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 nine months ended September 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 September 30, 2009 we owned 117 hotels in 23 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 nine months ended September 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 and a portion of the proceeds were used to pay off First Citizens Bank;

• 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;

• 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;

• On August 14, 2009, we sold our Comfort Inn in Ellsworth, ME (63 rooms) for approximately $2.2 million and used the proceeds to reduce our borrowings with GE Capital;

• On August 21, 2009, we sold our Masters Inn in Orlando, FL (120 rooms) for approximately $3.6 million and used the proceeds to reduce our borrowings with GE Capital; and

• On August 27, 2009, we sold our Super 8 hotel in Anamosa, IA (35 rooms) for approximately $0.85 million and used the proceeds to pay off Iowa Business Growth.

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 September 30, 2009, we owned 117 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 104 of our hotels and HLC is the manager of 13 of our hotels.

Overview of Discontinued Operations

The condensed consolidated statements of operations for discontinued operations for the three and nine months ended September 30, 2009 and 2008 include the results of operations for the three hotels classified as held for sale at September 30, 2009, as well as all properties that have been sold during 2009 and 2008 in accordance with FASB ASC 205-20 Presentation of Financial Statements-Discontinued Operations.

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

The assets held for sale at September 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 September 30, 2009 remain properly classified in accordance with ASC 205-20.

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. When these properties were sold in the third quarter of 2009, approximately $67,000 of the impairment loss was recovered. During the three months ended September 30, 2009, we recorded impairment charges of approximately $760,000 on assets sold and held for sale. The fair value of an asset held for sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price. 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 ASC 205-20. We periodically evaluate the assets in our portfolio to ensure they continue to meet our performance objectives. Accordingly, from time to time, we could identify other assets for disposition.

General

The discussion that follows is based primarily on the consolidated financial statements of the three and nine months ended September 30, 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 117 and 125 hotels as of September 2009 and 2008, respectively.

Results of Operations

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

Operating results are summarized as follows (in thousands):

Part I. FINANCIAL INFORMATION, CONTINUED:


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




                                                          Three months ended                                  Three months ended
                                                          September 30, 2009                                  September 30, 2008                      Continuing
                                             Continuing       Discontinued                       Continuing        Discontinued                       Operations
                                             Operations        Operations          Total         Operations         Operations          Total          Variance
Revenues                                    $     28,206      $       1,153      $  29,359      $     31,937      $        3,233      $  35,170      $     (3,731 )
Hotel and property operations expenses           (21,299 )             (879 )      (22,178 )         (22,315 )            (2,291 )      (24,606 )           1,016
Interest expense                                  (3,079 )             (298 )       (3,377 )          (3,114 )              (257 )       (3,371 )              35
Depreciation and amortization expense             (3,549 )              (10 )       (3,559 )          (3,517 )              (309 )       (3,826 )             (32 )
General and administrative expenses               (1,120 )               -          (1,120 )            (954 )                -            (954 )            (166 )
Net gain (loss) on dispositions of assets            (43 )              126             83                (1 )                (2 )           (3 )             (42 )
Other income                                          28                 -              28                28                  -              28                -
Impairment loss                                       -                (693 )         (693 )              -                   -              -                 -
Income tax (expense) benefit                         463                (15 )          448              (158 )               (17 )         (175 )             621

Net income (loss)                           $       (393 )    $        (616 )    $  (1,009 )    $      1,906      $          357      $   2,263      $     (2,299 )

