Forward-Looking Statements

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

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

Following is management's discussion and analysis of our operating results as well as liquidity and capital resources which should be read together with our financial statements and related notes contained in this report and with the financial statements and management's discussion and analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Results for the three and six months ended June 30, 2009 are not necessarily indicative of results that may be attained in the future.

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

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these statements requires management to make certain estimates and judgments that affect our financial position and results of operations. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

We are a self-administered real estate investment trust, and through our subsidiaries, as of June 30, 2009 we owned 121 hotels in 24 states. Our hotels operate under several national and independent brands.

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

Our significant events for the six months ended June 30, 2009 include:

• On March 20, 2009, we sold our Super 8 hotel located in Charles City, IA with a total of 43 rooms. The sale price was approximately $1.1 million;

• On May 6, 2009, the Company borrowed $10 million (fixed rate of 5.5%) from the previously unused $10 million loan facility available with Great Western Bank and used a portion of the borrowings to repay in full the FNBO $9.0 million mortgage loan (fixed rate 8.4%);

• On May 21, 2009, we sold our Holiday Inn Express in Gettysburg, PA with a total of 51 rooms. The sale price was approximately $2.6 million and a portion of the proceeds were used to pay in full the $1.2 million loan with Susquehanna Bank; and

• On July 20, 2009, we sold our Masters Inn in Kissimmee, FL (116 rooms) for approximately $1.6 million and used the proceeds to reduce our borrowings with GE Capital.

We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnerships, Supertel Limited Partnership and E & P Financing Limited Partnership, limited partnerships, limited liability companies or other subsidiaries of our operating partnerships. We currently own, indirectly, an approximate 98% general partnership interest in Supertel Limited Partnership and a 100% partnership interest in E & P Financing Limited Partnership.

As of June 30, 2009, we owned 121 limited service hotels and one office building. The hotels are leased to our wholly owned taxable REIT subsidiary, TRS Leasing, Inc, and its wholly owned subsidiaries (collectively "TRS Lessee"), and are managed by Royco Hotels Inc (Royco Hotels) and HLC Hotels Inc. (HLC). Royco Hotels is the manager of 106 of our hotels and HLC is the manager of 15 of our hotels.

Overview of Discontinued Operations

The condensed consolidated statements of operations for discontinued operations for the three and six months ended June 30, 2009 and 2008 include the results of operations for the six hotels classified as held for sale at June 30, 2009, as well as all properties that have been sold during 2009 and 2008 in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144").

The assets held for sale at June 30, 2009 and 2008 are separately disclosed in the Condensed Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that all our held for sale assets as of June 30, 2009 remain properly classified in accordance with SFAS No. 144.

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

Where the carrying values of the assets held for sale exceeded the estimated fair values, net of selling costs, we reduced the carrying values and recorded impairment charges. During the three months ended March 31, 2009, we recorded impairment charges of $150,000 on assets held for sale, with no additional impairment loss recorded during the three months ended June 30, 2009. The fair value of an asset held for sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price. The estimated selling costs are based on our experience with similar asset sales. We record impairment charges and write down the carrying value of an asset if the carrying value exceeds the estimated selling price less costs to sell.

Our continuing operations reflect the results of operations of those hotels which we are likely to retain in our portfolio for the foreseeable future as well as those assets which do not currently meet the held for sale criteria in SFAS No. 144. We periodically evaluate the assets in our portfolio to ensure they continue to meet our performance objectives. Accordingly, from time to time, we could identify other assets for disposition.

General

The discussion that follows is based primarily on the consolidated financial statements of the three and six months ended June 30, 2009 and 2008, and should be read along with the consolidated financial statements and notes.

The comparisons below reflect revenues and expenses of the company's 121 and 125 hotels as of June 2009 and 2008, respectively.

