LODGIAN, INC.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file no. 1-14537

Lodgian, Inc.

(Exact name of registrant as specified in its charter)


Delaware		52-2093696
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3445 Peachtree Road, N.E., Suite 700,
Atlanta, GA		30326
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code
(404) 364-9400

(Former name, former address and former fiscal year, if changed since last report): Not applicable

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.


Class		Outstanding as of November 1, 2007

Common		24,033,677

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LODGIAN, INC. AND SUBSIDIARIES CONDENSED

CONSOLIDATED BALANCE SHEETS


	September 30, 2007			December 31, 2006
	(Unaudited in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	69,159		$	48,188
Cash, restricted		15,324			13,791
Accounts receivable (net of allowances: 2007 - $322; 2006 - $277)		13,386			7,404
Insurance receivable		1,959			2,347
Inventories		2,998			2,893
Prepaid expenses and other current assets		24,723			22,450
Assets held for sale		13,697			89,437


Total current assets		141,246			186,510


Property and equipment, net		498,336			487,022
Deposits for capital expenditures		16,892			19,802
Other assets		5,528			5,824

	$	662,002		$	699,158


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	9,520		$	7,742
Other accrued liabilities		31,854			27,724
Advance deposits		1,877			1,384
Insurance advances		2,000			2,063
Current portion of long-term liabilities		13,651			46,557
Liabilities related to assets held for sale		7,316			68,351

Total current liabilities		66,218			153,821

Long-term liabilities		357,938			292,301

Total liabilities		424,156			446,122

Minority interests		—			10,922
Commitments and contingencies
Stockholders’ equity:
Common stock, $.01 par value, 60,000,000 shares authorized; 24,967,284 and 24,860,321 issued at September 30, 2007 and December 31, 2006, respectively		250			249
Additional paid-in capital		328,921			327,634
Accumulated deficit		(85,189	)		(84,816	)
Accumulated other comprehensive income		3,923			2,088
Treasury stock, at cost, 846,113 and 251,619 shares at September 30, 2007 and December 31, 2006, respectively		(10,059	)		(3,041	)


Total stockholders’ equity		237,846			242,114


	$	662,002		$	699,158

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Unaudited in thousands, except per share data)
Revenues:
Rooms	$	54,187		$	50,445		$	160,646		$	152,102
Food and beverage		14,381			12,912			45,004			40,658
Other		2,417			2,105			6,931			6,208

Total revenues		70,985			65,462			212,581			198,968


Direct operating expenses:
Rooms		14,157			13,297			40,592			38,810
Food and beverage		10,651			9,772			31,656			29,260
Other		1,683			1,523			4,837			4,705

Total direct operating expenses		26,491			24,592			77,085			72,775

		44,494			40,870			135,496			126,193

Other operating expenses:
Other hotel operating costs		20,924			19,078			61,415			56,395
Property and other taxes, insurance, and leases		4,734			5,862			15,557			14,980
Corporate and other		5,585			5,592			17,197			15,801
Casualty (gains) losses, net		—			(3,085	)		(1,867	)		(2,888	)
Restructuring		1,258			—			1,258			—
Depreciation and amortization		8,086			7,886			23,848			22,948
Impairment of long-lived assets		535			323			1,022			533

Total other operating expenses		41,122			35,656			118,430			107,769

Operating income		3,372			5,214			17,066			18,424

Other income (expenses):
Business interruption proceeds		299			2,706			571			3,401
Interest income and other		1,330			786			3,077			1,943
Interest expense		(6,642	)		(6,482	)		(19,607	)		(19,051	)
Loss on debt extinguishment		—			—			(3,411	)		—

(Loss) income before income taxes and minority interests		(1,641	)		2,224			(2,304	)		4,717
Minority interests (net of taxes, nil)		—			100			(421	)		(40	)
Benefit (provision) for income taxes — continuing operations		744			(1,039	)		1,411			(2,559	)

(Loss) income from continuing operations		(897	)		1,285			(1,314	)		2,118


Discontinued operations:
Income (loss) from discontinued operations before income taxes		1,300			(1,917	)		2,917			4,748
(Provision) benefit for income taxes — discontinued operations		(356	)		794			(1,976	)		(1,329	)

Income (loss) from discontinued operations		944			(1,123	)		941			3,419



Net income (loss) attributable to common stock	$	47		$	162		$	(373	)	$	5,537


Basic net (loss) income per share attributable to common stock	$	—		$	0.01		$	(0.02	)	$	0.22

Diluted net (loss) income per share attributable to common stock	$	—		$	0.01		$	(0.02	)	$	0.22

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


												Accumulated
						Additional						Other							Total
	Common Stock					Paid-In			Accumulated			Comprehensive		Treasury Stock					Stockholders’
	Shares			Amount		Capital			Deficit			Income		Shares		Amount			Equity
	(Unaudited in thousands, except share data)
Balance, December 31, 2006		24,860,321			249		327,634			(84,816	)		2,088		251,619		(3,041	)		242,114
Amortization of unearned stock compensation		—			—		1,126			—			—		—		—			1,126
Issuance and vesting of restricted and nonvested shares		81,587			1		(1	)		—			—		—		—			—
Exercise of stock options		26,749			—		257			—			—		—		—			257
Repurchases of treasury stock		—			—		—			—			—		594,494		(7,018	)		(7,018	)


Realization of pre-emergence deferred tax asset		—			—		(149	)		—			—		—		—			(149	)
Other		(1,373	)		—		54			—			—		—		—			54
Comprehensive income:
Net loss		—			—		—			(373	)		—		—		—			(373	)
Currency translation adjustments (related taxes estimated at nil)		—			—		—			—			1,835		—		—			1,835

Total comprehensive income																				1,462

Balance, September 30, 2007		24,967,284			250		328,921			(85,189	)		3,923		846,113		(10,059	)		237,846

Comprehensive income for the three months ended September 30, 2007 was $0.8 million. Comprehensive income for the three and nine months ended September 30, 2006 was $0.1 million and $6.0 million, respectively. Accumulated other comprehensive income is comprised of currency translation adjustments.

