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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    Form 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998         Commission File No. 0-23536



                           Supertel Hospitality, Inc.
             (Exact name of registrant as specified in its charter)

               Delaware                                   47-0774097
      (State or other jurisdiction of       (I.R.S. Employer Identification No.)
      incorporation of organization)

       309 North 5th Street
        Norfolk, Nebraska                                 68701
 (Address of principal executive offices)              (Zip Code)

       Registrant's telephone number, including area code: (402) 371-2520

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share



         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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

         The number of shares of common stock  outstanding  as of March 12, 1999
was 4,843,400  shares.  The  aggregate  market value of the common stock held by
non-affiliates of the registrant as of March 12, 1999 was $34,147,000.

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of the  registrant's  knowledge,  in definitive proxy or information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. /X/

         Documents  incorporated  by reference  include  portions of  Supertel's
Proxy Statement for the April 30, 1999 Annual Stockholders' Meeting ("1999 Proxy
Statement") incorporated by reference in Part III.

===============================================================================


<PAGE>


                                     PART I
Item 1.  Business.

General

         Supertel is one of the largest  franchisees  of Super 8 motels based on
the number of motels owned and total rooms rented. Supertel develops,  acquires,
constructs and operates  economy-class motels as a franchisee of Super 8 Motels,
Inc.  and at  February  1, 1999  owned 58 Super 8 motels  located  primarily  in
Nebraska, Kansas, Iowa, Missouri, Arkansas, Wisconsin and Texas. Supertel is one
of the few  multiple-location  franchisees  of Super 8 motels that both owns and
operates  motels.  Supertel also owned two Comfort Inn motels,  one River Valley
Suites motel, and two Wingate Inns at February 1, 1999.

         Strategic Planning. Supertel announced on June 4, 1998 the execution of
a merger  agreement  pursuant to which  Supertel would merge into PMC Commercial
Trust (AMEX:PCC) with each Supertel  stockholder  receiving 0.6 common shares of
PMC Commercial Trust, subject to certain adjustments.  The merger was subject to
a number of conditions,  including  approval by the stockholders of Supertel and
PMC  Commercial  Trust.  Supertel  announced on October 15, 1998 that the merger
agreement had been  terminated  by mutual  agreement  due to  unfavorable  stock
market  conditions.  The board of  directors  of Supertel  continues to consider
Supertel's strategic alternatives.

         Current   Operations.   Supertel  is  a  vertically   integrated  motel
construction,  development and operations company that (i) identifies  potential
sites for the  construction of new motels and analyzes  existing motels that are
available for acquisition, (ii) develops and constructs new motel properties and
renovates   existing  motels  it  acquires  and  (iii)  manages  its  own  motel
properties.  Certain historical  information concerning Supertel's operations is
set forth in the following table.

<TABLE>
----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------

       Year-End Information               1994              1995               1996               1997              1998

----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------
<S>                                     <C>               <C>                 <C>               <C>               <C>
Number of Motels                                  41                 48                 59                62                63
----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------

Total Rooms Rented                           667,545            793,151            903,643         1,041,904         1,094,009
----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------

Motel Revenues                           $25,161,000        $31,362,000        $37,832,000       $46,345,000       $51,339,000
----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------

ProForma Net Income After Taxes           $3,077,000         $3,624,000         $3,371,000       $ 4,102,000        $5,017,000
----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------

Average Occupancy Rate                         69.4%              69.6%              65.7%             65.7%             66.9%
----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------

Average Room Rate (1)                         $37.69             $39.54             $41.87            $44.48            $46.93
----------------------------------- ----------------- ------------------ ------------------ ----------------- -----------------
</TABLE>
(1)      Includes telephone, vending and movie revenues.

                                      -2-
<PAGE>
         History.  Paul J. Schulte and Steve H. Borgmann  developed  their first
Super 8 motel as a franchisee of Super 8 Motels, Inc. in 1978. From 1978 through
October  1990,  Messrs.   Schulte  and  Borgmann  developed  by  acquisition  or
construction an additional 26 motels in the states of Nebraska,  Iowa, Missouri,
Kansas and Arizona through a series of limited  partnerships  and  corporations.
These  various  entities  were  combined  into  Spartan "8" Limited  Partnership
("Spartan")  in October  1990.  Messrs.  Schulte and  Borgmann  continued as the
general  partners of Spartan which acquired or developed nine  additional  motel
properties in Nebraska,  Kansas,  Missouri and Arkansas between October 1990 and
February 1994.

         Simplex,  Inc.  ("Simplex")  has been involved in the motel  management
business for Spartan and its  predecessors  since 1980. Motel  Developers,  Inc.
("MDI")  or its  predecessors  have  acted as a  general  contractor  for  motel
properties  developed by Messrs.  Schulte and Borgmann since 1977.  Supertel was
organized in December  1993 to act as the  successor to  businesses  operated by
Spartan,  MDI and  Simplex,  at which time  Simplex and MDI became  wholly-owned
subsidiaries of Supertel. Supertel completed an initial public offering in April
1994.  Spartan,  MDI and Simplex are sometimes  referred to as the  "Predecessor
Companies". The narrative description and financial information herein have been
prepared as if Supertel owned and operated the properties throughout the periods
described herein.

Lodging Industry Overview

         The lodging  industry can be divided into four broad  segments based on
price and chain affiliation. These segments are: upscale, midscale, economy, and
small  chains or  independent  motels.  Each of the first three  categories  are
further divided into two subcategories  based on price: upper and lower. Super 8
motels are in the lower economy segment, together with Motel 6, Budgetel, Ramada
Limited, EconoLodge,  Roadway Inn, Sleep Inn and others. Wingate Inns are in the
upper midscale segment, together with Hampton Inns and Courtyard by Marriott.

         Lower  economy-class  motels  appeal  to  family,  senior  citizen  and
business travelers seeking  comfortable  lodging at low cost.  Supertel believes
the  geographic  location and cost  structure of its economy  motels  results in
higher  margins  than are  obtained in other  segments of the lodging  industry.
Upper  mid-scale  hotels  appeal to the business  traveler  looking for extended
benefits.

Motel Operations

         Supertel's  Super 8 motels are economy  lodging  facilities  containing
between 40 and 133 guest  rooms.  The guest  rooms  contain  between 220 and 290
square  feet of space and are  furnished  with  either king or queen size or two

                                      -3-
<PAGE>

double beds, dresser, table and chairs or recliner and a remote controlled color
television  (frequently  with cable or satellite  hook ups).  The motels provide
continental  breakfasts,  wake up calls and 24-hour  desk  service.  The typical
motel is of an  English-tudor  style  design  and is  located  near  restaurants
operated by third parties.

         Supertel's  personnel  have  extensive  experience in  conducting  site
selection.  Site selection  typically  consists of reviewing area  demographics,
conducting  market  research and comparing the proposed site to other  potential
expansion locations. Supertel acts as its own general contractor in constructing
Super  8  motels.  In the  conduct  of  general  contractor  duties,  Supertel's
personnel   purchase  building  materials  and  award  contracts  for  plumbing,
concrete,  concrete  finishing,   electrical,   heating  and  air  conditioning,
carpentry, finish carpentry and specialized equipment such as computer equipment
and telephone equipment.

         Each of  Supertel's  63 motels has an on-site  manager.  The manager is
generally a resident of the local  community.  Supertel  management  is in daily
contact with each motel manager. Supertel's motels with 80 or fewer rooms employ
an average of 12 housekeeping and maintenance employees and its motels with more
than 80 rooms employ an average of 16 housekeeping and maintenance employees.

         Supertel's  training  personnel  conducts  training  of all motel staff
members  including  motel  managers,  motel desk clerks and motel  housekeepers.
Supertel's  employee training emphasizes its guest safety programs which include
room key control,  outside  lighting and security  cameras for monitoring  motel
premises.

Customers and Marketing

         During 1998,  Supertel rented 1,094,009  rooms.  Over 59% of its guests
were  members of the VIP Club,  a popular  guest  program  developed  by Super 8
Motels,   Inc.  The  members  of  the  VIP  Club  receive  room  discounts  upon
presentation  of their club card at check-in  and check  cashing  privileges  in
addition  to other  benefits.  Supertel's  marketing  efforts  include  VIP Club
enrollment drives and VIP enrollment contests among desk clerks.

         Supertel's  marketing  efforts  also include  negotiating  and renewing
billboards and developing and renewing yellow page advertising. Specific on-site
marketing  sales programs for individual  motels are  implemented and planned by
Supertel  personnel.  In addition,  Supertel  participates in various  community
campaigns in support of the local area at each motel location.

                                      -4-
<PAGE>

Service and Quality Assurance

         Supertel  believes  it ranks  among the best Super 8 motels for quality
and service.  Super 8 Motels,  Inc. conducts surveys of guests of Super 8 motels
through the use of in-room guest comment cards. Guests are requested to complete
and mail the self-addressed  cards to Super 8 Motels, Inc. following a stay in a
Super 8 motel. The comment card covers nine areas: appearance, room cleanliness,
room comfort,  room  furnishings,  bathroom,  price value  perception,  employee
friendliness,  employee  efficiency and employee  response.  The following chart
reflects the average guest  responses on the Super 8 surveys,  which use a scale
of 1.00 to 4.00 with the best score being 1.00. <TABLE>
                                          1996          1997          1998
                                          ----          ----          ----
<S>                                       <C>           <C>           <C>
All Super 8 motels ...........            1.41          1.38          1.41

Supertel-owned motels.........            1.15          1.14          1.17
</TABLE>

         Super 8 Motels, Inc. also conducts four unannounced inspections of each
motel per year,  one each  quarter.  The  inspection  scores shown below are the
average for the year.  A score of 0 to 50 is graded as  excellent,  51 to 300 is
graded good, 301 to 500 is graded average and above 500 is graded unacceptable.
<TABLE>

                                           1996          1997          1998
                                           ----          ----          ----
<S>                                        <C>           <C>           <C>
All Super 8 motels .................       187           180           175
Supertel-owned motels (all motels)..        61            65            65
Supertel-owned motels (properties
  owned/opened more than one year)..        61            65            65
</TABLE>

                                      -5-
<PAGE>


Motel Properties

         Certain  information for the 63 motels owned by Supertel at February 1,
1999 is set forth below. All motels are Super 8 motels except as noted.
<TABLE>
Location                                    Date Opened                  Rooms in Motel

Nebraska
         <S>                                <C>                                 <C>
         Columbus                           12/31/81                             63
         O'Neill                            7/30/82                              72
         Omaha                              2/18/83                             115
         Lincoln                            purchased 8/1/83                     83
         Lincoln                            10/29/83                            133
         Omaha                              5/23/86                              74
         Wayne                              6/8/92                               40
         Omaha                              12/29/93                            101
         Norfolk                            purchased 11/2/94                    66

Iowa

         Creston                            9/19/78                              84
         Keokuk                             2/2/85                               62
         Iowa Ci                            12/21/85                             87
         Oskaloosa                          12/31/85                             51
         Burlingto                          12/30/86                             63
         Clinton                            1/25/88                              63
         Mt. Pleasant                       8/29/88                              55
         Pella                              3/15/90                              41
         Storm Lake                         10/11/90                             59
         Muscatine                          purchased 1/4/95                     63
         Ft. Madison                        purchased 1/4/95                     42

Kansas

         Hays                               5/31/87                              78
         Pittsburg                          8/14/87                              64
         Manhattan                          11/23/87                             87
         Wichita                            2/17/89                             119
         Lenexa                             12/22/89                            101
         Garden City                        purchased 6/1/91                     60
         El Dorado                          1/16/92                              49
         Wichita                            purchased 11/7/94                    59
         Parsons                            purchased 3/15/96                    48

