt, excluding debt related to hotel properties held for sale,
was $145.5 million and $151.9 million, respectively. As of December 31, 2009, the carrying value and estimated fair value of the Companys debt, excluding debt related to hotel properties held for sale, was $153.9 million and $157.9
million, respectively. The carrying value of the Companys other financial instruments approximates fair value due to the short-term nature of these financial instruments.

Other

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

Off
Balance Sheet Financing Transactions

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



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Funds from Operations

The Companys funds from operations (FFO) for the three and nine months ended September 30, 2010 was
$2.4 million, and $0.6 million, respectively, representing an increase of $0.3 million and a decrease of $6.0 million from FFO reported for the three and nine months ended September 30, 2009, respectively. FFO without impairment, a non-cash
item, for the three and nine months ended September 30, 2010 was $3.3 million and $6.2 million, respectively, representing an increase of $0.6 million and a decrease of $1.2 million from the three and nine months ended September 30, 2009,
respectively. FFO is reconciled to net loss as follows (in thousands):



|                                              |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                              |  | Three months endedSeptember 30, |       |   | Nine months endedSeptember 30, |  
|                                              |  | 2010                            |       |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|Net loss attributable to common shareholders  |  | $                               | (472  | ) |                                | $ | (1,415 | )    |  | $ | (7,883 | ) |  | $ | (3,217 | )
|Depreciation and amortization                 |  |                                 | 2,908 |   |                                |   | 3,559  |      |  |   | 8,959  |   |  |   | 10,870 |  
|Net gain on disposition of real estate assets |  |                                 | (46   | ) |                                |   | (83    | )    |  |   | (513   | ) |  |   | (1,047 | )
|                                              |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|FFO available to common shareholders          |  | $                               | 2,390 |   |                                | $ | 2,061  |      |  | $ | 563    |   |  | $ | 6,606  |  
|                                              |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Impairment                                    |  |                                 | 933   |   |                                |   | 693    |      |  |   | 5,649  |   |  |   | 843    |  
|                                              |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|FFO without impairment, a non-cash item       |  | $                               | 3,323 |   |                                | $ | 2,754  |      |  | $ | 6,212  |   |  | $ | 7,449  |  
|                                              |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  

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.

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

To arrive at FFO without impairment, a non-cash item, we adjust FFO available to common shareholders, to exclude the
following items:



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



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



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

The impairment charges of hotel properties that were recognized in 2009 and 2010 were primarily based on valuations of hotels, which had
declined due to market conditions, that we no longer expected to hold for long-term investment, and/or for which we have reduced our prior expected holding periods. In order to enhance liquidity, we have declared certain properties as held for sale
and may declare other properties held for sale. To the extent these properties are expected to be sold at a loss, we record an impairment charge when the loss is known. We have recognized certain of these impairment charges in several quarters in
2009 and 2010 and we believe it is reasonably likely that we will recognize similar charges and gains in the near future. However, we believe that as the financial markets stabilize and our liquidity needs change, the potential for impairment
charges of our hotel properties will disappear or become immaterial. We believe FFO, without impairment, provides investors with an additional measure to better evaluate our operating performance during this period of fundamental disruption in the
global financial and real estate markets.

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

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, 2010 and 2009,
respectively. The comparisons of same store operations (excluding Held For Sale hotels) are for 89 hotels owned as of July 1, 2009.



