All statements contained in this section that are not historical facts are based on current expectations. Words such as "believes", "expects", "anticipate", "intends", "plans" and "estimates" and variations of such words and similar words also identify forward-looking statements. Our actual results may differ materially. We caution you not to place undue reliance on any such forward-looking statements. We assume no obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.

GENERAL

As of December 31, 2008, we owned interests in 76 hotels in the eastern United States including interests in 18 hotels owned through joint ventures. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels to a third party lessee or to a TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. As of December 31, 2008 we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified independent managers, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS.

The TRS structure enables us to participate more directly in the operating performance of our hotels. The TRS directly receives all revenue from, and funds all expenses relating to hotel operations. The TRS is also subject to income tax on its earnings.

During the year ended December 31, 2008, the U.S. economy has been influenced by financial market turmoil, growing unemployment and declining consumer sentiment. As a result, the lodging industry is experiencing slowing growth or negative growth which could have a negative impact on our future results of operations and financial condition. For the year ended December 31, 2008, we have seen increases in Average Daily Rate ("ADR") and Revenue Per Available Room ("RevPAR"), in part, as a result of our strategy of investing in high quality upscale hotels in high barrier to entry markets, including gateway markets such as the New York City metro market. While we have seen increases in ADR and RevPAR in 2008, these increases were not at the levels realized in the previous year and we saw decreases in these measures in the fourth quarter of 2008.

The turmoil in the financial markets has caused credit to significantly tighten making it more difficult for hotel developers to obtain financing for development projects or for hotels without an operating history. This could have a negative impact on the collectability of our portfolio of development loans receivable. We monitor this portfolio to determine the collectability of the loan principal and interest accrued. We will continue to monitor this portfolio on an on-going basis. For more information, please see "Note 4 - Development Loans Receivable and Land Leases."

In addition, the tightening credit markets have made it more difficult to finance the acquisition of new hotel properties or refinance existing hotel properties that do not have a history of profitable operations. We monitor the maturity dates of our debt obligations and take steps in advance of the debt becoming due to extend or refinance the obligations. Please refer to "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for a discussion of our debt maturities.

The following table outlines operating results for the Company's portfolio of wholly owned hotels and those owned through joint venture interests that are consolidated in our financial statements for the three years ended December 31, 2008, 2007 and 2006:

CONSOLIDATED HOTELS:

                                                                           2008 vs. 2007                           2007 vs. 2006
                                Year Ended 2008       Year Ended 2007       % Variance        Year Ended 2006       % Variance

Rooms Available                        2,423,433             2,248,253               7.8 %           1,472,318              52.7 %
Rooms Occupied                         1,742,468             1,656,158               5.2 %           1,065,825              55.4 %
Occupancy                                  71.90 %               73.66 %            -1.8 %               72.39 %             1.3 %
Average Daily Rate (ADR)       $          136.59     $          131.26               4.1 %   $          116.23              12.9 %
Revenue Per Available Room
(RevPAR)                       $           98.21     $           96.69               1.6 %   $           84.14              14.9 %

Room Revenues                  $     237,995,147     $     217,393,817               9.5 %   $     123,882,745              75.5 %
Hotel Operating Revenues       $     250,463,773     $     229,460,728               9.2 %   $     132,354,355              73.4 %
Hotel Operating Revenues
from Discontinued Operations   $               -     $       6,684,522               N/A     $      15,847,421               N/A

The following table outlines operating results for the three years ended December 31, 2008, 2007 and 2006 for hotels we own through an unconsolidated joint venture interest. These operating results reflect 100% of the operating results of the property including our interest and the interests of our joint venture partners and other minority interest holders.