</TABLE>
                                      -6-

<PAGE>
<TABLE>

Location                                      Date Opened              Rooms in Motel


Missouri
         <S>                                 <C>                                <C>
         Kirksville                          8/28/86                             63
         Sedalia                             3/6/87                              87
         Moberly                             purchased 8/1/87                    60
         Marshall                            5/6/88                              54
         Kingdom City                        6/6/89                              62
         West Plains                         11/5/90                             49
         Jefferson City                      7/2/91                              77
         Neosho                              purchased 8/15/98                   58

Texas

         College Station                     6/21/94                             90
         Waco                                6/21/94                             78
         Irving                              2/10/95                            104
         Plano                               10/3/95                            102
         McKinney                            12/21/95                            80
         Denton                              4/11/96                             80
         Wichita Falls                       6/4/96                             104
         Grapevine                           6/4/96                             102
         Bedford                             8/15/96                            113
         Los Colinas (Wingate Inn)           4/1/97                             101
         Houston (Wingate Inn)               8/22/97                            101

South Dakota

         Watertown                           purchased 7/15/94                   58

Illinois

         Macomb                              purchased 1/17/95                   41
         Jacksonville                        purchased 3/22/95                   43

Arkansas

         Russellville                        3/21/91                             61
         Mountain Home                       4/13/92                             41
         Batesville                          10/6/92                             49
         Fayetteville                        5/17/93                             83
</TABLE>
                                      -7-
<PAGE>
<TABLE>

Location                                      Date Opened              Rooms in Motel


Arizona
         <S>                                 <C>                                <C>
         Bullhead City (Independent)         4/28/84                             76

Wisconsin

         Portage                             purchased 6/13/96                   61
         Antigo                              purchased 7/2/96                    52
         Shawano                             purchased 7/2/96                    55
         Minocqua (Comfort Inn)              purchased 7/2/96                    51
         Sheboygan (Comfort Inn)             purchased 7/30/96                   59
         Tomah                               purchased 8/14/96                   64
         Menomonie                           purchased 4/1/97                    81
                                                                               -----
                                                                              4,522
</TABLE>
                                      -8-
<PAGE>



Relationship with Super 8 Motels, Inc.

         Supertel's motel  properties are each operated  pursuant to a franchise
agreement with Super 8 Motels, Inc. Super 8 Motels, Inc., with corporate offices
located  in  Aberdeen,  South  Dakota,  is a  subsidiary  of  Cendant  Corp.,  a
publicly-owned  franchisor  of hotels and  motels,  including  Days Inn,  Howard
Johnson, Knights Inn, Ramada, Travelodge,  Villager Lodge, Wingate Inn and Super
8. There were 1,757 Super 8 motels operating as of December 31, 1998.

         Benefits to Supertel. Supertel's franchisee relationship allows the use
of the  nationally  recognized  service mark "Super 8" in its motel  operations.
Super 8 Motels, Inc. conducts national print and media advertising promoting the
service mark and Super 8 motels. Quality and consistency among Super 8 motels is
monitored by Super 8 Motels, Inc. through four unannounced annual inspections of
each Super 8 motel for compliance with facility and service  standards.  Super 8
Motels,  Inc. also assists  franchisees in advertising,  design and development,
market research and trade show participation.

         Super 8 Motels, Inc. operates a 24-hour  reservation system.  Travelers
can use an 800 telephone number through the reservation  system to reserve rooms
nationwide  at Super 8  motels.  In  addition  to the  reservation  service,  an
international  directory of Super 8 motels is published twice annually and Super
8 Motels,  Inc.  prepares  and delivers a special  directory  for tour groups to
travel agencies.

         Members of Super 8 Motels,  Inc.'s VIP Club program  rented over 59% of
Supertel's  motel rooms during 1998.  The 5,704,000  members (as of December 31,
1998) of the VIP Club receive room rate  discounts  upon  presentation  of their
club  card at  check-in  and  check  cashing  privileges  in  addition  to other
benefits.  Super 8  guarantees  any losses that  Supertel  may incur from checks
written by VIP Club cardholders.

         Super 8  Motels,  Inc.  provides  Supertel  with a central  source  for
purchasing of items used in the motel operations.  Supertel believes that volume
purchasing  from a central source results in overall lower purchase  costs. As a
franchisee  of Super 8 Motels,  Inc.,  Supertel  also  receives  rebates on long
distance   telephone  charges  and  premium   television   charges  through  its
relationship with the franchisor.

         Franchise  Agreements.  Supertel  pays a monthly  franchise fee ranging
from 4% to 8% of each motel's  gross  receipts from room revenues of which 1% to
3% is contributed to an advertising fund administered by Super 8 Motels, Inc. to
finance its national advertising program. An initial franchise fee of $20,000 is
required upon the execution of a franchise agreement for a new location.

                                      -9-
<PAGE>
         Super 8 Motels,  Inc.  has agreed not to franchise  additional  Super 8
motels  within a  specific  radius  (which  varies  from  five to  thirty  miles
depending  upon the  location) of each motel.  Each  franchise  agreement  has a
twenty year term.  Super 8 Motels,  Inc.  has the right to terminate a franchise
agreement,  subject to the Supertel's right to correct the condition giving rise
to  the  right  to  terminate,  if  Supertel  violates  the  agreement,  becomes
insolvent,  or permits an  attachment  or  execution to be levied on the subject
motel.

         Supertel  may  own  and  operate  motels  not  subject  to a  franchise
agreement  with  Super 8 Motels,  Inc.  In  addition,  in the event a  franchise
agreement with respect to a motel is not renewed or is terminated,  Supertel may
operate  such motel  independently  or pursuant  to an  agreement  with  another
franchisor  while  continuing  to  operate  its  other  motels  under  franchise
agreements with Super 8 Motels, Inc.

         Area  Development  Rights.  Super 8 Motels,  Inc. has granted  Supertel
exclusive rights to develop motels within the city limits of Omaha, Nebraska and
in a portion of the Kansas City metropolitan area located in Kansas.

Relationship With Wingate Inns, L.P.

         Wingate Inns,  L.P. is an affiliate of Cendant Corp.,  a  publicly-held
corporation. Super 8 Motels, Inc. is also an affiliate of Cendant Corp.

         Wingate  Inns  is  a  limited   service  hotel  chain  which   features
comfortable suite-like rooms focused on business travelers.  Wingate Inns hotels
are in the upper mid-scale segment of the lodging industry.  Supertel will pay a
monthly  franchise  fee of 8.5% of each  Wingate Inns gross  receipts  from room
revenues, of which 4% will be contributed to an advertising fund administered by
Wingate Inns, L.P. A minimum  initial  franchise fee of $35,000 is required upon
the execution of a franchise  agreement  for a new location,  with an additional
initial  fee of $350 for  each  room in  excess  of 100  rooms at the  location.
Subject to certain  conditions,  Wingate  Inns,  L.P.  will advance  $250,000 to
Supertel for each new Wingate Inn; one-fifteenth of the advance will be forgiven
without payment annually  following the motel opening if Supertel  complies with
the terms of the franchise agreement.

Competition

         There is  significant  competition in the lodging  industry.  There are
numerous lodging chains that operate on a national or regional basis, as well as
other motels, motor inns and independent lodging  establishments  throughout the
United  States.  Many of Supertel's  competitors  have  recognized  trade names,
greater  resources and longer  operating  histories  than  Supertel.  Supertel's

                                      -10-
<PAGE> 
motels also compete  directly with other economy motel chains that employ
concepts   similar  to  Super  8  motels  and  compete  for  the  same  type  of
cost-conscious  traveler.  The number of available rooms in these economy motels
has grown rapidly.

Government Regulation

         Supertel  is  subject  to  various  federal,   state  and  local  laws,
regulations  and  administrative  practices  affecting its business.  Supertel's
motel facilities must comply with regulations related to health,  sanitation and
safety  standards,  equal employment,  minimum wages,  building codes and zoning
ordinances and licenses to operate motel facilities.  Supertel believes it is in
substantial   compliance   with  all  such   regulations.   The  Americans  With
Disabilities Act became effective in 1992 and requires public  accommodations to
meet certain federal requirements related to access and use by disabled persons.
Compliance with the ADA could require removal of structural barriers to handicap
access  in  certain  public  areas of  properties  owned by  Supertel.  Supertel
expended  approximately  $215,000  during  1998 in  improvements  to  bring  its
properties materially in compliance with the ADA and comparable state laws.

Environmental Matters

         Under various federal,  state and local laws and regulations,  an owner
or operator of real estate may be liable for the costs of removal or remediation
of certain  hazardous  or toxic  substances  on such  property.  Such laws often
impose  such  liability  without  regard to  whether  the owner  knew of, or was
responsible  for, the presence of  hazardous  or toxic  substances.  The cost of
remediation or removal of such substances may be  substantial,  and the presence
of such substances,  or the failure to promptly  remediate such substances,  may
adversely affect the owner's ability to sell such real estate or to borrow using
such real estate as collateral.

         Supertel's   motels  have  been   subjected   to  Phase  I  or  similar
environmental  audits (which involve  inspection without soil sampling or ground
water analysis) by independent environmental  consultants.  Such audits have not
revealed any significant  environmental  liability.  Supertel  believes that the
motel  properties  are in compliance in all material  respects with all federal,
state  and  local  ordinances  and  regulations  regarding  hazardous  or  toxic
substances and other environmental matters.

Insurance

         Supertel  has  insurance  for risks such as fire,  personal  injury and
property  damage  claims in  connection  with the operation of the motels as its
management  deems  appropriate and in accordance  with prudent risk  management,
taking into  consideration  the  availability  and cost thereof.  The motels are

                                      -11-
<PAGE> 
insured for other risks, such as business interruption insurance covering
six months of each motel's revenues, in amounts deemed adequate by Supertel.

Employees

         As of December 31, 1998  Supertel had 1,180  employees.  The  corporate
staff   consisted   of  58  employees   involved  in   development/construction,
operations/training,  and purchasing and accounting.  The motel-level  employees
included 89 managers and assistant  managers/relief  managers,  381 desk clerks,
583 housekeepers and shuttle drivers and 69 maintenance employees. Approximately
46% of the desk clerks and housekeepers are part-time  employees.  The number of
Supertel employees varied during 1998 from a low of 1,121 employees to a high of
1,299  employees  due to the  seasonal  nature  of the  motel  business  and the
addition  of motels  during  the year.  None of the  employees  is  covered by a
collective bargaining agreement. Supertel considers its relations with employees
to be good.

Financial Information about Foreign Operations and Export Sales

         Supertel has no foreign locations or export sales.

Executive Officers of Supertel

         The executive  officers of Supertel at March 12, 1999 are listed below,
together with their ages and all Company positions and offices held by them.

         Name              Age                  Position

Paul J. Schulte            65          Director, President and Treasurer

Steve H. Borgmann          53          Director, Executive Vice
                                        President and Chief Operating Officer

Richard L. Herink          45          Director, Executive Vice President

Troy Beatty                33          Senior Vice President and Chief
                                        Financial Officer

         Paul Schulte  founded a  predecessor  of Supertel and was a controlling
shareholder,  director and president of the predecessor's operations since 1974.
Mr. Schulte has extensive experience in acquiring,  developing, owning, managing
and operating economy motels for Supertel or its predecessors since 1978.