|                   |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|------------------ |  | --------- | ----- |  | ------------------------------------- | - | ----- | --------- |  |  | ------------------------------------- | - |  | --------- | ----- |  | ------ |  | ----- | --------- |  | - | ----- |  |  |  | ---- | - |  | - | ----- | 
|                   |  |           |       |  | Three months ended September 30, 2010 |   |       |           |  |  | Three months ended September 30, 2009 |  
|Same Store Region  |  | RoomCount |       |  | RevPAR                                |   |       | Occupancy |  |  | ADR                                   |   |  | RoomCount |       |  | RevPAR |  |       | Occupancy |  |   | ADR   | 
|Mountain           |  |           | 214   |  |                                       | $ | 42.56 |           |  |  | 82.0                                  | % |  | $         | 51.87 |  |        |  | 214   |           |  | $ | 40.48 |  |  |  | 72.9 | % |  | $ | 55.53 | 
|West North Central |  |           | 2,447 |  |                                       |   | 32.68 |           |  |  | 66.2                                  | % |  |           | 49.36 |  |        |  | 2,447 |           |  |   | 33.60 |  |  |  | 68.3 | % |  |   | 49.17 | 
|East North Central |  |           | 964   |  |                                       |   | 47.49 |           |  |  | 72.3                                  | % |  |           | 65.67 |  |        |  | 964   |           |  |   | 44.74 |  |  |  | 68.4 | % |  |   | 65.44 | 
|Middle Atlantic    |  |           | 142   |  |                                       |   | 50.03 |           |  |  | 82.8                                  | % |  |           | 60.42 |  |        |  | 142   |           |  |   | 46.43 |  |  |  | 68.0 | % |  |   | 68.23 | 
|South Atlantic     |  |           | 2,645 |  |                                       |   | 30.20 |           |  |  | 69.4                                  | % |  |           | 43.50 |  |        |  | 2,645 |           |  |   | 26.69 |  |  |  | 59.3 | % |  |   | 45.01 | 
|East South Central |  |           | 677   |  |                                       |   | 39.16 |           |  |  | 62.2                                  | % |  |           | 62.92 |  |        |  | 677   |           |  |   | 35.35 |  |  |  | 57.4 | % |  |   | 61.59 | 
|West South Central |  |           | 456   |  |                                       |   | 31.29 |           |  |  | 69.3                                  | % |  |           | 45.17 |  |        |  | 456   |           |  |   | 24.88 |  |  |  | 53.3 | % |  |   | 46.73 | 
|                   |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Hotels       |  |           | 7,545 |  |                                       | $ | 34.81 |           |  |  | 68.7                                  | % |  | $         | 50.66 |  |        |  | 7,545 |           |  | $ | 32.67 |  |  |  | 63.4 | % |  | $ | 51.53 | 
|                   |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 



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



33



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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 three months ended September 30, 2010 and 2009, were as follows:



|                            |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|--------------------------- |  | --------- | ----- |  | ------------------------------------- | - | ----- | --------- |  |  | ------------------------------------- | - |  | --------- | ----- |  | ------ |  | ----- | --------- |  | - | ----- |  |  |  | ---- | - |  | - | ----- | 
|                            |  |           |       |  | Three months ended September 30, 2010 |   |       |           |  |  | Three months ended September 30, 2009 |  
|Same Store Brand            |  | RoomCount |       |  | RevPAR                                |   |       | Occupancy |  |  | ADR                                   |   |  | RoomCount |       |  | RevPAR |  |       | Occupancy |  |   | ADR   | 
|Limited Service             |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Midscale w/o F&B            |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Comfort Inn/ Comfort Suites |  |           | 1,524 |  |                                       | $ | 51.11 |           |  |  | 72.2                                  | % |  | $         | 70.82 |  |        |  | 1,524 |           |  | $ | 46.88 |  |  |  | 65.2 | % |  | $ | 71.95 | 
|Hampton Inn                 |  |           | 135   |  |                                       |   | 54.34 |           |  |  | 71.4                                  | % |  |           | 76.15 |  |        |  | 135   |           |  |   | 44.52 |  |  |  | 61.4 | % |  |   | 72.55 | 
|Holiday Inn Express         |  |           | 125   |  |                                       |   | 49.18 |           |  |  | 71.2                                  | % |  |           | 69.03 |  |        |  | 125   |           |  |   | 44.10 |  |  |  | 69.8 | % |  |   | 63.20 | 
|Other Midscale (1)          |  |           | 291   |  |                                       |   | 27.80 |           |  |  | 48.2                                  | % |  |           | 57.69 |  |        |  | 291   |           |  |   | 27.12 |  |  |  | 46.8 | % |  |   | 57.98 | 
|                            |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Midscale w/o F&B      |  |           | 2,075 |  |                                       | $ | 47.93 |           |  |  | 68.7                                  | % |  | $         | 69.78 |  |        |  | 2,075 |           |  | $ | 43.79 |  |  |  | 62.6 | % |  | $ | 69.93 | 
|                            |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Economy                     |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Days Inn                    |  |           | 1,146 |  |                                       |   | 35.01 |           |  |  | 68.8                                  | % |  |           | 50.87 |  |        |  | 1,146 |           |  |   | 30.55 |  |  |  | 58.8 | % |  |   | 51.99 | 
|Super 8                     |  |           | 2,968 |  |                                       |   | 32.60 |           |  |  | 67.8                                  | % |  |           | 48.08 |  |        |  | 2,968 |           |  |   | 32.86 |  |  |  | 68.1 | % |  |   | 48.24 | 
|Other Economy (2)           |  |           | 258   |  |                                       |   | 27.10 |           |  |  | 47.6                                  | % |  |           | 56.88 |  |        |  | 258   |           |  |   | 24.34 |  |  |  | 38.0 | % |  |   | 64.05 | 
|                            |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Economy               |  |           | 4,372 |  |                                       | $ | 32.91 |           |  |  | 66.9                                  | % |  | $         | 49.20 |  |        |  | 4,372 |           |  | $ | 31.75 |  |  |  | 63.9 | % |  | $ | 49.70 | 
|                            |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Midscale/Economy      |  |           | 6,447 |  |                                       | $ | 37.74 |           |  |  | 67.5                                  | % |  | $         | 55.95 |  |        |  | 6,447 |           |  | $ | 35.63 |  |  |  | 63.5 | % |  | $ | 56.12 | 
|                            |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Economy Extended Stay (3)   |  |           | 1,098 |  |                                       | $ | 17.58 |           |  |  | 76.0                                  | % |  | $         | 23.12 |  |        |  | 1,098 |           |  | $ | 15.30 |  |  |  | 62.9 | % |  | $ | 24.31 | 
|                            |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Hotels                |  |           | 7,545 |  |                                       | $ | 34.81 |           |  |  | 68.7                                  | % |  | $         | 50.66 |  |        |  | 7,545 |           |  | $ | 32.67 |  |  |  | 63.4 | % |  | $ | 51.53 | 
|                            |  |           |       |  |                                       |   |       |           |  |  |                                       |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 

|                                                              
|--------------------------------------------------------------
|                                                              
|1        Includes Baymont, Ramada Limited and Sleep Inn brands
|2        Includes Guesthouse Inn and two independent hotels   
|3        Includes seven Savannah Suites                       

The following table presents our RevPAR, ADR and Occupancy, by region, for the nine months ended September 30, 2010 and 2009,
respectively. The comparisons of same store operations (excluding Held For Sale hotels) are for 89 hotels owned as of January 1, 2009.



|                   |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|------------------ |  | --------- | ----- |  | ------------------------------------ | - | ----- | --------- |  |  | ------------------------------------ | - |  | --------- | ----- |  | ------ |  | ----- | --------- |  | - | ----- |  |  |  | ---- | - |  | - | ----- | 
|                   |  |           |       |  | Nine months ended September 30, 2010 |   |       |           |  |  | Nine months ended September 30, 2009 |  
|Same Store Region  |  | RoomCount |       |  | RevPAR                               |   |       | Occupancy |  |  | ADR                                  |   |  | RoomCount |       |  | RevPAR |  |       | Occupancy |  |   | ADR   | 
|Mountain           |  |           | 214   |  |                                      | $ | 34.71 |           |  |  | 70.5                                 | % |  | $         | 49.24 |  |        |  | 214   |           |  | $ | 34.22 |  |  |  | 64.9 | % |  | $ | 52.72 | 
|West North Central |  |           | 2,447 |  |                                      |   | 28.73 |           |  |  | 60.2                                 | % |  |           | 47.70 |  |        |  | 2,447 |           |  |   | 29.99 |  |  |  | 61.7 | % |  |   | 48.57 | 
|East North Central |  |           | 964   |  |                                      |   | 38.42 |           |  |  | 62.5                                 | % |  |           | 61.43 |  |        |  | 964   |           |  |   | 37.13 |  |  |  | 59.2 | % |  |   | 62.71 | 
|Middle Atlantic    |  |           | 142   |  |                                      |   | 41.46 |           |  |  | 70.5                                 | % |  |           | 58.85 |  |        |  | 142   |           |  |   | 40.22 |  |  |  | 60.3 | % |  |   | 66.71 | 
|South Atlantic     |  |           | 2,645 |  |                                      |   | 28.82 |           |  |  | 67.7                                 | % |  |           | 42.55 |  |        |  | 2,645 |           |  |   | 27.46 |  |  |  | 59.2 | % |  |   | 46.39 | 
|East South Central |  |           | 677   |  |                                      |   | 35.57 |           |  |  | 58.5                                 | % |  |           | 60.77 |  |        |  | 677   |           |  |   | 34.59 |  |  |  | 56.1 | % |  |   | 61.65 | 
|West South Central |  |           | 456   |  |                                      |   | 31.00 |           |  |  | 72.0                                 | % |  |           | 43.04 |  |        |  | 456   |           |  |   | 25.62 |  |  |  | 54.7 | % |  |   | 46.85 | 
|                   |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Hotels       |  |           | 7,545 |  |                                      | $ | 31.16 |           |  |  | 64.2                                 | % |  | $         | 48.54 |  |        |  | 7,545 |           |  | $ | 30.48 |  |  |  | 59.7 | % |  | $ | 51.09 | 
|                   |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 