UNCONSOLIDATED JOINT VENTURES:

                                                                           2008 vs. 2007                           2007 vs. 2006
                                Year Ended 2008       Year Ended 2007       % Variance        Year Ended 2006       % Variance

Rooms Available                          963,892               954,114               1.0 %             879,384               8.5 %
Rooms Occupied                           677,485               682,169              -0.7 %             613,272              11.2 %
Occupancy                                  70.29 %               71.50 %            -1.2 %               69.74 %             1.8 %
Average Daily Rate (ADR)       $          146.91     $          144.51               1.7 %   $          132.54               9.0 %
Revenue Per Available Room
(RevPAR)                       $          103.26     $          103.32              -0.1 %   $           92.43              11.8 %

Room Revenues                  $      99,530,317     $      98,580,629               1.0 %   $      81,285,744              21.3 %
Total Revenues                 $     127,874,193     $     130,167,451              -1.8 %   $     111,301,348              17.0 %

Revenue per available room ("RevPAR") for the year ended December 31, 2008 increased 1.6% for our consolidated hotels and decreased 0.1% for our unconsolidated hotels when compared to the same period in 2007. This represents a deceleration in the rate of increase in RevPAR when compared to the increase experienced during the year ended December 31, 2007 over the same period in 2006. The deceleration of our growth in RevPAR is primarily due to deteriorating economic conditions in 2008 and the stabilization of hotel properties acquired in the previous years.

The increase in revenue per available room ("RevPAR") during the year ended December 31, 2007 was due primarily to the Company's broadened strategic portfolio focus on stronger central business districts and primary suburban office parks; the size of the recent acquisitions as a percentage of the portfolio; franchise affiliations with stronger brands, such as Hyatt Summerfield Suite, Hilton Garden Inn, Residence Inn and Courtyard by Marriott; and a focus on improving the average daily rate ("ADR"). The increase in both rooms and total revenue can be attributed primarily to the hotels acquired during the respective periods.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2008 TO DECEMBER 31, 2007
(dollars in thousands, except per share data)

Revenue

Our total revenues for the year ended December 31, 2008 consisted of hotel operating revenues, interest income from our development loan program, land lease revenue, and other revenue. Hotel operating revenues are recorded for wholly owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture interests that are consolidated in our financial statements. Hotel operating revenues increased $21,003, or 9.2%, from $229,461 for the year ended December 31, 2007 to $250,464 for the same period in 2008. The increase in revenues is primarily attributable to the acquisitions consummated in 2008 and improved RevPAR and occupancy at certain of our hotels. We acquired interests in the following six consolidated hotels since December 31, 2007:

                                                                        2008 Total
Brand                  Location       Acquisition Date     Rooms          Revenue

Duane Street
Hotel (TriBeCa)    New York, NY               1/4/2008           45     $     3,688
TownePlace
Suites             Harrisburg, PA             5/8/2008          107           1,755
                   JFK Airport,
Sheraton Hotel     Jamaica, NY               6/13/2008          150           3,931
Holiday Inn
Express            Camp Springs, MD          6/26/2008          127           1,313
nu Hotel           Brooklyn, NY              7/7/2008*           93           2,314
Hampton Inn &
Suites             Smithfield, RI             8/1/2008          101             848

                                                                623     $    13,849

*The property was purchased on 1/14/2008, but did not open for business until 7/7/2008.

Revenues for all six hotels were recorded from the date of acquisition as hotel operating revenues. Further, hotel operating revenues for the year ended December 31, 2008 included revenues for a full year related to the following six hotels that were purchased during the year ended December 31, 2007:

                                                                    2008 Total      2007 Total
Brand              Location       Acquisition Date     Rooms          Revenue         Revenue
Residence
Inn            Langhorne, PA              1/8/2007          100     $     4,062     $     3,352
Residence
Inn            Carlisle, PA              1/10/2007           78           2,417           2,091
Holiday Inn
Express        Chester, NY               1/25/2007           80           2,337           2,367
Hampton Inn    Seaport, NY                2/1/2007           65           5,833           5,200
Independent    373 Fifth Avenue           6/1/2007           70           4,562           3,051
Holiday Inn    Norwich, CT                7/1/2007          134           3,297           1,689