                                      -12-
<PAGE>
         Steve Borgmann was a controlling  shareholder,  director and officer of
the predecessor's  operations since 1983. Mr. Borgmann has extensive  experience
in acquiring,  developing,  owning,  managing and operating  economy  motels for
Supertel or its predecessors since 1978.

         Richard  Herink became  executive  vice president of Supertel in August
1995.  From  April 1993 to August  1995,  he was  executive  vice  president  of
FirsTier Bank, N.A.,  Norfolk.  Prior to April 1993, he was a division president
with Farm Credit Services of the Midlands.

         Troy  Beatty  became  chief  financial  officer of Supertel in December
1996. From March 1994 to December 1996, Mr. Beatty was division  controller with
Raytheon  Corp.  in Amana,  Iowa;  from March  1990 to March 1994 was  assistant
controller with Cooper Industries; and from August 1987 to March 1990 was senior
associate with Coopers & Lybrand.

                            CERTAIN BUSINESS FACTORS

         This 10-K contains certain  forward-looking  statements and information
relating to Supertel  that are based on the  beliefs of Supertel  management  as
well as  assumptions  made by and  information  currently  available to Supertel
management.  Such statements  reflect the current views of Supertel with respect
to  future  events  and  are  subject  to  certain  risks,   uncertainties   and
assumptions,  including the business factors  described in this 10-K. Should one
or more of these  risks  or  uncertainties  materialize,  or  should  underlying
assumptions  prove  incorrect,  actual  results may vary  materially  from those
described herein as believed, estimated or expected.

         Lodging  Industry  Risks.  The lodging  industry in general,  including
Super 8,  Comfort  Inns and  Wingate  Inns,  may be  adversely  affected by such
factors as changes in national and regional economic conditions (particularly in
geographic areas in which Supertel has a high concentration of motels),  changes
in local market  conditions,  oversupply  of motel space or a reduction in local
demand  for  rooms and  related  services,  changes  in  interest  rates and the
availability of financing.

         Operating factors affecting the lodging industry  generally,  including
Supertel, include (i) competition from other motels and hotels, (ii) demographic
changes,   (iii)  the  recurring  need  for   renovations,   refurbishment   and
improvements of motels and increased  expenses  related to motel security,  (iv)
restricted changes in zoning and similar land use laws, and regulations relating
to health,  safety,  disability and  employment  laws, (v) changes in government
regulations  that influence or determine  wages,  prices or construction  costs,

                                      -13-
<PAGE>

(vi) changes in the  characteristics of motel locations,  (vii) the inability to
secure  property and liability  insurance to fully protect against all losses or
to obtain such insurance at reasonable costs,  (viii) changes in real estate tax
rates and other  operating  costs,  (ix) changes in travel patterns which may be
affected  by  increases  in  transportation  costs or gasoline  prices,  weather
patterns or  construction  of  highways,  and (x) changes in brand  identity and
reputation.

         Unexpected  or adverse  changes in any of the  foregoing  factors could
have a material adverse effect on Supertel's  financial  condition or results of
operations.

         Expansion Risks. Supertel has adopted a strategy to increase the number
of lodging  facilities  through the development of new motels and hotels and the
acquisition of existing motels. Supertel's ability to expand depends on a number
of factors,  including the selection and  availability of suitable  locations at
acceptable  prices,  the hiring and training of sufficiently  skilled management
and personnel, and the availability of financing. There can be no assurance that
financing,  or desirable  locations for  acquisitions or new development will be
available, or if available,  will be on terms acceptable to Supertel.  There can
be no assurance that Supertel's  expansion plans will be completed  successfully
or that the nature of such  expansion  will not be  modified  to reflect  future
events  or  economic  conditions.  During  1998,  Supertel  completed  a 19-unit
addition in O'Neill, Nebraska, purchased a 58-unit motel in Neosho, Missouri and
started a 40-unit addition in Creston,  Iowa. Supertel's  development activities
were  limited  in 1998 since  Supertel's  management  believed  there were fewer
acceptably-priced  development  opportunities and acquisition  candidates during
1998.

         New  motel  development  is  subject  to a number of  additional  risks
including  construction  delay or cost overruns,  risks that properties will not
achieve  anticipated  occupancy levels or sustain expected room rate levels, and
commencement  risks  such as receipt of  zoning,  occupancy  and other  required
governmental  permits  and  authorizations,  which in each case could  adversely
affect  Supertel's  financial  performance.  Supertel has historically  incurred
significant  costs  relating to pre-opening  activities  and operating  expenses
prior to reaching  stabilized  levels of occupancy and average daily room rates.
Consequently,  as Supertel develops new motel  properties,  the costs associated
therewith may negatively impact Supertel's results of operations.

         Acquisitions  entail risks that the new properties will fail to perform
in accordance with  expectations and that the anticipated costs of renovation or
conversion will prove inaccurate, as well as general investment risks associated
with any new real  estate  investment.  Certain of the  properties  acquired  by
Supertel  may not  operate  as  Super 8  franchisees,  and  Supertel  may  incur
financial and guest  acceptance  risks in converting  such properties to Super 8
motels or operating such properties under a franchise agreement with a different
motel franchisor. 

                                      -14-
<PAGE>
         Risks  of  Leverage.  Supertel's  business  is  capital  intensive  and
Supertel will have significant capital  requirements in the future. In the event
Supertel's  cash  flow  and  working  capital  are not  sufficient  to fund  its
expenditures or to service its indebtedness, Supertel would be required to raise
additional  funds  through  the  sale  of  additional  equity  securities,   the
refinancing  of all or part of its  indebtedness,  the  incurrence of additional
indebtedness, or the sale of assets. There can be no assurance that any of these
sources of funds would be available in amounts  sufficient  for Supertel to meet
its obligations. Furthermore, Supertel's leveraged capital structure could limit
its ability to finance its acquisition strategy and other capital  expenditures,
or to compete  effectively  or to operate  successfully  under adverse  economic
conditions.  In addition,  adverse  economic  conditions  could result in higher
interest  rates which could  increase  debt service  requirements  on Supertel's
floating rate debt and thereby reduce the amounts  available for acquisition and
development of lodging facilities.

         Management  of Growth.  Supertel has  increased  annually the number of
motel rooms owned and operated.  Such growth has resulted in, and is expected to
continue to create, increased responsibilities for management personnel, as well
as added demands on Supertel's operating and financial systems. In addition,  as
Supertel continues to pursue its growth strategy,  new motels and hotels will be
opened in  geographic  markets in which  Supertel  has  limited  or no  previous
operating  or franchise  experience.  If Supertel is unable to manage its growth
effectively,  Supertel's  financial condition and results of operations could be
materially and adversely affected.

         Lodging  Industry  Competition.  The  economy  segment  of the  lodging
industry is highly  competitive.  The success of an economy motel in its market,
in large part,  will be  dependent  upon its ability to compete in such areas as
reasonableness  of room  rates,  quality of  accommodations,  service  level and
convenience of location. Supertel's motels compete with existing motel and hotel
facilities  in their  geographic  markets,  as well as  future  motel  and hotel
facilities in proximity to Supertel's  properties.  Supertel's  motels generally
operate in areas that contain numerous competitors.  Demographic,  geographic or
other changes in one or more of Supertel's  markets could impact the convenience
or desirability of the sites of certain motels, which would adversely affect the
operations  of those  motels.  There can be no  assurance  that new or  existing
competitors  will not  significantly  lower rates or offer greater  convenience,
services or amenities or significantly  expand or improve facilities in a market
in which Supertel's motels compete. In addition,  competition  generally reduces
the number of suitable motel acquisition  opportunities  offered to Supertel and
increases the bargaining  power of property owners seeking to sell,  which could
adversely  affect  the  availability  of or price paid for  existing  properties
acquired by Supertel.

          Seasonality.  The lodging  industry is seasonal in nature.  Generally,
motel  revenues are greater in the second and third  quarters  than in the first
and fourth quarters.  This seasonality can be expected to cause quarterly 

                                      -15-
<PAGE>
fluctuations in Supertel's  revenues.  Quarterly  earnings also may be adversely
affected by factors beyond Supertel's control,  including weather conditions and
economic factors.

         Loss of Franchises or Certain Franchisor  Services.  Each Super 8 motel
owned by Supertel will be subject to a franchise  agreement in the form provided
by Super 8 Motels, Inc. Similarly, each Wingate Inn hotel owned by Supertel will
be subject to a franchise  agreement with Wingate Inns, L.P. and the two Comfort
Inns owned by Supertel are subject to a franchise  agreement  with Choice Hotels
International, Inc. The continuation of each franchise agreement will be subject
to specified operating standards and other terms and conditions.  The failure of
Supertel to maintain such standards or adhere to such other terms and conditions
with respect to a motel or hotel could result in the loss or cancellation of the
franchise  agreement  covering that property and may have an adverse effect upon
the  profitability  of a covered  property.  In  addition,  the  failure  of the
franchisor to perform its obligations under each Franchise Agreement may have an
adverse  effect on Supertel.  See  "Business  Relationship  With Super 8 Motels,
Inc." and "Business - Relationship with Wingate Inns, L.P."

         Dependence  on Senior  Management.  Supertel's  continued  success will
depend to a  significant  extent upon the efforts  and  abilities  of its senior
management  team,  including  Paul J. Schulte,  Steve H. Borgmann and Richard L.
Herink.  The loss of their  services  could have a material  adverse affect upon
Supertel's  business.  Supertel  has  employment  agreements  with each of these
individuals.

         Environmental  Matters.  Under various  federal,  state and local laws,
ordinances  and  regulations,  an owner or operator of real  property may become
liable for the cost of removal or  remediation of certain  hazardous  substances
released on or in its property.  Such laws often impose liability without regard
to whether the owner or operator knew of, or was responsible for, the release of
such hazardous  substances.  The presence of such substances,  or the failure to
properly remediate any contamination from such substances,  may adversely affect
the owner's  ability to sell the real estate or to borrow  using the real estate
as collateral.  Supertel has not been notified by any governmental  authority of
any liability or other claim in  connection  with any of its motels and Supertel
is not aware of any other  environmental  condition  with  respect to any of its
motels  that could be  material  to its  results of  operations.  See  "Business
Environmental Matters."

Item 2.  Properties.

         Supertel's  executive,   training  and  administrative  operations  are
located in an owned  building  containing  approximately  18,000  square feet of
space in Norfolk, Nebraska.

                                      -16-
<PAGE>
         Supertel's  motel  properties  are all  owned.  See  "Business  - Motel
Properties" and "Business - Motel Operations".

Item 3.  Legal Proceedings.

         A complaint  was filed  against  Supertel,  the members of its board of
directors,  and PMC  Commercial  Trust in the Delaware Court of Chancery on June
16, 1998.  The complaint  was  purportedly  filed on behalf of a stockholder  of
Supertel,  and seeks  certification  as a class action.  The complaint  alleges,
among other  things,  that by  entering  into the merger  agreement  and related
agreements with PMC Commercial Trust,  Supertel's board of directors did not act
in good  faith and in  compliance  with  their  fiduciary  duties to  Supertel's
stockholders.  Supertel  believes  there is no merit to the  allegations  of the
complaint. The merger agreement was terminated by mutual consent in October 1998
due to unfavorable market conditions.

         In  addition,  Supertel  from time to time is  involved  in  litigation
relating  to  claims  arising  out of its  operations  in the  normal  course of
business.  In  the  opinion  of  management,  the  ultimate  disposition  of all
litigation  involving  Supertel  will not have a material  impact on  Supertel's
consolidated financial statements.