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



34



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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, 2010 and 2009, were as follows:



|                            |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|--------------------------- |  | --------- | ----- |  | ------------------------------------ | - | ----- | --------- |  |  | ------------------------------------ | - |  | --------- | ----- |  | ------ |  | ----- | --------- |  | - | ----- |  |  |  | ---- | - |  | - | ----- | 
|                            |  |           |       |  | Nine months ended September 30, 2010 |   |       |           |  |  | Nine months ended September 30, 2009 |  
|Same Store Brand            |  | RoomCount |       |  | RevPAR                               |   |       | Occupancy |  |  | ADR                                  |   |  | RoomCount |       |  | RevPAR |  |       | Occupancy |  |   | ADR   | 
|Limited Service             |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Midscale w/o F&B            |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Comfort Inn/ Comfort Suites |  |           | 1,524 |  |                                      | $ | 43.68 |           |  |  | 64.8                                 | % |  | $         | 67.45 |  |        |  | 1,524 |           |  | $ | 41.82 |  |  |  | 58.8 | % |  | $ | 71.16 | 
|Hampton Inn                 |  |           | 135   |  |                                      |   | 49.59 |           |  |  | 67.1                                 | % |  |           | 73.89 |  |        |  | 135   |           |  |   | 44.92 |  |  |  | 60.2 | % |  |   | 74.65 | 
|Holiday Inn Express         |  |           | 125   |  |                                      |   | 44.88 |           |  |  | 67.2                                 | % |  |           | 66.76 |  |        |  | 125   |           |  |   | 45.43 |  |  |  | 69.4 | % |  |   | 65.48 | 
|Other Midscale (1)          |  |           | 291   |  |                                      |   | 32.58 |           |  |  | 54.9                                 | % |  |           | 59.35 |  |        |  | 291   |           |  |   | 31.69 |  |  |  | 53.1 | % |  |   | 59.67 | 
|                            |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Midscale w/o F&B      |  |           | 2,075 |  |                                      | $ | 42.58 |           |  |  | 63.7                                 | % |  | $         | 66.87 |  |        |  | 2,075 |           |  | $ | 40.82 |  |  |  | 58.7 | % |  | $ | 69.53 | 
|                            |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Economy                     |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Days Inn                    |  |           | 1,146 |  |                                      |   | 31.69 |           |  |  | 65.8                                 | % |  |           | 48.16 |  |        |  | 1,146 |           |  |   | 29.04 |  |  |  | 55.1 | % |  |   | 52.72 | 
|Super 8                     |  |           | 2,968 |  |                                      |   | 28.23 |           |  |  | 61.0                                 | % |  |           | 46.25 |  |        |  | 2,968 |           |  |   | 29.37 |  |  |  | 62.0 | % |  |   | 47.36 | 
|Other Economy (2)           |  |           | 258   |  |                                      |   | 28.67 |           |  |  | 50.9                                 | % |  |           | 56.33 |  |        |  | 258   |           |  |   | 29.93 |  |  |  | 46.0 | % |  |   | 65.00 | 
|                            |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Economy               |  |           | 4,372 |  |                                      | $ | 29.16 |           |  |  | 61.7                                 | % |  | $         | 47.28 |  |        |  | 4,372 |           |  | $ | 29.31 |  |  |  | 59.3 | % |  | $ | 49.47 | 
|                            |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Midscale/Economy      |  |           | 6,447 |  |                                      | $ | 33.48 |           |  |  | 62.3                                 | % |  | $         | 53.72 |  |        |  | 6,447 |           |  | $ | 33.02 |  |  |  | 59.1 | % |  | $ | 55.89 | 
|                            |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Economy Extended Stay (3)   |  |           | 1,098 |  |                                      | $ | 17.52 |           |  |  | 75.2                                 | % |  | $         | 23.31 |  |        |  | 1,098 |           |  | $ | 15.57 |  |  |  | 63.1 | % |  | $ | 24.69 | 
|                            |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 
|Total Hotels                |  |           | 7,545 |  |                                      | $ | 31.16 |           |  |  | 64.2                                 | % |  | $         | 48.54 |  |        |  | 7,545 |           |  | $ | 30.48 |  |  |  | 59.7 | % |  | $ | 51.09 | 
|                            |  |           |       |  |                                      |   |       |           |  |  |                                      |   |  |           |       |  |        |  |       |           |  |   |       |  |  |  |      |   |  |   |       | 