Revenues and Operating Expenses

Revenues from continuing operations for the three months ended September 30, 2009 compared to the three months ended September 30, 2008, decreased $3.7 million or 11.7%, which was primarily due to decreased occupancy and average daily rate ("ADR") resulting from unfavorable economic conditions. We refer to our entire portfolio as limited service hotels which we further describe as midscale without food and beverage hotels, economy hotels and extended stay hotels. The same store portfolio used for comparison of the third quarter of 2009 over the same period of 2008 consists of the 114 hotels in continuing operations that were owned by the Company as of July 1, 2008. Our 29 same store midscale without food and beverage hotels reflected an ADR decrease of 6.6% to $68.69, a decrease in occupancy of 8.1% and a revenue per available room ("RevPAR") decrease of 14.1% to $42.75 for the third quarter of 2009 over the same period of 2008. Our 77 same store economy hotels reflected an ADR decrease of 3.7% to $46.50, a 7.7% decrease in occupancy and a RevPAR decrease of 11.1% to $28.40 for the third quarter of 2009 over the same period of 2008. Our eight same store extended stay properties reflected an ADR decrease of 1.8% to $24.65. Occupancy for the eight same store extended stay properties stayed essentially flat at 62.6%, and RevPAR decreased 2.2% to $15.43. During the third quarter of 2009 compared to the year ago period, ADR for the entire 114 same store hotel portfolio decreased 5.0% to $48.78 and RevPAR decreased 11.6% to $30.01. The occupancy for all same store hotels for the three months ended September 30, 2009 decreased 7.0% from that of the year ago period.

During the third quarter of 2009, hotel and property operations expenses from continuing operations decreased $1.0 million. The decline resulted primarily from lower occupancy levels, with payroll expense down $0.3 million, hotel franchise related expenses down $0.3 million, management fees down $0.2 million, utilities expense down $0.1 million, and miscellaneous expenses down $0.1 million.

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

Interest expense from continuing operations and depreciation and amortization expense from continuing operations both remained relatively flat compared to the prior period. The general and administrative expense increased $0.2 million from the year ago period. This primarily resulted from an increased payroll accrual.

Impairment loss

During the three months ended September 30, 2009, we recorded a total impairment charge of $693,000. Of this, $465,000 was from the third quarter 2009 sale of a Comfort Inn in Ellsworth, Maine and $295,000 was recorded against one property classified as Held for Sale. The offsetting ($67,000) was a recapture of previously booked impairment related to the gain on the sales of a Super 8 in Anamosa, Iowa and a Masters Inn in Orlando, Florida. No impairment charge was recorded for the third quarter of 2008.

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

Dispositions

In the third quarter of 2009, we recognized a net gain on the disposition of assets of approximately $83,000. This was primarily the result of an approximate $126,000 gain from the sale of a Masters Inn in Orlando, Florida and a $43,000 loss on the disposition of assets which were not fully depreciated.

Income Tax (Expense) 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 September 30, 2009. The income tax will vary based on the taxable earnings or loss of the TRS Lessee.

The income tax benefit from continuing operations was $463,000 compared with an expense of $158,000 in the year ago period, due to a decrease in income by the TRS Lessee.

Comparison of the nine months ended September 30, 2009 to the nine months ended September 30, 2008

Operating results are summarized as follows (in thousands):

                                                           Nine months ended                                    Nine months ended
                                                          September 30, 2009                                   September 30, 2008                      Continuing
                                             Continuing        Discontinued                       Continuing        Discontinued                       Operations
                                             Operations         Operations          Total         Operations         Operations          Total          Variance
Revenues                                    $     78,915      $        4,064      $  82,979      $     88,971      $        8,819      $  97,790      $    (10,056 )
Hotel and property operations expenses           (59,626 )            (3,463 )      (63,089 )         (63,466 )            (6,360 )      (69,826 )           3,840
Interest expense                                  (9,154 )              (629 )       (9,783 )          (9,671 )              (801 )      (10,472 )             517
Depreciation and amortization expense            (10,677 )              (193 )      (10,870 )         (10,217 )              (929 )      (11,146 )            (460 )
General and administrative expenses               (3,138 )                -          (3,138 )          (2,949 )                -          (2,949 )            (189 )
Net gain (loss) on dispositions of assets           (159 )             1,206          1,047                -                   (2 )           (2 )            (159 )
Other income                                         100                  -             100                91                  -              91                 9
Impairment Loss                                       -                 (843 )         (843 )              -                   -              -                 -
Income tax benefit                                 1,445                  61          1,506               175                  14            189             1,270

Net income (loss)                           $     (2,294 )    $          203      $  (2,091 )    $      2,934      $          741      $   3,675      $     (5,228 )