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

         No matter was submitted to a vote of  stockholders  of Supertel  during
the fourth quarter of the fiscal year ended December 31, 1998.




                                      -17-
<PAGE>


                                     PART II

Item 5.  Market for the Registrant's Common Equity and Related Security Holder
         Matters.

         Information  required for Item 5 is included with the  information  set
forth under Item 8 below.

Item 6.  Selected Financial Data

                                   (Dollars in thousands, except per share data)

<TABLE>
                                                             1998         1997        1996        1995      1994((1))
--------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
<S>                                                          <C>         <C>          <C>         <C>       <C>
Income Statement Data:
  Motel revenues                                              $51,339     $46,345     $37,832     $31,362     $25,161
  Operating income                                             12,393      11,121       9,104       8,386       6,576
  Net Income                                                    5,017       4,102       3,371       3,624     2,925(2)
  Net income per share - basic and diluted                       1.04        0.85        0.70        0.75      0.70(2)
  Cash dividends per share (3)                                    N/A         N/A         N/A         N/A         N/A
--------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
Other Data:
  Occupancy                                                     66.9%       65.7%       65.7%       69.6%       69.4%
  Average daily room rate (ADR)                                $46.93      $44.48      $41.87      $39.54      $37.69
  Revenue per available room (REVPAR)                          $31.41      $29.24      $27.49      $27.52      $26.16
  Rooms owned (at year end)                                     4,522       4,459       4,156       3,295       2,846
--------------------------------------------------------- ------------ ----------- ----------- ----------- -----------
Balance Sheet Data:
  Working capital                                              $5,583      $5,285      $3,463      $3,468        $454
  Total Assets                                                106,239     103,406      92,276      67,928      48,846
  Long-term debt (excluding current portion)                   59,224      63,534      58,895      38,188      24,045
  Stockholders' equity                                         37,919      32,861      28,759      25,388      21,763

</TABLE>
(1)      Supertel's  initial public offering was in May 1994.  Information prior
         to  that  time  is  drawn  from  historical  financial  information  of
         Supertel's predecessors.

(2)      Excludes  pro  forma   after-tax   nonrecurring   gain  on  involuntary
         conversion of $151,333,  or $.03 per share, and an $860,706 benefit, or
         $0.21 per  share,  resulting  from a change in  accounting  for  income
         taxes.

(3)      Supertel  has not  declared  or paid any cash  dividends  on its common
         stock.



                                      -18-
<PAGE>>
Item 7.  Management's Discussion and Analysis of Financial Condition and 
         Results of Operations

Overview

         Supertel  revenues are derived  primarily  from motel  operations.  The
following  table  sets  forth,  for  the  periods  indicated,  certain  data  as
percentages of motel revenues.
<TABLE>

                                                                         Year Ended December 31,
                                                                  1998            1997            1996
<S>                                                                  <C>              <C>         <C>
Motel revenues:
   Lodging revenues                                                   96.9%            96.7%      96.8%
   Other lodging activities                                            3.1               3.3        3.2
                                                                     ------           ------      -----
     Total motel revenues                                            100.0%           100.0%      100.0%

Operating expenses:
   Payroll and payroll taxes                                           24.4             23.9        23.9
   Royalties and advertising fund                                       6.1              6.4         6.4
   Other lodging                                                       25.4             27.9        27.9
                                                                       ----             ----        ----
     Total lodging expenses                                            55.9             58.2        58.2
   Other lodging activities                                             2.2              2.3         2.4
   Depreciation and amortization                                        8.7              8.7         8.3
   General and administration                                           7.7              6.8         7.0
   Transaction Expense                                                  1.4                -           -
                                                                        ---              ---         ---

     Total operating expenses                                          75.9             76.0        75.9

     Operating income                                                  24.1             24.0        24.1

   Other income (expenses):

   Interest and miscellaneous expense                                 (7.9)            (9.6)        (9.3)

     Net income before taxes                                          16.2%            14.4%        14.8%
                                                                      =====            =====        =====
</TABLE>

Results of Operations

         For the Years Ended December 31, 1998 and 1997.

         Total  motel  revenues  for  1998  were  $51,338,529,  an  increase  of
$4,993,714  or 10.8%  over the total  revenues  of  $46,344,815  for  1997.  The
increase was  primarily due to an increase of $4,910,813 in revenue from lodging
operations.   Revenues  from  other  lodging  activities,   which  consisted  of
telephone, vending and movie revenues, increased $82,901.

         The  increase in revenues  from  lodging  operations  resulted  from an
increase in the number of rooms rented and an increase in the average daily room
rate.  Supertel  rented  1,094,009  rooms in 1998 compared to 1,041,904 rooms in
1997,  an increase  of 52,105  rooms or 5.0%.  The  average  daily room rate was
$46.93 for 1998, compared to $44.48 for 1997, an increase of $2.45 or 5.5%.

                                      -19-
<PAGE>

         Motel  revenue was also  favorably  impacted  by changes in  occupancy.
Occupancy as a percentage of rooms available increased to 66.9% in 1998 compared
to 65.7% in 1997. For seasoned  properties  (those  owned/opened over one year),
occupancy  was 67.2% in both years.  The  increase in the  occupancy  percentage
resulted  primarily  from the continued  seasoning of  Supertel's  properties in
Texas.  Revenue per available  room  (REVPAR) for 1998  increased to $31.41 from
$29.24 in 1997.

         Lodging expenses for 1998 were $28,697,945  compared to $26,952,031 for
1997, an increase of $1,745,914  or 6.5%.  The increase in lodging  expenses was
due primarily to the increase in the number of rooms rented. Lodging expenses as
a percentage  of motel  revenues  decreased to 55.9% in 1998 from 58.2% in 1997.
The percentage decrease resulted from cost controls implemented under Supertel's
open book management program and a larger base of revenue to cover fixed costs.

         Depreciation  and  amortization   expenses  for  1998  were  $4,451,933
compared to $4,060,778  in 1997,  an increase of $391,155 or 9.6%.  The increase
was primarily due to an increase in the number of motel  properties  owned for a
full year.

         General and administrative  expenses for 1998 were $3,949,588  compared
to  $3,154,737  for  1997,  an  increase  of  $794,851  or  25.2%.  General  and
administrative  expenses as a percent of motel revenue increased to 7.7% in 1998
from 6.8% in 1997. The increase in general and  administrative  expenses was due
primarily to increased payroll expense attributable to employee salary increases
and employee incentive programs initiated in 1998.

         Interest  expense  decreased to $4,056,558  in 1998 from  $4,529,700 in
1997,  a decrease  of  $473,142  or 10.4%.  The  decrease  was due to the use of
operating income to pay down bank debt. Average bank borrowings were $53,285,701
in 1998 compared to $56,943,962 in 1997, a decrease of 6.4%.

         Supertel also incurred a one-time charge of $708,143 in 1998 related to
the  terminated  merger  agreement with PMC  Commercial  Trust.  For the reasons
described  above,  and  including the one-time  charge,  net income for 1998 was
$5,017,191  compared to  $4,101,665  in 1997,  an increase of $915,526 or 22.3%.
Basic and  diluted  net income per share from  continuing  operations  for 1998,
including the one-time charge, was $1.04 compared to $0.85 for 1997, an increase
of 22.4%. 

                                      -20-
<PAGE>

         For the Years Ended December 31, 1997 and 1996.

         Total  motel  revenues  for  1997  were  $46,344,815,  an  increase  of
$8,512,427  or 22.5%  over the total  revenues  of  $37,832,388  for  1996.  The
increase was  primarily due to an increase of $8,212,728 in revenue from lodging
operations.   Revenues  from  other  lodging  activities,   which  consisted  of
telephone, vending and movie revenues, increased $299,699.

         The increase in revenues  from lodging  operations  resulted  primarily
from renting  1,041,904  rooms in 1997 compared to 903,643 rooms rented in 1996,
an  increase  of 138,261  rooms or 15.3%.  The  increase  in revenue  from other
lodging activities resulted from the increase in the number of rooms rented. The
increase  in rooms  rented  resulted  primarily  from the number of rooms  added
during  the  year.  Supertel  opened  two new  Wingate  Inn  hotels in Texas and
purchased one existing super 8 motel in Wisconsin.  In addition,  new rooms were
added to one Nebraska property.

         Revenues from lodging operations were favorably impacted by an increase
in the average daily room rate. The average daily room rate was $44.48 for 1997,
compared to $41.87 for 1996, an increase of $2.61 or 6.2%.

         Occupancy  as a  percentage  of rooms  available  was 65.7% in 1997 and
1996. New motels generally have lower occupancy rates than those  experienced by
seasoned  properties.  The occupancy  rate for seasoned  properties  (properties
owned more than one year) in 1997 was 67.2% versus  67.9% for 1996.  Revenue per
available  room  (REVPAR) for 1997  increased to $29.24 from $27.49 in the prior
year.

         Lodging expenses for 1997 were $26,952,031  compared to $22,023,380 for
1996, an increase of $4,928,651 or 22.4%.  The increase in lodging  expenses was
due primarily to the increase in the number of rooms rented. Lodging expenses as
a percentage of motel revenues for 1997 and 1996 was 58.2%.

         Depreciation  and  amortization   expenses  for  1997  were  $4,060,778
compared to $3,132,866 for 1996, an increase of $927,912 or 29.6%.  The increase
was primarily due to an increase in the number of motel  properties  owned for a
full year.

         General and administrative  expenses for 1997 were $3,154,737  compared
to  $2,665,794  for 1996,  an increase of  $488,943  or 18.3%.  The  increase in
general and  administrative  expenses was due primarily to expansion of staff to
handle current and anticipated motel growth. 

                                      -21-
<PAGE>
         Interest expense increased by 27.8% or $984,404 to $4,529,700 for 1997,
from  $3,545,296  in 1996.  The increase  was  primarily  due to the  additional
borrowings for acquisitions and  construction.  Average bank borrowings for 1997
increased to $56,943,962  from  $45,320,603 for 1996, an increase of $11,623,359
or 25.6%.

         For  the  reasons  described  above,  net  income  increased  21.7%  to
$4,101,665 for 1997 from  $3,371,247 for 1996.  Basic and diluted net income per
share from continuing  operations for 1997 was $0.85 compared to $0.70 for 1996.
Weighted average shares outstanding stayed constant at 4,840,000.

Liquidity and Capital Resources

         Supertel's  growth  has been  financed  through a  combination  of cash
provided  from  operations  and  long-term  debt  financing.  Cash provided from
operations was $11,167,344 for 1998 and $9,037,668 for 1997.  Supertel  requires
capital principally for the construction, acquisition and improvement of lodging
facilities plus expenditures for future site development.  Capital  expenditures
for such purposes were approximately $5,349,000 in 1998 and $11,800,000 in 1997.

         Long-term debt  (excluding  current  installments of long-term debt was
$59,223,649  at  December  31,  1998  and  $63,534,321  at  December  31,  1997.
Supertel's  current  installments  of long-term debt were $2,437,936 at December
31, 1998 and  $1,942,380 at December 31, 1997.  The reduction in long-term  debt
during 1998 resulted  from the use of cash provided from  operations to pay down
debt. Such cash was used to pay down debt, rather than for capital  expenditures
for  construction  and  acquisition  of  lodging  facilities,  since  Supertel's
management believes there were fewer acceptably-priced development opportunities
and acquisition candidates during 1998.