|                                                              
|--------------------------------------------------------------
|                                                              
|1        Includes Baymont, Ramada Limited and Sleep Inn brands
|2        Includes Guesthouse Inn and two independent hotels   
|3        Includes seven Savannah Suites                       



35



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##### Table of Contents



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, 2009.



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

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



36



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##### Table of Contents



Part II.
OTHER INFORMATION:



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

Litigation

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

Plaintiffs are seeking to recover for damages
arising out of physical and mental injury, lost wages, pain and suffering, past and future medical expenses and punitive or exemplary damages. At this time, the company has settled two claims with authorization from the insurers and has recorded a
liability for the amount of the claims and a receivable reflecting recoverability of the claim from the insurers.

The Company
has not recorded a liability for the remaining unsettled claims as the amount of the loss contingency is not reasonably estimable. The Company will continue to evaluate the estimability of loss contingency amounts. The damages claimed by plaintiffs
for the unsettled claims are in excess of $40 million. The company retains three tranches of commercial general liability insurance with aggregate limits of $51 million. There are no deductibles on two of the tranches; the third tranche has a
deductible of ten thousand dollars. The company believes it has adequate coverage.



37



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Part II. OTHER INFORMATION, CONTINUED:





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

Summary Financial
Data

The following sets forth summary financial data that has been prepared by the Company without audit. The Company
believes the following data should be used as a supplement to the consolidated statements of operations and should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2009.