                                                            527     $    22,508     $    17,750

We invest in hotel development projects by providing secured first mortgage or mezzanine financing to hotel developers and through the acquisition of land that is then leased to hotel developers. Interest income is earned on our development loans at rates ranging between 10.0% and 20.0%. Interest income from development loans receivable was $7,890 for the year ended December 31, 2008 compared to $6,046 for the same period in 2007. The average balance of development loans receivable outstanding in 2008 was higher than the average balance outstanding in 2007. This resulted in a $1,844, or 30.5% increase in interest income. For one of our development loans to an unaffiliated developer, we recorded an impairment charge as of December 31, 2008 for the remaining principal of $18,748, which is net of unamortized discount and loan fees in the amount of $1,252. The loan was deemed to be fully impaired when the developer was unable to obtain additional construction financing to complete the project and consequently defaulted under his senior mortgage loan. The project, located in Brooklyn, New York, NY, was to include hotel, residential and retail components, however, the land acquisition financing and our loan were not sufficient to fund the ongoing construction. A receivable for uncollected interest income of $569, which is net of unrecognized deferred loan fees of $143, was also recorded as an impairment charge. In connection with the development loan, we also hold an option to acquire an interest in the hotel upon completion of the development project. This option was valued at $1,687 at its inception and is deemed to be fully impaired. The total impairment charge recorded during the year ended December 31, 2008 related to this development loan and option was $21,004.

In 2006 we acquired two parcels of land, and in 2007 we acquired an additional two parcels of land, which are being leased to hotel developers. The hotel developers are owned in part by certain executives and affiliated trustees of the Company. Our net investment in these parcels is approximately $23,366. Each land parcel is leased at a minimum rental rate of 10% of our net investment in the land. Additional rents are paid by the lessee for the principal and interest on the mortgage, real estate taxes and insurance. During the year ended December 31, 2008, we recorded $5,363 in land lease revenue from these parcels. We incurred $2,939 in expense related to these land leases resulting in a contribution of $2,424 to our operating income during the year ended December 31, 2008.

Other revenue consists primarily of fees earned for asset management services provided to properties owned by two of our unconsolidated joint ventures. Other revenues increased from $980 for the year ended December 31, 2007 to $1,054 during the year ended December 31, 2008.

For the year ended December 31, 2008, interest income decreased $380 compared to the same period in 2007. Increased levels of interest income in 2007 resulted from higher levels of interest bearing deposits related to the acquisition of hotel properties during 2007.

Expenses

Total hotel operating expenses increased 10.7% to approximately $144,972 for the year ended December 31, 2008 from $130,910 for the year ended December 31, 2007. Consistent with the increase in hotel operating revenues, hotel operating expenses increased primarily due to the acquisitions consummated since the comparable period in 2007, as mentioned above. The acquisitions also resulted in an increase in depreciation and amortization from $33,863 for the year ended December 31, 2007 to $40,998 for the year ended December 31, 2008. Similarly, real estate and personal property tax and property insurance increased $1,604, or 14.1%, in the year ended December 31, 2008 when compared to the same period in 2007.

General and administrative expense increased by approximately $761 from $7,953 in 2007 to $8,714 in 2008. General and administrative expenses increased primarily to increased stock based compensation costs associated with the issuance of additional stock awards in June 2008.

Unconsolidated Joint Venture Investments

Through our investment in the Mystic Partners joint venture, we have an 8.8% interest in the Hilton Hotel in Hartford, CT. In 2008, the Company determined that its interest in this hotel was impaired. As of December 31, 2008, the Company recorded an impairment loss of approximately $1,890 which represents our entire investment in the hotel. Offsetting this loss was approximately $1,373 in income from our unconsolidated joint venture investments. The net of the impairment charge and income from our unconsolidated joint ventures is a net loss of approximately $517. For the year ended December 31, 2007, approximately $3,476 in income from unconsolidated joint venture investments was recorded, resulting in a decrease of $3,993 over the same period in 2008.

During 2007, we acquired joint venture interests in the following property:

                                                                                                    Hersha Preferred
Joint Venture        Brand          Name        Acquisition Date     Rooms         Ownership %       Equity Return
Metro 29th         Holiday
Street             Inn          Manhattan-New
Associates, LLC    Express      York, NY                2/1/2007          228              50.0 %                N/A

Net Income/Loss

Net loss applicable to common shareholders for year ended December 31, 2008 was $13,608 compared to net income applicable to common shareholders of $13,047 for the same period in 2007.