         Supertel's financing for construction, acquisition and site development
activities is provided by a long-term  revolving line of credit for  $25,000,000
and long-term debt with five banks aggregating  $37,000,000 and maturing in 2002
through 2007. Approximately $3,300,000 remained available on this line of credit
at December 31, 1998.  Supertel's loan agreements  contain certain  restrictions
and covenants related to, among other things, minimum debt service, maximum debt
per motel room and maximum  debt to tangible  net worth.  At December  31, 1998,
Supertel was in compliance with these  covenants.  Supertel's ratio of long-term
debt (including current installments) to long-term debt and stockholders' equity
was 61.9% at December 31, 1998 compared to 66.6% at December 31, 1997.

                                      -22-
<PAGE>

         Supertel's  current  ratio  during the past three years and its working
capital are as shown in the following table:
<TABLE>
                                                Year ended December 31,
                            ----------------------------------------------------------------
                                    1998                  1997                 1996
                            --------------------- --------------------- --------------------
    <S>                           <C>                   <C>                  <C>
    Working Capital               $5,582,980            $5,284,508           $3,463,122
    Current ratio                       1.72                  1.87                 1.76
                            --------------------- --------------------- --------------------
</TABLE>
         During 1998, Supertel  constructed and acquired 77 motel rooms. Capital
and other  expenditures for such development  totaled  $5,348,533.  Supertel has
principal  payments  totaling  $2,437,936  due  under  existing  long-term  debt
obligations during 1999.  Supertel believes that a combination of cash flow from
operations,  the use of funds from its line of credit,  securing  new short- and
long-term credit facilities,  and the ability to leverage potential unencumbered
properties will be sufficient to fund development and debt repayments.

Year 2000

         In 1998,  Supertel began preparing its computer-based  systems for Year
2000 ("Y2K") computer software compliance issues. Historically, certain computer
programs were written using two digits rather than four to define the applicable
year.  As a result,  software may  recognize a date using the two digits "00" as
1900 rather than the year 2000.  Computer  programs  that do not  recognize  the
proper date could generate  erroneous data or cause systems to fail.  Supertel's
Y2K project covers both  traditional  computer systems and  infrastructure  ("IT
Systems") and computer  based hardware and software,  facilities,  and equipment
("Non-IT Systems").

         Supertel has completed an  assessment of its IT and Non-IT  Systems and
is in the process of replacing  noncompliant  systems.  Approximately 60% of the
systems are compliant.  Supertel expects to replace any noncompliant  systems by
the end of the  second  quarter  of 1999.  Supertel  does not have any  material
suppliers or customers  and the Y2K  noncompliance  of any  particular  supplier
should not materially affect Supertel.

         Supertel has incurred  approximately $225,000 of Y2K project expense to
date.  Future  expenses  are  estimated  to  include  approximately  $75,000  of
additional  costs.  Such cost  estimates  are  based  upon  presently  available
information and may change as Supertel continues with its Y2K project.

Recent Accounting Pronouncements

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards No. 133,  "Accounting for Derivative  

                                      -23-
<PAGE>
Instruments  and  Hedging  Activities",  which is  effective  January  1,  2000.
Management  does not  believe  adoption of this  Statement  will have a material
impact on Supertel's financial position, results of operations or cash flows.

Item 7(A).        Quantitative and Qualitative Disclosures about Market Risk.

         Supertel is exposed to interest  rate changes  primarily as a result of
its line of credit  and  long-term  debt  used to  maintain  liquidity  and fund
capital   expenditures  and  expansion  of  Supertel's  property  portfolio  and
operations.  Supertel's interest rate risk management  objective is to limit the
impact of  interest  rate  changes on  earnings  and cash flows and to lower its
overall  borrowing costs. To achieve its objectives,  Supertel borrows primarily
at  variable  rates in order to mitigate  its  interest  rate risk for  changing
market  conditions.  Supertel  does not enter into  derivative  or interest rate
transactions for speculative purposes.

         Supertel's   interest  rate  risk  is  monitored  using  a  variety  of
techniques.  The table below presents the principal  amounts,  weighted  average
interest  rates,  fair  values  and other  terms  required  by year of  expected
maturity to evaluate the expected  cash flows and  sensitivity  to interest rate
changes. <TABLE>

                               1999        2000       2001        2002       2003     Thereafter    Total     Fair Value
                               ----        ----       ----        ----       ----     ----------    -----     ----------
<S>                         <C>         <C>        <C>          <C>        <C>        <C>         <C>         <C> 
Fixed Rate Debt                210,600     228,769    248,507   4,255,897          -           -   4,943,772   4,943,772
Average Interest Rate            8.31%       8.31%      8.31%       8.31%                              8.31%

Variable Rate  Libor Debt      620,871  22,400,718    721,026     777,009    837,339  10,321,968  35,678,931  35,678,931
Average Interest Rate            7.47%       7.47%      7.47%       7.47%      7.47%       7.47%       7.47%

Variable Rate Treasury Debt  1,523,799   1,384,423  1,489,176   1,598,141  1,715,218  12,425,680  20,136,438  20,136,438
Average Interest Rate            7.00%       7.00%      7.00%       7.00%      7.00%       7.00%       7.00%

Variable Rate Prime Debt        82,667      82,667     82,667      82,667     82,667     489,111     902,444     902,444
Average Interest Rate            9.25%       9.25%      9.25%       9.25%      9.25%       9.25%       9.25%

Total Debt                   2,437,936  24,096,577  2,541,376   6,713,714  2,635,224  23,236,759  61,661,585  61,661,585
Average Interest Rate            7.43%       7.43%      7.43%       7.43%      7.43%       7.43%       7.43%
</TABLE>


         As the table  incorporates  only  those  exposures  that  existed as of
December 31, 1998, it does not consider those exposures or positions which could
arise after that date.  Moreover,  because firm commitments are not presented in
the table above, the information presented therein has limited predictive value.
As a result,  Supertel's ultimate realized gain or loss with respect to interest
rate  fluctuations  will depend on the exposures  that arrive during the period,
Supertel's financing strategies at that time, and interest rates.

                                      -24-
<PAGE>


Item 8.  Financial Statements and Supplementary Data

         The Consolidated  Financial  Statements of Supertel listed in the index
appearing under Items 14(a)(1) and (2) hereof are filed as a part of this Annual
Report on Form 10-K and are  incorporated  by reference in this Item 8. See also
"Index to Financial  Statements" below.  Certain unaudited  quarterly  financial
data is set forth below.

                                   (Dollars in thousands, except per share data)


<TABLE>
                                                                                              Stock market prices
                                                                Net income per             -------------------------
                       Motel        Operating     Net Income     share - basic     Shares
                      Revenues        Income                      and diluted       (000)         High         Low

   <S>                 <C>           <C>          <C>                  <C>           <C>          <C>         <C>
    ---------------- ----------- ------------- ------------- ------------------ ----------- ------------- -----------

    1998
      First              10,904         2,052           581                .12       4,840         14.00        8.50
      Second             13,537         3,834         1,673                .35       4,840         14.25       12.25
      Third              14,657         4,293         1,995                .41       4,842         13.13        9.00
      Fourth             12,241         2,214           768                .16       4,843         10.50        8.00
    ---------------- ----------- ------------- ------------- ------------------ ----------- ------------- -----------
    ================ =========== ============= ============= ================== =========== ============= ===========

      Year               51,339        12,393         5,017               1.04       4,841         14.25        8.00
    ================ =========== ============= ============= ================== =========== ============= ===========
    ================ =========== ============= ============= ================== =========== ============= ===========

    1997
      First             $ 9,066       $ 1,356         $ 217              $0.05       4,840        $11.00       $8.88
      Second             12,317         3,442         1,345               0.28       4,840          9.25        8.00
      Third              13,464         4,008         1,731               0.36       4,840         12.00        8.25
      Fourth             11,498         2,315           809               0.17       4,840         11.63       10.00
    ---------------- ----------- ------------- ------------- ------------------ ----------- ------------- -----------

      Year              $46,345       $11,121       $ 4,102              $0.85       4,840        $12.00       $8.00

    ================ =========== ============= ============= ================== =========== ============= ===========
</TABLE>

       Net income per share is computed  independently for each of the quarters.
       Therefore,  the sum of the  quarterly  income per share may not equal the
       total for the year.

                                      -25-
<PAGE>
         Supertel's common stock is traded in the over-the-counter market and is
quoted by the National  Association of Securities  Dealers Automated  Quotations
National Market System under the symbol "SPPR".  As of March 12, 1999,  Supertel
estimates there were 1,200 beneficial holders of common stock.

Item 9.  Changes in and Disagreements with Accountants on Accounting and 
         Financial Disclosure.

         There has been no change in Supertel's  independent  accountants during
the two most recent fiscal years.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

         The  section  entitled  "Election  of  Directors"  in  the  1999  Proxy
Statement is incorporated herein by reference. Information concerning Supertel's
executive officers is set forth in Item 1 above.


Item 11. Executive Compensation.

         The sections entitled "Director  Meetings and  Compensation",  "Summary
Compensation Table",  "Option Grants in 1998", and "Option Exercises in 1998 and
Year-End  Values"  in the  1999  Proxy  Statement  are  incorporated  herein  by
reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management.

         The section entitled "Certain Stockholders" in the 1999 Proxy Statement
is incorporated herein by reference.


Item 13. Certain Transactions and Relationships.

         The section entitled "Certain  Agreements and Transactions" in the 1999
Proxy Statement is incorporated herein by reference.

                                      -26-
<PAGE>


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

 (a)      (1)(2)   Financial Statements.  See Table of Contents to Consolidated
                   Financial Statements.

 (a)      (3)      Exhibits.  See Exhibit Index, which index is incorporated
                   herein by reference.

 (b)      Reports on Form 8-K.  Supertel filed a Form 8-K dated October 15, 1988
          reporting that Supertel and PMC Commercial  Trust mutually  terminated
          their June 3, 1998 Merger Agreement.






                                      -27-
<PAGE>


                                      
















                   SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

                        Consolidated Financial Statements

                           December 31, 1998 and 1997

                   (With Independent Auditors' Report Thereon)





                                      -28-
<PAGE>



                                      

                   SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES



                                Table of Contents



                                                                   Page

Independent Auditors' Report                                        30

Consolidated Balance Sheets as of December 31, 1998 and 1997        31

Consolidated Statements of Income for the years ended
     December 31, 1998, 1997, and 1996                              32

Consolidated Statements of Stockholders' Equity for the
     years ended December 31, 1998, 1997, and 1996                  33

Consolidated Statements of Cash Flows for the years ended
     December 31, 1998, 1997, and 1996                              34

Notes to Consolidated Financial Statements                          35






                                      -29-
<PAGE>





                          Independent Auditors' Report



     To the Shareholders and Board of Directors of
         Supertel Hospitality, Inc.:


     We have audited the  accompanying  consolidated  balance sheets of Supertel
     Hospitality,  Inc. and  subsidiaries  (the Company) as of December 31, 1998
     and 1997, and the related consolidated statements of income,  stockholders'
     equity, and cash flows for each of the years in the three-year period ended
     December  31,  1998.  These  consolidated   financial  statements  are  the
     responsibility  of  the  Company's  management.  Our  responsibility  is to
     express an opinion on these consolidated  financial statements based on our
     audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
     standards.  Those  standards  require that we plan and perform the audit to
     obtain  reasonable  assurance  about  whether  the  consolidated  financial
     statements are free of material misstatement.  An audit includes examining,
     on a test basis,  evidence  supporting  the amounts and  disclosures in the
     consolidated  financial  statements.  An audit also includes  assessing the
     accounting principles used and significant estimates made by management, as
     well  as   evaluating   the  overall   consolidated   financial   statement
     presentation. We believe that our audits provide a reasonable basis for our
     opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
     present  fairly,  in all  material  respects,  the  financial  position  of
     Supertel Hospitality,  Inc. and subsidiaries at December 31, 1998 and 1997,
     and the  results of their  operations  and their cash flows for each of the
     years in the three-year  period ended December 31, 1998, in conformity with
     generally accepted accounting principles.