|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|(In thousands, except per share and statistical data)        |  |                                 |        |   |                                |   |        |     
|                                                             |  |                                
|                                                             |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                             |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009    |  
|Income (loss) from continuing operations before income taxes |  | $                               | 675    |   |                                | $ | (301   | )    |  | $ | (4,652  | ) |  | $ | (2,246  | )
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss available to common shareholders                    |  | $                               | (472   | ) |                                | $ | (1,415 | )    |  | $ | (7,883  | ) |  | $ | (3,217  | )
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Earnings per share from continuing operations - basic        |  | $                               | 0.01   |   |                                | $ | (0.02  | )    |  | $ | (0.23   | ) |  | $ | (0.12   | )
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Earnings per share from discontinued operations - basic      |  | $                               | (0.03  | ) |                                | $ | (0.04  | )    |  | $ | (0.12   | ) |  | $ | (0.03   | )
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Earnings per share - basic                                   |  | $                               | (0.02  | ) |                                | $ | (0.06  | )    |  | $ | (0.35   | ) |  | $ | (0.15   | )
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Earnings per share - diluted                                 |  | $                               | (0.02  | ) |                                | $ | (0.06  | )    |  | $ | (0.35   | ) |  | $ | (0.15   | )
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Adjusted EBITDA (1)                                          |  | $                               | 5,795  |   |                                | $ | 5,479  |      |  | $ | 10,116  |   |  | $ | 17,056  |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                             |  |                                 |        |  
|FFO attributable to common shareholders (2)                  |  | $                               | 2,390  |   |                                | $ | 2,061  |      |  | $ | 563     |   |  | $ | 6,606   |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                             |  |                                 |        |  
|FFO per share - basic                                        |  |                                 | 0.10   |   |                                |   | 0.09   |      |  |   | 0.03    |   |  |   | 0.31    |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|FFO without impairment, a non-cash item, per share - basic   |  |                                 | 0.15   |   |                                |   | 0.13   |      |  |   | 0.28    |   |  |   | 0.35    |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|FFO per share - diluted                                      |  |                                 | 0.10   |   |                                |   | 0.09   |      |  |   | 0.03    |   |  |   | 0.31    |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|FFO without impairment, a non-cash item, per share - diluted |  |                                 | 0.15   |   |                                |   | 0.13   |      |  |   | 0.28    |   |  |   | 0.35    |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                             |  |                                 |        |  
|Net cash flow:                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Provided by operating activities                             |  | $                               | 3,524  |   |                                | $ | 1,184  |      |  | $ | 8,118   |   |  | $ | 6,864   |  
|(Used in) provided by investing activities                   |  | $                               | (302   | ) |                                | $ | 6,772  |      |  | $ | 2,808   |   |  | $ | 8,827   |  
|Used in financing activities                                 |  | $                               | (3,174 | ) |                                | $ | (8,293 | )    |  | $ | (10,742 | ) |  | $ | (15,990 | )
|                                                             |  |                                 |        |  
|Weighted average number of shares outstanding for:           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|calculation of earnings per share - basic                    |  |                                 | 22,880 |   |                                |   | 21,880 |      |  |   | 22,435  |   |  |   | 21,542  |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|calculation of earnings per share - diluted                  |  |                                 | 22,880 |   |                                |   | 21,880 |      |  |   | 22,435  |   |  |   | 21,542  |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                             |  |                                 |        |  
|Weighted average number of shares outstanding for:           |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|calculation of FFO per share - basic                         |  |                                 | 22,880 |   |                                |   | 21,880 |      |  |   | 22,435  |   |  |   | 21,542  |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|calculation of FFO per share - diluted                       |  |                                 | 22,880 |   |                                |   | 21,880 |      |  |   | 22,435  |   |  |   | 21,542  |  
|                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



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Part II. OTHER INFORMATION, CONTINUED:





|Item 5. | Other Information, continued:
|------- | -----------------------------