Results of Operations

Comparison of the three months ended June 30, 2009 to the three months ended
June 30, 2008

Operating results are summarized as follows (in thousands):



                                                          Three months ended                                   Three months ended
                                                             June 30, 2009                                        June 30, 2008                        Continuing
                                             Continuing        Discontinued                       Continuing        Discontinued                       Operations
                                             Operations         Operations          Total         Operations         Operations          Total          Variance
Revenues                                    $     27,889      $        1,357      $  29,246      $     31,812      $        2,832      $  34,644      $     (3,923 )
Hotel and property operations expenses           (19,936 )            (1,116 )      (21,052 )         (21,806 )            (1,996 )      (23,802 )           1,870
Interest expense                                  (3,145 )              (138 )       (3,283 )          (3,193 )              (248 )       (3,441 )              48
Depreciation and amortization expense             (3,594 )                -          (3,594 )          (3,455 )              (286 )       (3,741 )            (139 )
General and administrative expenses               (1,047 )                -          (1,047 )          (1,040 )                -          (1,040 )              (7 )
Net gain (loss) on dispositions of assets            (49 )             1,073          1,024                (1 )                -              (1 )             (48 )
Other income                                          34                  -              34                32                  -              32                 2
Impairment loss                                       -                   -              -                 -                   -              -                 -
Income tax (expense) benefit                          49                 (34 )           15              (309 )               (25 )         (334 )             358

Net income (loss)                           $        201      $        1,142      $   1,343      $      2,040      $          277      $   2,317      $     (1,839 )

Revenues and Operating Expenses

Revenues from continuing operations for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, decreased $3.9 million or 12.3%, which was primarily due to decreased occupancy resulting from unfavorable economic conditions. We refer to our entire portfolio as limited

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

service hotels which we further describe as midscale without food and beverage hotels, economy hotels and extended stay hotels. The same store portfolio used for comparison of the second quarter of 2009 over the same period of 2008 consists of the 115 hotels owned by the Company as of April 1, 2008 (excluding Held For Sale hotels). Our 30 same store midscale without food and beverage hotels reflected an average daily rate ("ADR") decrease of 4.4% to $69.53, a decrease in occupancy of 10.5% and a revenue per available room ("RevPAR") decrease of 14.4% to $41.61 for the second quarter of 2009 over the same period of 2008. Our 77 same store economy hotels reflected an ADR decrease of 2.1% to $46.90, a 10.2% decrease in occupancy and a RevPAR decrease of 12.0% to $28.19 for the second quarter of 2009 over the same period of 2008. Our eight same store extended stay properties reflected an ADR decrease of 1.7% to $25.05. Occupancy for the eight same store extended stay properties stayed essentially flat at 65.0%, and RevPAR decreased 2.5% to $16.27. During the second quarter of 2009 compared to the year ago period, ADR for the entire 115 same store hotel portfolio decreased 3.5% to $49.13 and RevPAR decreased 12.2% to $29.79. The occupancy for all same store hotels for the three months ended June 30, 2009 decreased 9.1% from that of the year ago period.

During the second quarter of 2009, hotel and property operations expenses from continuing operations decreased $1.9 million. The decline resulted primarily from lower occupancy levels, with payroll expense down $0.4 million, hotel franchise related expenses down $0.5 million, room and office supplies down $0.3 million, utilities expense down $0.2 million, management fees down $0.2 million, and miscellaneous expenses down $0.3 million.

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

Interest expense from continuing operations did not experience a material change compared to the year ago period. The depreciation and amortization expense from continuing operations increased $0.1 million for the three months ended June 30, 2009 compared to the year ago period. The general and administrative expense from continuing operations for the same period did not experience a material change compared to the year ago period.

Impairment loss

There was no impairment charge recorded for the second quarter of 2009 or 2008.

Dispositions

In the second quarter of 2009, we recognized a net gain on the disposition of assets of approximately $1.0 million. This primarily resulted from the sale of a Holiday Inn Express in Gettysburg, PA, with an offsetting $49,000 loss occurring from normal operations.

Income Tax Benefit

The income tax benefit from continuing operations is related to the taxable loss from our taxable subsidiary, the TRS Lessee. Management believes the combined federal and state income tax rate for the TRS Lessee will be approximately 39%. The tax benefit is a result of TRS Lessee's loss for the three months ended June 30, 2009. The income tax will vary based on the taxable earnings or loss of the TRS Lessee.