                              KPMG Peat Marwick LLP



     Omaha, Nebraska
     January 20, 1999




                                      -30-
<PAGE>
<TABLE>


                                SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

                                        Consolidated Balance Sheets

                                         December 31, 1998 and 1997

                                     Assets                                             1998         1997
                                                                                     -----------  -----------
<S>                                                                                <C>           <C>
Current assets:
   Cash, including cash equivalents of $11,553,210 in 1998 and $8,594,991 in 1997  $ 11,520,593    9,532,430
   Accounts receivable                                                                1,428,531    1,157,372
   Prepaid expenses                                                                     388,409      492,998
   Recoverable income taxes                                                                  --      148,925
                                                                                     -----------  -----------

          Total current assets                                                       13,337,533   11,331,725
                                                                                     -----------  -----------

Property and equipment, at cost                                                     113,530,994  108,740,409
Less accumulated depreciation                                                        22,122,750   18,365,073
                                                                                     -----------  -----------

          Net property and equipment                                                 91,408,244   90,375,336
                                                                                     -----------  -----------

Other assets:
   Intangible assets, less amortization of $1,300,288 in 1998 and $1,058,133 in 1997  1,312,828    1,515,858
   Other assets                                                                         180,174      182,725
                                                                                     -----------  -----------

          Total other assets                                                          1,493,002    1,698,583
                                                                                     -----------  -----------

                                                                                  $ 106,238,779  103,405,644
                                                                                    ============ ============
                      Liabilities and Stockholders' Equity
Current liabilities:
   Current installments of long-term debt                                          $  2,437,936    1,942,380
   Accounts payable                                                                   1,370,408      771,569
   Income taxes payable                                                                 207,900           --

   Accrued expenses:
     Real estate taxes                                                                1,838,088    1,702,126
     Sales and lodging taxes                                                            437,786      419,676
     Payroll and payroll taxes                                                          910,704      565,934
     Royalty fees                                                                       256,906      283,220
     Interest                                                                           294,825      362,312
                                                                                     -----------  -----------

          Total accrued expenses                                                      3,738,309    3,333,268
                                                                                     -----------  -----------

          Total current liabilities                                                   7,754,553    6,047,217
                                                                                     -----------  -----------

Deferred income taxes                                                                   926,075      514,900
Long-term debt, excluding current installments                                       59,223,649   63,534,321
Other long-term liabilities                                                             415,278      448,611




Stockholders' equity:
   Preferred stock, $1.00 par value. Authorized 1,000,000 shares; none issued               --            --
   Common stock, $0.01 par value. Authorized 10,000,000 shares; issued
     and outstanding 4,843,400 shares in 1998 and 4,840,000 shares in 1997               48,434       48,400
   Additional paid-in capital                                                        18,387,933   18,346,529
   Retained earnings                                                                 19,482,857   14,465,666
                                                                                     -----------  -----------

          Total stockholders' equity                                                 37,919,224   32,860,595

Commitments and contingency
                                                                                     -----------  -----------
                                                                                  $ 106,238,779  103,405,644
                                                                                    ============ ============

See accompanying notes to consolidated financial statements.
</TABLE>

                                      -31-
<PAGE>
<TABLE>


                                    SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

                                         Consolidated Statements of Income

                                   Years ended December 31, 1998, 1997, and 1996

                                                                          1998             1997            1996
                                                                      --------------   --------------  --------------
<S>                                                                 <C>                   <C>             <C>
Motel revenues:
    Lodging revenues                                                $    49,732,576       44,821,763      36,609,035
    Other lodging activities                                              1,605,953        1,523,052       1,223,353
                                                                      --------------   --------------  --------------

             Total motel revenues                                        51,338,529       46,344,815      37,832,388
                                                                      --------------   --------------  --------------
Direct operating expenses:
    Payroll and payroll taxes                                            12,545,648       11,067,550       9,030,390
    Royalties and advertising fund                                        3,107,849        2,978,371       2,415,065
    Other lodging                                                        13,044,448       12,906,110      10,577,925
                                                                      --------------   --------------  --------------

             Total lodging expenses                                      28,697,945       26,952,031      22,023,380

    Other lodging activities                                              1,137,494        1,056,455         906,058
    Depreciation and amortization                                         4,451,933        4,060,778       3,132,866
    General and administrative                                            3,949,588        3,154,737       2,665,794
    Transaction expense                                                     708,143               --              --
                                                                      --------------   --------------  --------------

             Total direct operating expenses                             38,945,103       35,224,001      28,728,098
                                                                      --------------   --------------  --------------

             Operating income                                            12,393,426       11,120,814       9,104,290
                                                                      --------------   --------------  --------------

Other income (expenses):
    Interest expense                                                    (4,056,558)      (4,529,700)     (3,545,296)
    Miscellaneous income and other expenses                                  25,110          105,383          27,753
                                                                      --------------   --------------  --------------

                                                                        (4,031,448)      (4,424,317)     (3,517,543)
                                                                      --------------   --------------  --------------

             Income before income taxes                                   8,361,978        6,696,497       5,586,747

Income tax expense                                                        3,344,787        2,594,832       2,215,500
                                                                      --------------   --------------  --------------

             Net income                                             $     5,017,191        4,101,665       3,371,247
                                                                      ==============   ==============  ==============

Basic and diluted net income per share                              $          1.04              .85             .70
                                                                      ==============   ==============  ==============

Weighted average shares outstanding                                       4,841,403        4,840,000       4,840,000
                                                                      ==============   ==============  ==============
See accompanying notes to consolidated financial statements.

</TABLE>
                                      -32-
<PAGE>
<TABLE>


                                       SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

                                     Consolidated Statements of Stockholders' Equity

                                      Years ended December 31, 1998, 1997, and 1996


                                                                          Additional                           Total
                                              Preferred       Common       paid-in          Retained       stockholders'
                                                stock        stock         capital          earnings           equity
                                             ------------  ----------   ---------------  ---------------   ---------------
<S>                                        <C>                <C>           <C>               <C>              <C>
Balance, December 31, 1995                 $          --      48,400        18,346,529        6,992,754        25,387,683

Net income                                            --          --                --        3,371,247         3,371,247
                                             ------------  ----------   ---------------  ---------------   ---------------

Balance, December 31, 1996                            --      48,400        18,346,529       10,364,001        28,758,930

Net income                                            --          --                --        4,101,665         4,101,665
                                             ------------  ----------   ---------------  ---------------   ---------------

Balance, December 31, 1997                            --      48,400        18,346,529       14,465,666        32,860,595

Exercise of stock options                             --          34            41,404               --            41,438

Net income                                            --          --                --        5,017,191         5,017,191
                                             ------------  ----------   ---------------  ---------------   ---------------

Balance at December 31, 1998               $          --      48,434        18,387,933       19,482,857        37,919,224
                                             ============  ==========   ===============  ===============   ===============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      -33-
<PAGE>


<TABLE>


                                SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

                                   Consolidated Statements of Cash Flows

                               Years ended December 31, 1998, 1997, and 1996

                                                                        1998          1997          1996
                                                                     ------------  ------------  ------------
<S>                                                                <C>               <C>           <C>
Cash flows from operating activities:
   Net income                                                      $   5,017,191     4,101,665     3,371,247
   Adjustments to reconcile net income to net cash provided by
     operating activities:
       Depreciation                                                    4,209,778     3,738,474     2,862,390
       Amortization                                                      242,155       322,304       270,476
       Loss on sale of property and equipment                             92,910        67,302       104,244
       Deferred income taxes                                             411,175       460,000       388,600
       (Increase) decrease in current assets:
         Accounts receivable                                           (271,159)     (139,327)     (395,547)
         Prepaid expenses                                                104,589     (173,136)      (88,298)
         Recoverable income taxes                                        148,925        55,878        37,166
       Increase (decrease) in current liabilities:
         Accounts payable                                                598,839      (14,887)     (646,730)
         Accrued expenses                                                405,041       619,395       865,893
         Income taxes payable                                            207,900            --            --
                                                                     ------------  ------------  ------------

          Net cash provided by operating activities                   11,167,344     9,037,668     6,769,441
                                                                     ------------  ------------  ------------

Cash flows from investing activities:
   Additions to property and equipment                               (5,348,533)   (11,765,451)  (27,015,120)
   Increase in intangibles and other assets                             (36,574)     (218,649)     (720,335)
   Proceeds from sale of property and equipment                           12,937        27,334        26,730
                                                                     ------------  ------------  ------------

          Net cash used in investing activities                      (5,372,170)   (11,956,766)  (27,708,725)
                                                                     ------------  ------------  ------------

Cash flows from financing activities:
   Repayments of long-term debt                                      (51,077,263)  (67,077,199)  (48,262,058)
   Proceeds from long-term debt                                       47,262,147    72,592,352    68,964,934
   Proceeds from the exercise of stock options                            41,438            --            --
   Other financing sources                                              (33,333)       448,611            --
                                                                     ------------  ------------  ------------

          Net cash provided by (used in) financing activities        (3,807,011)     5,963,764    20,702,876
                                                                     ------------  ------------  ------------

          Net increase (decrease) in cash and cash equivalents         1,988,163     3,044,666     (236,408)

Cash and cash equivalents at beginning of year                         9,532,430     6,487,764     6,724,172
                                                                     ------------  ------------  ------------

Cash and cash equivalents at end of year                           $  11,520,593     9,532,430     6,487,764
                                                                     ============  ============  ============

Supplemental cash flow information: Cash paid during the year for:
     Interest (including amounts capitalized of $12,090 in 1998,
       $156,101 in 1997, and $214,577 in 1996)                     $   4,136,135     4,686,198     3,615,125
     Income taxes                                                      2,817,472     2,078,594     1,789,734
                                                                     ============  ============  ============
Noncash financing activities:
   Long-term debt of $750,000 was refinanced in 1997


See accompanying notes to consolidated financial statements.
</TABLE>




                                      -34-
<PAGE>



                   SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997




  (1)   Organization and Summary of Significant Accounting Policies

        (a)   Business

              Supertel  Hospitality,  Inc.  ("Supertel" or the "Company")  owns,
              operates,  and constructs limited service lodging facilities under
              the Super 8, Comfort Inn, and Wingate Inn brand names. The Company
              has  sixty-three  properties  throughout  the  Midwest  and Texas.
              Supertel   is   a   vertically-integrated    motel   construction,
              development,  and operations company that (i) identifies potential
              sites for the  construction  of new motels and  analyzes  existing
              motels that are  available  for  acquisition,  (ii)  develops  and
              constructs new motel  properties and renovates  existing motels it
              acquires, and (iii) manages its own motel properties.

        (b)   Basis of Presentation

              The   consolidated    financial    statements   include   Supertel
              Hospitality,  Inc. and its  wholly-owned  subsidiaries,  which are
              Simplex, Inc. ("Simplex") and Motel Developers,  Inc. ("MDI"). All
              significant  intercompany  balances  and  transactions  have  been
              eliminated in consolidation.