|                                                      |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                      |  | Three months endedSeptember 30, |       |   | Nine months endedSeptember 30, |  
|                                                      |  | 2010                            |       |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA         |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net loss attributable to common shareholders          |  | $                               | (472  | ) |                                | $ | (1,415 | )    |  | $ | (7,883 | ) |  | $ | (3,217 | )
|Interest, including disc ops                          |  |                                 | 3,011 |   |                                |   | 3,377  |      |  |   | 9,141  |   |  |   | 9,783  |  
|Income tax benefit, including disc ops                |  |                                 | (33   | ) |                                |   | (448   | )    |  |   | (1,201 | ) |  |   | (1,506 | )
|Depreciation and amortization, including disc ops     |  |                                 | 2,908 |   |                                |   | 3,559  |      |  |   | 8,959  |   |  |   | 10,870 |  
|                                                      |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|EBITDA                                                |  |                                 | 5,414 |   |                                |   | 5,073  |      |  |   | 9,016  |   |  |   | 15,930 |  
|Noncontrolling interest                               |  |                                 | 13    |   |                                |   | 38     |      |  |   | (5     | ) |  |   | 21     |  
|Preferred stock dividends                             |  |                                 | 368   |   |                                |   | 368    |      |  |   | 1,105  |   |  |   | 1,105  |  
|                                                      |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Adjusted EBITDA (1)                                   |  | $                               | 5,795 |   |                                | $ | 5,479  |      |  | $ | 10,116 |   |  | $ | 17,056 |  
|                                                      |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|RECONCILIATION OF NET LOSS TO FFO                     |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) attributable to common shareholders |  | $                               | (472  | ) |                                | $ | (1,415 | )    |  | $ | (7,883 | ) |  | $ | (3,217 | )
|Depreciation and amortization                         |  |                                 | 2,908 |   |                                |   | 3,559  |      |  |   | 8,959  |   |  |   | 10,870 |  
|Net gain on disposition of assets                     |  |                                 | (46   | ) |                                |   | (83    | )    |  |   | (513   | ) |  |   | (1,047 | )
|                                                      |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|FFO available to common shareholders (2)              |  | $                               | 2,390 |   |                                | $ | 2,061  |      |  | $ | 563    |   |  | $ | 6,606  |  
|                                                      |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Impairment                                            |  |                                 | 933   |   |                                |   | 693    |      |  |   | 5,649  |   |  |   | 843    |  
|                                                      |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|FFO without impairment, a non-cash item (3)           |  | $                               | 3,323 |   |                                | $ | 2,754  |      |  | $ | 6,212  |   |  | $ | 7,449  |  
|                                                      |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|ADDITIONAL INFORMATIONSAME STORE                     |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Average Daily Rate                                    |  | $                               | 50.66 |   |                                | $ | 51.53  |      |  | $ | 48.54  |   |  | $ | 51.09  |  
|Revenue Per Available Room                            |  | $                               | 34.81 |   |                                | $ | 32.67  |      |  | $ | 31.16  |   |  | $ | 30.48  |  
|Occupancy                                             |  |                                 | 68.7  | % |                                |   | 63.4   | %    |  |   | 64.2   | % |  |   | 59.7   | %



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

Adjusted EBITDA doesnt represent cash generated from operating activities determined by GAAP and
should not be considered as an alternative to net income, cash flow from operations or any other operating performance measure prescribed by GAAP. Adjusted EBITDA is not a measure of our liquidity, nor is Adjusted EBITDA indicative of funds
available to fund our cash needs, including our ability to make cash distributions. Neither does the measurement reflect cash expenditures for 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
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 5. | Other Information, continued:
|------- | -----------------------------

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

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



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

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

To arrive at FFO without impairment, a non-cash item, we adjust FFO available to common shareholders, to exclude the
following items:



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



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

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

The impairment charges of hotel properties that were recognized in 2009 and 2010 were primarily
based on valuations of hotels, which had declined due to market conditions that we no longer expected to hold for long-term investment, and/or for which we have reduced our prior expected holding periods. In order to enhance liquidity, we have
declared certain properties as held for sale and may declare other properties held for sale. To the extent these properties are expected to be sold at a loss, we record an impairment charge when the loss is known. We have recognized certain of these
impairment charges over several quarters in 2009 and 2010 and we believe it is reasonably likely that we will recognize similar charges and gains in the near future. However, we believe that as the financial markets stabilize and our liquidity needs
change, the potential for impairment charges of our hotel properties will disappear or become immaterial. We believe FFO, without impairment, provides investors with an additional measure to better evaluate our operating performance during this
period of fundamental disruption in the global financial and real estate markets.

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



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Part II. OTHER INFORMATION, CONTINUED:





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



|           |  |                                                                                  
|---------- |  | ---------------------------------------------------------------------------------
|ExhibitNo. |  | 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/     KELLY A.
WALTERSKelly A. WaltersPresident and Chief Executive Officer


Dated this
10thday of November, 2010



By:

/s/     CORRINE L.
SCARPELLOCorrine L. ScarpelloChief Financial Officer and Secretary


Dated this
10thday of November, 2010



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Supertel Hospitality, Inc., and Subsidiaries





Exhibits



|           |  |                                                                                  
|---------- |  | ---------------------------------------------------------------------------------
|ExhibitNo. |  | 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



43