Operating income for the year ended December 31, 2008 was $31,771 compared to operating income of $53,546 during the same period in 2007. The $21,775, or 40.7%, decrease in operating income was primarily the result of the impairment charge of $21,004 related to our investment in a development loan and an option to acquire the hotel property upon completion, noted above. This impairment charge was recorded during the fourth quarter of 2008.

The weighted average minority interest ownership in our operating partnership increased from 11.83% for the year ended December 31, 2007 to 15.10% for the year ended December 31, 2008. This change is a result of the issuance of units in our operating partnership as consideration for the acquisition of hotel properties and is partially offset by the issuance of 6,600,000 of our common shares in May of 2008. Interest expense, increased $1,041 from $42,115 for the year ended December 31, 2007 to $43,156 for the year ended December 31, 2008. The increase in interest expense is the result of mortgages placed on newly acquired properties and increased average balances on our line of credit.

Included in net loss applicable to common shareholders for the year ended December 31, 2008 is $2,432 in income from discontinued operations compared to $4,110 in income during the same period in 2007. Discontinued operations was driven primarily by a gain of $2,452 resulting from the sale of the Holiday Inn Conference Center in New Cumberland, PA in October 2008 and a gain of $3,745 results from the sale of the Fairfield Inn, Mt. Laurel, NJ and Hampton Inn, Linden, NJ in November 2007.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2007 TO DECEMBER 31, 2006
(dollars in thousands, except per share data)

Revenue

Our total revenues for the year ended December 31, 2007 consisted of hotel operating revenues, interest income from our development loan program, land lease revenue, and other revenue. Hotel operating revenues are recorded for wholly owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture interests that are consolidated in our financial statements. Hotel operating revenues increased $97,107, or 73.4%, from $132,354 for the year ended December 31, 2006 to $229,461 for the same period in 2007. The increase in revenues is primarily attributable to the acquisitions consummated in 2007, a full twelve months of operations from our 2006 acquisitions and improved RevPAR and occupancy at certain of our hotels.

We acquired interests in six consolidated hotels during the year ended December 31, 2007, as noted above. Revenues for all six hotels were recorded from the date of acquisition as hotel operating revenues. Further, hotel operating revenues for the year ended December 31, 2007 included revenues for a full year related to the following 22 hotels that were purchased during the year ended December 31, 2006:

                                                                             2007 Total      2006 Total
Brand                      Location         Acquisition Date     Rooms         Revenue         Revenue
Courtyard             Langhorne, PA                 1/3/2006         118     $     4,088     $     4,312
Fairfield Inn         Mt. Laurel, NJ                1/3/2006         118           2,697           2,760
Fairfield Inn         Bethlehem, PA                 1/3/2006         103           2,427           2,489
Courtyard             Scranton, PA                  2/1/2006         120           3,229           2,543
Residence Inn         Tysons Corner, VA             2/2/2006          96           4,554           4,092
Hampton Inn           Philadelphia, PA             2/15/2006         250          10,096           7,799
Hilton Garden Inn     JFK Airport, NY              2/16/2006         188           9,745           7,883
Hawthorne Suites      Franklin, MA                 4/25/2006         100           2,642           1,877
Residence Inn         North Dartmouth, MA           5/1/2006          96           3,015           2,386
Comfort Inn           North Dartmouth, MA           5/1/2006          84           1,403           1,213
Holiday Inn Express   Cambridge, MA                 5/3/2006         112           4,370           2,950
Residence Inn         Norwood, MA                  7/27/2006          96           3,096           1,088
Holiday Inn Express   Hauppauge, NY                 9/1/2006         133           5,038           1,580
Hampton Inn           Brookhaven, NY                9/6/2006         161           5,536           1,658
Courtyard             Alexandria, VA               9/29/2006         203           7,014           1,301
Summerfield Suites    White Plains, NY            12/27/2006         159           9,821               *
Summerfield Suites    Bridgewater, NJ             12/27/2006         128           5,650               *
Summerfield Suites    Gaithersburg, MD            12/27/2006         140           4,863               *
Summerfield Suites    Pleasant Hill, CA           12/27/2006         142           6,091               *
Summerfield Suites    Pleasanton, CA              12/27/2006         128           4,841               *
Summerfield Suites    Scottsdale, AZ              12/27/2006         164           6,350               *
Summerfield Suites    Charlotte, NC               12/27/2006         144           3,096               *