        (c)   Property and Equipment

              The Company  records its  property and  equipment  at cost.  Major
              improvements  and  betterments to existing  property and equipment
              are capitalized. Expenditures for repairs and maintenance which do
              not extend the life of the applicable asset are charged to expense
              as incurred.  The Company computes depreciation on a straight-line
              and declining  balance  method over the estimated  useful lives of
              the related assets as follows:

              Buildings                                          40 years
              Furniture, fixtures, and equipment             5 to 7 years
              Vehicles                                            5 years
                                                           ===============

        (d)   Intangible Assets

              The Company has  twenty-year  franchise  agreements  with  Cendant
              Corp. and Choice Hotels International  expiring from 1999 to 2017.
              Connected  with  these  agreements  is the  requirement  that  the
              Company pay to the  franchisor  royalties,  advertising  fees, and
              reservation  service  fees  amounting  to  5%  to  8.5%  of  motel
              revenues.

              The Company  amortizes its intangible  assets on the straight-line
              method over the following years:

              Franchise fees                                      20 years
              Organization costs                                   5 years
              Loan origination fees                         Period of loan
              Noncompetitive agreements                            5 years
                                                       ====================


                                      -35-
<PAGE>


        (e)   Income Taxes

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

        (f)   Cash and Cash Equivalents

              For purposes of the  consolidated  statements  of cash flows,  the
              Company considers all highly liquid investments with maturities of
              less than ninety days to be cash equivalents.

        (g)   Income Per Share

              Basic net income per share is computed using the weighted  average
              number of common shares outstanding during the period. Diluted net
              income per share is computed using the weighted  average number of
              common shares outstanding during the period and dilutive potential
              common shares outstanding during the period.

        (h)   Use of Estimates

              Management  of the  Company  has made a number  of  estimates  and
              assumptions  relating to the  reporting of assets and  liabilities
              and the disclosure of contingent assets and liabilities to prepare
              these  consolidated   financial   statements  in  conformity  with
              generally  accepted  accounting  principles.  Actual results could
              differ from those estimates.

        (i)   Disclosures About Fair Value of Financial Instruments

              The  carrying  amounts  for cash and  cash  equivalents,  accounts
              receivable,  accounts  payable,  and accrued expenses  approximate
              fair value because of the short maturity of these instruments. The
              carrying   amounts  of  each  of  the  Company's   long-term  debt
              instruments  also approximate fair value because the interest rate
              is variable as it is tied to various market rates.

        (j)   Stock Option Plan

              Prior to January  1, 1996,  the  Company  accounted  for its stock
              option  plan in  accordance  with  the  provisions  of  Accounting
              Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
              to Employees, and related  interpretations.  As such, compensation
              expense would be recorded on the date of grant only if the current
              market price of the underlying  stock exceeded the exercise price.
              On January 1, 1996, the Company  adopted the Financial  Accounting
              Standards  Board's  Statement  of Financial  Accounting  Standards
              (SFAS) No. 123, Accounting for Stock-Based


                                      -36-
<PAGE>


              Compensation,  which permits entities to recognize as expense over
              the vesting period the fair value of all stock-based awards on the
              date of grant. Alternatively, SFAS No. 123 also allows entities to
              continue to apply the provisions of APB Opinion No. 25 and provide
              pro forma net income and pro forma earnings per share  disclosures
              for employee  stock option grants made in 1995 and future years as
              if the fair  value-based  method  defined in SFAS No. 123 had been
              applied.  The  Company  has  elected  to  continue  to  apply  the
              provisions  of APB  Opinion  No.  25 and  provide  the  pro  forma
              disclosure  provisions of SFAS No. 123 (see note 7). For the years
              ending 1998,  1997,  and 1996, the effect of the stock options was
              not significant.

        (k)   Impairment  of  Long-lived  Assets  and  Long-lived  Assets  to be
              Disposed Of

              Recoverability  of  assets  to be held and used is  measured  by a
              comparison  of the carrying  amount of an asset to future net cash
              flows  expected to be generated  by the asset.  If such assets are
              considered  to be impaired,  the  impairment  to be  recognized is
              measured by the amount by which the carrying  amount of the assets
              exceed the fair value of the assets.  Assets to be disposed of are
              reported  at the lower of the  carrying  amount or fair value less
              costs to sell.  Adoption of this statement did not have a material
              impact on the Company's financial position, results of operations,
              or liquidity.

        (l)   Comprehensive Income

              During 1998,  the Company  adopted the provisions of SFAS No. 130,
              Reporting  Comprehensive  Income.  This statement requires that an
              enterprise classify items of other  comprehensive  income by their
              nature  in a  financial  statement  and  display  the  accumulated
              balance of other  comprehensive  income  separately  from retained
              earnings and additional  paid-in-capital  in the equity section of
              the consolidated  balance sheet. At December 31, 1998, the Company
              has no  items  of  accumulated  other  comprehensive  income  and,
              therefore,  comprehensive  income is equal to net  income  for the
              year then ended.

  (2)   Property and Equipment

        Property  and  equipment  at December  31, 1998 and 1997  consist of the
following:
<TABLE>
                                                                1998                           1997
                                                           ----------------               ---------------
        <S>                                            <C>                                   <C>
        Land                                           $        16,319,837                     15,986,770
        Buildings                                               77,482,811                     74,911,403
        Furniture, fixtures, and equipment                      18,611,306                     17,427,363
        Vehicles                                                   305,682                        269,025
        Construction in progress                                   811,358                        145,848
                                                           ----------------               ---------------
                                                               113,530,994                    108,740,409

                                                           ----------------               ---------------
        Less accumulated depreciation                           22,122,750                     18,365,073
                                                           ----------------               ---------------
        Net property and equipment                     $        91,408,244                     90,375,336
                                                           ================               ===============
</TABLE>





                                      -37-
<PAGE>


  (3)   Long-term Debt

        Long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
                                                                        1998                     1997
                                                                   ---------------          ----------------
<S>                                                                    <C>                     <C>
Iowa and  Nebraska  Finance  Authority  Bonds,  
     currently  ranging  from  7.74% to 9.79%,  due in monthly  installments  of
     $12,043, including interest, with maturities through January 2007.
     Secured by real estate                                                841,877                  914,426
Notes payable at 5.45 to 9.25% (with blended
     rate of 7.41% at December 31, 1998), due in
     variable installments with maturities through
     November 2009. Secured principally by
     motel properties and assignment of rents                           60,819,708               64,562,275
                                                                   ---------------          ----------------

                Total long-term debt                                    61,661,585               65,476,701

Less current installments of long-term debt                              2,437,936                1,942,380
                                                                   ---------------          ----------------

                Long-term debt, excluding current
                   installments                                 $       59,223,649               63,534,321
                                                                   ===============          ================
</TABLE>



The Company has a line of credit  with a bank to fund  future  acquisitions  and
construction of motel facilities.  During 1997, the Company  refinanced its line
of credit. The line was reduced from $40,000,000 to $25,000,000.  The line bears
interest  at the LIBOR rate plus 1.75%  (7.45% at  December  31,  1998) on funds
advanced and matures on June 1, 2000. Approximately $3,300,000 remains available
on this line of credit at December  31,  1998.  The  Company  must pay an annual
commitment fee of 1/4 of 1% on the unused portion of the commitment. The Company
paid commitment fees of approximately $9,769 in 1998 and $28,393 in 1997.

Borrowings  under this line of credit are classified as long-term debt since the
maturity  is longer  than one year and the  Company  has the intent to  maintain
borrowings of at least the same amount for the next year.

As part of the  refinancing  of the line of credit,  the Company  entered into a
term loan with the same bank for the amount of $14,745,500, of which $13,900,000
remains  outstanding  at December 31, 1998.  The rate of interest on the loan is
fixed at 8.65% until June 1, 2002,  at which time the rate of  interest  will be
adjusted and fixed until maturity,  based on the weekly average of the five-year
United States Treasury  Security Index for the week immediately  preceding April
15, 2002, plus 1.9%.

In 1997,  the Company also  entered  into a promissory  note with a bank for the
amount of $4,500,000,  of which $4,200,000  remains  outstanding at December 31,
1998.  The rate of  interest  on the note is 8.25% per  annum  until the date of
maturity, May 19, 2002.


                                      -38-
<PAGE>


No other  significant  changes occurred in long-term debt in 1998 or 1997. Other
remaining  principal  balances represent notes payable to banks in the aggregate
amount of $21,700,000, all at various rates and maturities.

The Company's loan agreements contain certain restrictions and covenants related
to, among others, minimum debt service, maximum debt per motel room, and maximum
debt to tangible net worth.  At December 31, 1998, the Company was in compliance
with these  covenants.  At December  31,  1998,  all of the  Company's  retained
earnings were  unrestricted and available for the payment of dividends under the
most restrictive terms of the agreements.

The aggregate maturities of long-term debt for the five years following 1998 are
as follows:

<TABLE>
           <S>                <C>
           1999               $   2,437,936
           2000                  24,096,576
           2001                   2,541,376
           2002                   6,713,714
           2003                   2,635,224
        Thereafter               23,236,759
                             ---------------

                         $       61,661,585
                             ===============
</TABLE>
  (4)   Income Taxes

        Income tax expense for the years ended December 31, 1998, 1997, and 1996
consists of the following:

<TABLE>
                          1998                                       1997                                     1996
         ---------------------------------------     ------------------------------------     -------------------------------------
           Current       Deferred        Total        Current       Deferred       Total        Current      Deferred       Total
         ------------    --------      ---------     ---------      --------     ---------     ---------     --------     ---------
<S>      <C>             <C>           <C>           <C>            <C>          <C>           <C>            <C>         <C>
Federal  $  2,374,832     345,157      2,719,989     1,707,866       367,000     2,074,866     1,480,000      305,000     1,785,000
State         558,780      66,018        624,798       426,966        93,000       519,966       346,900       83,600       430,500
         ------------    --------      ---------     ---------      --------     ---------     ---------     --------     ---------
         $  2,933,612     411,175      3,344,787     2,134,832       460,000     2,594,832     1,826,900      388,600     2,215,500
         ============    ========      =========     =========      ========     =========     =========      =======     =========
</TABLE>

Income tax  expense is  reconciled  with  income  taxes  computed at the federal
statutory rate of 34% for the years ended  December 31, 1998,  1997, and 1996 as
follows:
 <TABLE>

                                                                     1998                 1997               1996
                                                                 --------------       --------------      ------------
        <S>                                                <C>                           <C>
        Tax expense computed at federal statutory rate     $         2,843,073           2,276,809          1,899,494
        State income tax, net of federal tax effect                    412,367             343,178            284,130
        Other                                                          (89,347)            (25,155)            31,876
                                                                 --------------       --------------      ------------

                                                           $         3,166,093           2,594,832          2,215,500
                                                                 ==============       ==============      ============
</TABLE>


                                      -39-
<PAGE>


        The tax effects of temporary  differences  that give rise to significant
        portions of the  deferred tax assets and  deferred  tax  liabilities  at
        December 31, 1998 and 1997 are presented below:
<TABLE>
                                                       1998               1997
                                                    ------------       ------------
<S>                                               <C>                     <C>
Deferred tax assets:
     Other                                        $          --             10,400
                                                    ------------       ------------

Deferred tax liabilities:
     Book basis over tax basis on property
        and equipment                                   835,565            497,722
     Book basis over tax basis on other assets           90,510             27,578
                                                    ------------       ------------

                Total deferred tax liabilities          926,075            525,300
                                                    ------------       ------------

                Net deferred tax liabilities      $     926,075            514,900
                                                    ============       ============

</TABLE>
        There was no  valuation  allowance  provided  for deferred tax assets at
December 31, 1997.