Revenues and Operating Expenses

Revenues from continuing operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, decreased $10.1 million or 11.3%, which was primarily due to decreased occupancy and average daily rate ("ADR") resulting from unfavorable economic conditions. The same store portfolio used for comparison of the nine months of 2009 over the same period of 2008 consists of the 104 hotels in continuing operations that were owned by the Company as of January 1, 2008 and ten hotels purchased January 2, 2008. Our 29 same store midscale without food and beverage hotels reflected an ADR decrease of 4.9% to $68.28, a decrease in occupancy of 8.5% and a revenue per available room ("RevPAR") decrease of 12.9% to $39.77. Our 77 same store economy hotels reflected an ADR decrease of 2.1% to $46.30, an 8.3% decrease in occupancy and a RevPAR decrease of 10.2% to $26.72 for the first nine months of 2009 over the same period of 2008. Our eight same store extended stay properties reflected an ADR decrease of 1.4% to $24.84, a decrease in occupancy of 5.4% and a RevPAR decrease of 6.7% to $15.57. During the first nine months of 2009 compared to the year ago period, ADR for the entire 114 same store hotel portfolio decreased 3.1% to $48.36 and RevPAR decreased 10.9% to $28.26. The occupancy for all same store hotels for the nine months ended September 30, 2009 decreased 8.0% from that of the year ago period.

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

During the nine months ended September 30, 2009, hotel and property operations expenses from continuing operations decreased $3.8 million. The decrease was driven by lower occupancy levels as well as increased cost control measures, with payroll expense down $1.1 million, hotel franchise related expenses down $0.9 million, room and office supplies down $0.5 million, management fees down $0.5 million, utilities expense down $0.2 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 nine months ended September 30, 2009 compared to the year ago period. The decrease was partially due to the paydown of a bridge loan using proceeds from the sale of the Series B preferred stock; the remaining positive variance resulted from more favorable interest rates over the prior period on the variable rate loans. The depreciation and amortization expense from continuing operations increased $0.5 million for the nine months ended September 30, 2009 compared to the year ago period. This is primarily related to capital expenditures made on the hotels. The general and administrative expense increased $0.2 million from the year ago period. This primarily resulted from an increased payroll accrual.

Impairment loss

During the nine months ended September 30, 2009, we recorded $843,000 of impairment loss. Of this, $150,000 was recorded on hotels in the first quarter. During the third quarter, we recorded a $465,000 impairment charge on one hotel, which was sold in the third quarter 2009, with an offsetting ($67,000) to recapture previously booked impairment related to the gain on the sales of two hotels. We also booked a $295,000 impairment charge against a property classified as held for sale. There was no impairment charge recorded for the first nine months of 2008.

Dispositions

During the nine months ended September 30, 2009, the Company sold its interests in six hotels, recognizing gains of approximately $1.2 million.

Income Tax Benefit

The income tax benefit from continuing operations is related to the taxable loss from the TRS Lessee. The tax benefit is a result of TRS Lessee's losses for the nine months ended September 30, 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 $1.3 million during the nine months ended September 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

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

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'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 and during the third quarter of 2009 one additional hotel was identified to sell. Six of these hotels were sold during the nine months ended September 30, 2009 and two additional hotels were sold in October 2009. The proceeds were used to reduce debt. We expect to sell the remaining hotels held for sale during the first quarter of 2010. We believe these transactions demonstrate 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 left approximately $1.0 million available for support of general operations and also unencumbered five continuing operations hotels from mortgage debt.

The Company's $9.0 million note payable to Wells Fargo Bank, previously due in September 2009, has been extended to November 12, 2009. We are negotiating with Wells Fargo to extend the maturity for an additional six months. The Company intends to refinance or repay the credit facility with Wells Fargo Bank using other financing, funds from operations or proceeds from the sale of hotels.

The Company is required to meet various financial covenants required by its existing lenders. As further discussed below, as of September 30, 2009, the Company was either in compliance with the financial covenants or obtained waivers for non-compliance. Based upon the Company's belief that adverse . . .