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

The income tax benefit from continuing operations was $49,000 compared to an expense of $309,000 in the year ago period, due to a decrease in income by the TRS.

Comparison of the six months ended June 30, 2009 to the six months ended June 30, 2008

Operating results are summarized as follows (in thousands):

                                                                 2009                                                 2008                             Continuing
                                             Continuing        Discontinued                       Continuing        Discontinued                       Operations
                                             Operations         Operations          Total         Operations         Operations          Total          Variance
Revenues                                    $     50,955      $        2,665      $  53,620      $     57,339      $        5,281      $  62,620      $     (6,384 )
Hotel and property operations expenses           (38,573 )            (2,338 )      (40,911 )         (41,432 )            (3,788 )      (45,220 )           2,859
Interest expense                                  (6,125 )              (281 )       (6,406 )          (6,600 )              (501 )       (7,101 )             475
Depreciation and amortization expense             (7,190 )              (121 )       (7,311 )          (6,741 )              (579 )       (7,320 )            (449 )
General and administrative expenses               (2,018 )                -          (2,018 )          (1,996 )                -          (1,996 )             (22 )
Net gain (loss) on dispositions of assets           (116 )             1,080            964                 1                  -               1              (117 )
Other income                                          72                  -              72                63                  -              63                 9
Impairment Loss                                       -                 (150 )         (150 )              -                   -              -                 -
Income tax benefit                                 1,006                  52          1,058               353                  11            364               653

Net income (loss)                           $     (1,989 )    $          907      $  (1,082 )    $        987      $          424      $   1,411      $     (2,976 )

Revenues and Operating Expenses

Revenues from continuing operations for the six months ended June 30, 2009 compared to the six months ended June 30, 2008, decreased $6.4 million or 11.1%, which was primarily due to decreased occupancy resulting from unfavorable economic conditions. The same store portfolio used for comparison of the six months of 2009 over the same period of 2008 consists of the 105 hotels owned by the Company as of January 1, 2008 (excluding Held For Sale hotels), and ten properties purchased January 2, 2008. Our 30 same store midscale without food and beverage hotels reflected an average daily rate ("ADR") decrease of 4.0% to $67.84, a decrease in occupancy of 8.7% and a revenue per available room ("RevPAR") decrease of 12.3% to $37.79. Our 77 same store economy hotels reflected an ADR decrease of 1.1% to $46.19, an 8.6% decrease in occupancy and a RevPAR decrease of 9.7% to $25.86 for the first six months of 2009 over the same period of 2008. Our eight same store extended stay properties reflected an ADR decrease of 1.1% to $24.94, a decrease in occupancy of 7.8% and a RevPAR decrease of 8.8% to $15.64. During the first six months of 2009 compared to the year ago period, ADR for the entire 115 same store hotel portfolio decreased 2.1% to $48.16 and RevPAR decreased 10.5% to $27.33. The occupancy for all same store hotels for the six months ended June 30, 2009 decreased 8.5% from that of the year ago period.

During the six months ended June 30, 2009, hotel and property operations expenses from continuing operations decreased $2.9 million. The decrease was driven by lower occupancy levels as well as increased cost control measures, with payroll expense down $0.8 million, hotel franchise related expenses down $0.6 million, room and office supplies down $0.5 million, utilities expense down $0.1 million, management fees down $0.3 million, and other expenses down $0.6 million.

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

Interest expense from continuing operations decreased by $0.5 million for the six months ended June 30, 2009 compared to the year ago period. The decrease was partially a result of the paydown of a bridge loan using proceeds from the sale of the Series B preferred stock; the remaining $0.2 million decrease was from regular debt principal paydown. The depreciation and amortization expense from continuing operations increased $0.4 million for the six months ended June 30, 2009 compared to the year ago period. This is primarily related to capital expenditures made on the hotels. The general and administrative expense from continuing operations for the same period did not experience a material change.

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

Impairment loss

During the six months ending June 30, 2009, we recorded an impairment charge of $150,000 on two hotels. There was no impairment charge recorded for the first six months of 2008.