  (5)   Leases

        The Company has leases for outdoor  advertising  signs and various other
        items under  noncancelable one to ten-year  agreements.  Rental payments
        are expensed when incurred and charged to  advertising  expense.  Future
        minimum lease payments  required  under  noncancelable  operating  lease
        agreements at December 31, 1998 are as follows:

<TABLE>
          <S>             <C>
          1999            $     342,910
          2000                  198,574
          2001                   73,864
          2002                   18,220
          2003                   17,820
       Thereafter                14,850
                             ------------------

                          $     666,238
                             ==================
</TABLE>

        Rent  expense  incurred  was  $615,357 in 1998,  $643,570  in 1997,  and
$529,311 in 1996.

  (6)   Litigation

        The  Company is involved  in various  litigation  incurred in the normal
        course  of  business.  In  the  opinion  of  management,   the  ultimate
        disposition of this  litigation  will not have a material  impact on the
        Company's consolidated financial statements.

  (7)   Stock Option Plan

        The Company  adopted stock option plans in 1997 and 1994,  whereby stock
        options may be offered at the discretion of the  compensation  committee
        of the Board of Directors to key employees to purchase  shares of common
        stock of the Company.  Also,  each  nonemployee  director  will annually
        receive an option to acquire 1,500 shares of common  stock.  Options for
        an  aggregate  of 400,000  common  shares may be granted  and all shares
        subject to options  may be  purchased  at a price not less than its fair
        market value at the date the options are granted.  At December 31, 1998,
        there were 237,200 additional shares available for grant under the plan.

                                      -40-
<PAGE>
        The per share  weighted  average  fair  value of stock  options  granted
        during 1998, 1997, and 1996 was $3.79,  $3.99, and $7.32,  respectively,
        on the date of grant using the Black Scholes  option-pricing  model with
        the following  weighted average  assumptions:  1998 - expected  dividend
        yield of 0%, risk-free interest rate of 5%, and an expected life of five
        years; 1997 - expected dividend yield of 0%, risk-free  interest rate of
        6.0%, and an expected life of five years;  and 1996 - expected  dividend
        yield of 0%,  risk-free  interest rate of 6.5%,  and an expected life of
        ten years.

        The Company  applies APB Opinion No. 25 in accounting  for its plan and,
        accordingly,  no  compensation  cost has been  recognized  for its stock
        options  in the  consolidated  financial  statements.  Had  the  Company
        determined  compensation  cost based on the fair value at the grant date
        for its stock options under SFAS No. 123, the Company's net income would
        have been reduced to the pro forma amounts indicated below:
<TABLE>
                                                              1998                 1997                1996
                                                        ------------------   ------------------  ------------------
        <S>                                         <C>                         <C>                <C>
        Net income:
             As reported                            $      5,017,191            4,101,665          3,371,247
             Pro forma                                     4,886,291            3,958,794          3,210,566
                                                        ==================   ==================  ==================

        Net income per share - basic and diluted:
             As reported                            $          1.04                  0.85               0.70
             Pro forma                                         1.01                  0.82               0.66
                                                        ==================   ==================  ==================
</TABLE>

        Pro forma net income  reflects only options  granted in 1998,  1997, and
        1996.  Therefore,  the full impact of calculating  compensation cost for
        stock  options  under SFAS No. 123 is not reflected in the pro forma net
        income amounts  presented above because  compensation  cost is reflected
        over the options' vesting period of twelve months, and compensation cost
        for options granted prior to January 1, 1995 is not considered.

        The  changes in the  outstanding  stock  options  during the three years
        ended December 31, 1998 are summarized below:
<TABLE>

                                                                Number            Option price
                                                              of options         per share range
                                                              ------------       ----------------
        <S>                                                     <C>            <C>
        Options outstanding at December 31, 1995                  37,300       $ 10.00 to 11.125
            Granted                                               36,600         10.00 to 11.125
            Exercised                                                 --               --
            Canceled                                              (1,000)             13.50
                                                              ------------       ----------------

        Options outstanding at December 31, 1996                  72,900         10.00 to 13.75
            Granted                                               59,700          8.50 to 10.00
            Exercised                                                 --               --
            Canceled                                             (19,900)        10.00 to 13.50
                                                              ------------       ----------------

        Options outstanding at December 31, 1997                 112,700          8.50 to 13.75
            Granted                                               57,600         10.75 to 13.03
            Exercised                                             (3,400)        10.00 to 11.125
            Canceled                                              (4,100)        10.00 to 13.50
                                                              ------------       ----------------

        Options outstanding at December 31, 1998                 162,800       $  8.50 to 13.75
                                                              ============       ================

        Options exercisable at December 31, 1998                 108,200       $  8.50 to 13.75
                                                              ============       ================
</TABLE>


                                      -41-
<PAGE>
  (8)   Profit Sharing Plan

        Beginning in July 1996, the Company began  sponsoring a  nonstandardized
        401(k) profit sharing plan and trust covering certain eligible full-time
        employees.  In  January  1998,  the plan was  expanded  to  include  all
        eligible full-time and part-time  employees.  The Company  contributions
        provided  for by the plan equal 50% of the  participants'  contributions
        not  to  exceed  4%  of  the  participant's  compensation.  The  Company
        contributed and expensed  approximately $310,000 and $41,000 in 1998 and
        1997, respectively.

  (9)   Acquisition of Operating Properties

        During  1996,  the  Company  acquired  for cash  seven  motel  operating
        properties.   For  consolidated   financial  statement   purposes,   the
        acquisitions  were accounted for as purchases.  The following  unaudited
        pro forma consolidated results of operations for 1996 have been prepared
        as if the acquisitions had occurred at the beginning of fiscal 1996:
<TABLE>
        <S>                                               <C>
        Pro forma:
            Net revenue                                   $    39,610,881
            Net income                                          3,504,152
        Net income per share - basic and diluted                      .72
                                                            ==============
</TABLE>

        The pro forma  consolidated  results do not purport to be  indicative of
        results that would have occurred had the acquisition  been in effect for
        the  periods  presented,  nor do they  purport to be  indicative  of the
        results that will be obtained in the future.  There were no  significant
        acquisitions in 1998 or 1997.

(10)    Transaction Expense

        In 1998, the Company  incurred legal,  accounting,  investment  banking,
        environmental,  and  title  expenses  fees  of  $708,000  relating  to a
        terminated  merger  agreement,  and all related expenses are included in
        the  accompanying   consolidated  financial  statements  as  a  separate
        component of operating expenses.



                                      -42-
<PAGE>




                                   SIGNATURES


Pursuant to the  requirements  of Section 13 or Section 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its  behalf  by the  undersigned,  thereunto  duly  authorized,  in the  City of
Norfolk, State of Nebraska, on the 22nd day of March, 1999.

                                            Supertel Hospitality, Inc.


                                            By: /s/  Paul J. Schulte
                                                --------------------------
                           Paul J. Schulte, President


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has  been  signed  below  by  the  following   persons  on  behalf  of  Supertel
Hospitality,  Inc.  and in the  capacities  indicated  on the 22nd day of March,
1999.


    /s/ Paul J. Schulte               Director and Chief Executive Officer
--------------------------
Paul J. Schulte

    /s/ Steve H. Borgmann             Director, Executive Vice President and
--------------------------
Steve H. Borgmann                     Chief Operating Officer

    /s/ Richard Herink                Director and Executive Vice President
--------------------------
Richard Herink

   /s/ Troy Beatty                    Senior Vice President (Chief Financial
--------------------------
Troy Beatty                           Officer and Principal Accounting Officer)

   /s/ Joseph Caggiano                Director
--------------------------
Joseph Caggiano

   /s/ Paul J. Schulte*               Director
--------------------------
Loren Steele




*  Pursuant to power of attorney -- Exhibit 24.1






                                      -43-
<PAGE>


                                  EXHIBIT INDEX

Exhibit         Description                                         Page

  3.1    Certificate  of  Incorporation  of  Supertel,  incorporated  herein  by
         reference to the Company's Registration Statement on Form S-1 (Reg. No.
         33-75796) filed with the Securities and Exchange Commission on March 1,
         1994 (the "Registration Statement").

  3.2    Bylaws  of   Supertel,   incorporated   herein  by   reference  to  the
         Registration Statement.

  4.1    Revolving  Term  Promissory  Note  and  Loan  Agreement  (Modified  and
         Extended)  dated  December  30, 1996  between  Supertel  and First Bank
         National  Association,  incorporated  herein by reference to Supertel's
         Annual Report on Form 10-K for the year ended December 31, 1996.

  4.2    Modification to Revolving Term Promissory Note and Loan Agreement dated
         June 24, 1997  between  Supertel and First Bank  National  Association,
         incorporated  herein by reference to  Supertel's  Annual Report on Form
         10-K for the year ended December 31, 1997.

  4.3    Term Loan Agreement  dated May 9, 1997 between  Supertel and First Bank
         National  Association,  incorporated  herein by reference to Supertel's
         quarterly report on Form 10-Q for the quarter ended June 30, 1997.

 10.1    Form of Super 8 Franchise  Agreement,  incorporated herein by reference
         to the Registration Statement.

 10.2    Amendment  dated  March  4,  1996  to  Super  8  Franchise   Agreement,
         incorporated  herein by reference to  Supertel's  annual report on Form
         10-K for the year ended December 31, 1995.

 10.3    Form  of  Wingate  Inn  Franchise  Agreement   incorporated  herein  by
         reference to  Supertel's  annual report on Form 10-K for the year ended
         December 31, 1995.

 10.4    Amended and Restated Territorial  Development  Agreement dated June 30,
         1994 between Supertel and Super 8 Motels, Inc.,  incorporated herein by
         reference to Supertel's  quarterly  report on Form 10-Q for the quarter
         ended June 30, 1994.

 10.5    Amendment  dated  May 31,  1995 to  Amended  and  Restated  Territorial
         Development  Agreement  between  Supertel  and  Super 8  Motels,  Inc.,
         incorporated herein by reference to Supertel's quarterly report on Form
         10-Q for the quarter ended June 30, 1995.

 10.6    Supertel's 1994 Stock Option Plan,  incorporated herein by reference to
         the Registration Statement.

 10.7    Supertel's  1997  Stock  Plan,  incorporated  herein  by  reference  to
         Supertel's  annual report on Form 10-K for the year ended  December 31,
         1997.

 10.8    Employment  Agreements  dated May 1, 1995 between  Supertel and each of
         Paul J. Schulte and Steve H. Borgmann, incorporated herein by reference
         to Supertel's  quarterly report on Form 10-Q for the quarter ended June
         30, 1995.

 10.9    Employment  Agreement  dated  November  6, 1995  between  Supertel  and
         Richard L.  Herink,  incorporated  herein by  reference  to  Supertel's
         annual report on Form 10-K for the year ended December 31, 1995.

 21.1    List of Subsidiaries.............................

 23.1    Consent of KPMG Peat Marwick LLP.................

 24.1    Power of Attorney................................

 27      Financial Data Schedule..........................




         Pursuant to Item 601(b)(4) of Regulation S-K, certain  instruments with
respect to  long-term  debt are not filed with this annual  report on Form 10-K.
Supertel  will  furnish  a copy of any  such  long-term  debt  agreement  to the
Securities and Exchange Commission upon request.

         Management  contracts and compensatory  plans are set forth as exhibits
10.6 through 10.9.

                                      -45-
<PAGE>