                                                                   2,983     $   109,662     $    45,931

We invest in hotel development projects by providing secured first mortgage or mezzanine financing to hotel developers and through the acquisition of land that is then leased to hotel developers. Interest income earned on our development loans during the period covered by this comparison was at rates ranging between 10.0% and 13.5%. Interest income from development loans receivable was $6,046 for the year ended December 31, 2007 compared to $2,487 for the same period in 2006. The average balance of development loans receivable outstanding in 2007 was higher than the average balance outstanding in 2006. This resulted in a $3,559, or 143.1%, increase in interest income.

In 2006 we acquired two parcels of land, and in 2007 we acquired an additional two parcels of land, which are being leased to hotel developers. The hotel developers are owned in part by certain executives and affiliated trustees of the Company. Our net investment in these parcels is approximately $23,366. Each land parcel is leased at a minimum rental rate of 10% of our net investment in the land. Additional rents are paid by the lessee for the principal and interest on the mortgage, real estate taxes and insurance. During the year ended December 31, 2007, we recorded $4,860 in land lease revenue from these parcels. We incurred $2,721 in expense related to these land leases resulting in a contribution of $2,139 to our operating income during the year ended December 31, 2007.

Other revenue consists primarily of fees earned for asset management services provided to properties owned by two of our unconsolidated joint ventures. Other revenues increased $243, or 32.9%, from $737 during the year ended December 31, 2006 to $980 during the year ended December 31, 2007.

For the year ended December 31, 2007, interest income decreased $496 compared to the same period in 2006. Increased levels of interest income in 2006 resulted from higher levels of interest bearing deposits related to the acquisition of hotel properties and interest earned on proceeds from the offering of our common stock during 2006.

Expenses

Total hotel operating expenses increased 70.7% to approximately $130,910 for the year ended December 31, 2007 from $76,694 for the year ended December 31, 2006. Consistent with the increase in hotel operating revenues, hotel operating expenses increased primarily due to the acquisitions consummated since the comparable period in 2006, as mentioned above. The acquisitions also resulted in an increase in depreciation and amortization from $18,420 for the year ended December 31, 2006 to $33,863 for the year ended December 31, 2007. Similarly, real estate and personal property tax and property insurance increased $5,370, or 89.8%, in the year ended December 31, 2007 when compared to the same period in 2006.

General and administrative expense increased by approximately $2,133 from $5,820 in 2006 to $7,953 in 2007. General and administrative expenses increased primarily due to higher compensation expense related to an increase in staffing in our asset management and accounting teams and an increase in incentive compensation.

Unconsolidated Joint Venture Investments

Income from unconsolidated joint venture investments increased $1,677 from
$1,799 for the year ended December 31, 2006 to $3,476 for the year ended
December 31, 2007. During 2007, we acquired unconsolidated joint venture
interests in the following property:


                                                                                                    Hersha Preferred
 Joint Venture       Brand          Name        Acquisition Date     Rooms         Ownership %       Equity Return
Metro 29th         Holiday
Street             Inn          Manhattan-New
Associates, LLC    Express      York, NY                2/1/2007          228              50.0 %                N/A

In addition, we acquired joint venture interests in the following two properties during 2006:

                                                                                                                 Hersha
                                                                                                                Preferred
 Joint Venture          Brand             Name         Acquisition Date     Rooms         Ownership %         Equity Return
PRA Suites at
Glastonbury, LLC   Homewood Suites   Glastonbury, CT          6/15/2006          136              40.0 % *              10.0 %
Mystic Partners,
LLC                Marriott          Hartford, CT              2/8/2006          409              15.0 %                 8.5 %

*Percent owned was 40% through March 31, 2007. On April 1, 2007 our percent owned increased to 48.0%.

Income from unconsolidated joint venture investments was favorably impacted by the inclusion of these investments for a full twelve months in 2007.

Net Income

Net income applicable to common shareholders for year ended December 31, 2007 was approximately $13,047 compared to net income applicable to common shareholders of $298 for the same period in 2006.

. . .