Dispositions

During the six months ended June 30, 2009, the Company sold its interests in two hotels, recognizing a gain of approximately $1.1 million on one property and a $7,000 gain on the other. This was offset by a $0.1 million loss on the disposition of assets, due primarily to replacement of furniture and fixtures which were not fully depreciated.

Income Tax Benefit

The income tax benefit from continuing operations is related to the taxable loss from the TRS Lessee. The tax benefit is a result of TRS Lessee's losses for the six months ended June 30, 2009 and the year ago period. The income tax benefit will vary based on the taxable earnings of the TRS Lessee.

The income tax benefit from continuing operations increased by approximately $653,000 during the six months ended June 30, 2009 compared to the year ago period, due to an increased loss by the TRS Lessee for the same period.

Liquidity and Capital Resources

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

We expect to meet our short-term liquidity requirements generally through borrowings on our revolving credit facility with Great Western Bank and net cash provided by operations. We believe that our available borrowing capacity and net cash provided by operations will be adequate to fund both operating requirements and the payment of dividends in accordance with REIT requirements.

We expect to meet our long-term liquidity requirements, such as scheduled debt maturities, through long-term secured and unsecured borrowings and the issuance of additional securities.

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

The Company is required to meet various financial covenants required by its existing lenders. In addition, approximately $9.5 million of the Company's debt is scheduled to mature during the remainder of 2009.

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

The Company's management has prepared contingency plans for its liquidity requirements which include ongoing operations at reduced revenue levels from that of 2008 coupled with the sale of several of its hotels in 2009. The Company sold two hotels in the fourth quarter of 2008, the proceeds of which were used to reduce debt. During the first quarter of 2009 the Company identified eight hotels that it intended to sell. Two of these hotels were sold during the first half of 2009. A third hotel was sold in July 2009. The proceeds were used to reduce debt. We expect to sell the remaining five hotels during 2009.

We believe these transactions demonstrated that there is a market for our type of hotels. We have received numerous inquiries regarding some of our other hotels and we anticipate additional sales will occur when it makes economic sense to do so or conditions so dictate. Following the close of the first quarter, the Company paid off a $9.0 million 8.4 percent note payable to First National Bank of Omaha that was scheduled to mature in November 2009. The loan was refinanced using a $10 million facility provided by Great Western Bank. The new facility bears interest at 5.5 percent and matures in May 2012. The refinancing leaves approximately $1.0 million available for support of general operations and also unencumbered five continuing operations hotels from mortgage debt. The Company's other outstanding near-term debt includes a $9.5 million note payable to Wells Fargo Bank in September 2009. The Company currently expects to either refinance the loan or retire the debt with funds from operations or sale of properties. If the Company's future financial performance fails to meet these financial covenants, or the Company is unable to repay or refinance its debt as it becomes due then its lenders have the ability to take control of its encumbered hotel assets. If this were to happen, the Company's ability to conduct business could be severely impacted as there can be no assurance that the adequacy and timeliness of cash flow would be available to the meet the Company's liquidity requirements.

The Company did not declare a common stock dividend for the 2009 first or second quarters. The Company will monitor requirements to maintain its REIT status and will routinely evaluate the dividend policy. The Company intends to continue to meet its dividend requirements to retain its REIT status. The Company believes it has the ability to repay its indebtedness when due from operations, sales of hotels and refinancings while at the same time continue to be a substantial owner of limited service and economy hotels.

If the Company's future financial performance fails to meet these financial covenants, or the Company is unable to repay or refinance its debt as it becomes due, then its lenders have the ability to take control of its encumbered hotel assets. If this were to happen, the Company's ability to conduct business could be severely impacted as there can be no assurance that the adequacy and timeliness of cash flow would be available to the meet the Company's liquidity requirements.

Financing

At June 30, 2009, the Company had long-term debt of $188.5 million, consisting
of notes and mortgages payable, with a weighted average term to maturity of 5.7
years and a weighted average interest rate of 6.0% (weighted average interest
. . .