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 30, 2007			September 30, 2006
	(Unaudited in thousands)
Operating activities:
Net (loss) income	$	(373	)	$	5,537
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		23,848			27,511
Impairment of long-lived assets		3,551			10,596
Stock compensation expense		1,126			1,222
Casualty gain, net		(4,525	)		(3,535	)
Deferred income taxes		(149	)		3,453
Minority interests		421			39
Gain on asset dispositions		(1,947	)		(1,483	)
Loss (gain) on extinguishment of debt		4,735			(10,869	)
Amortization of deferred financing costs		1,048			1,046
Other		—			(132	)
Changes in operating assets and liabilities:
Accounts receivable, net of allowances		(4,082	)		(3,001	)
Insurance receivable		931			(2,425	)
Inventories		(63	)		(321	)
Prepaid expenses and other assets		2,812			(714	)
Accounts payable		(2,213	)		(33	)
Other accrued liabilities		1,162			1,595
Advance deposits		505			(980	)

Net cash provided by operating activities		26,787			27,506

Investing activities:
Capital improvements		(31,009	)		(31,270	)
Proceeds from sale of assets, net of related selling costs		72,289			9,404
Acquisition of minority partner’s interest		(16,361	)		—
Withdrawals for capital expenditures		3,948			15,585
Insurance receipts related to casualty claims, net		658			3,745
Net (increase) decrease in restricted cash		(1,533	)		1,422
Other		(33	)		(36	)

Net cash provided by (used in) investing activities		27,959			(1,150	)

Financing activities:
Proceeds from issuance of long term debt		130,000			44,954
Proceeds from exercise of stock options		257			822
Principal payments on long-term debt		(152,522	)		(35,886	)
Purchases of treasury stock		(6,366	)		(2,212	)
Payments of deferred financing costs		(1,666	)		(870	)
Payments of defeasance costs		(3,820	)		—
Other		53			108

Net cash (used in) provided by financing activities		(34,064	)		6,916

Effect of exchange rate changes on cash		289			51

Net increase in cash and cash equivalents		20,971			33,323
Cash and cash equivalents at beginning of period		48,188			19,097

Cash and cash equivalents at end of period	$	69,159		$	52,420


Supplemental cash flow information:
Cash paid during the period for:
Interest, net of the amounts capitalized shown below	$	20,337		$	25,477
Interest capitalized		187			117
Income taxes, net of refunds		1,281			840
Supplemental disclosure of non-cash investing and financing activities:
Net non-cash debt decrease		—			10,195
Treasury stock repurchases traded, but not settled		652			—
Purchases of property and equipment on account		3,272			3,031

See notes to condensed consolidated financial statements.

LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business Summary

Lodgian, Inc. (the “Company”) is one of the largest independent owners and operators of full-service hotels in the United States in terms of the number of guest rooms, as reported by Hotel Business in the 2007 Green Book published in December 2006. The Company is considered an independent owner and operator because the Company does not operate its hotels under its own name. The Company operates substantially all of its hotels under nationally recognized brands, such as “Crowne Plaza”, “Hilton”, “Holiday Inn”, “Marriott” and “Wyndham”. The Company’s hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale and upscale market segments of the lodging industry. Management believes that these strong national brands provide many benefits such as guest loyalty and market share premiums.

As of September 30, 2007, the Company operated 48 hotels with an aggregate of 8,693 rooms, located in 25 states and Canada. Of the 48 hotels, 44 hotels, with an aggregate of 8,116 rooms, were held for use, while 4 hotels with an aggregate of 577 rooms, were held for sale. The Company consolidated all of these hotels in its financial statements. The 48 hotels consisted of:

	•		47 hotels that were wholly owned and operated through subsidiaries; and

	•		one hotel that was operated in a joint venture in which the Company has a 50% voting equity interest and exercises control.

On March 20, 2007, the Company acquired its joint venture partner’s 18% interest in the Radisson New Orleans Airport Plaza Hotel for $2.9 million. On July 26, 2007, the Company acquired its joint venture partner’s 50% interest in the Crowne Plaza Melbourne, FL for $13.5 million. As a result, the hotels are now consolidated as wholly-owned subsidiaries.

As of September 30, 2007, the Company operated all but three of its hotels under franchises obtained from nationally recognized hospitality franchisors. The Company operated 26 hotels under franchises obtained from InterContinental Hotels Group (“IHG”) as franchisor of the Crowne Plaza, Holiday Inn, Holiday Inn Select and Holiday Inn Express brands. The Company operated 12 hotels under franchises from Marriott International as franchisor of the Marriott, Courtyard by Marriott, Fairfield Inn by Marriott, Springhill Suites by Marriott and Residence Inn by Marriott brands. The Company operated an additional 7 hotels under other nationally recognized brands.

2. General

The condensed consolidated financial statements include the accounts of Lodgian, Inc., its wholly-owned subsidiaries and one joint venture. The Company believes it has control of the joint venture when it manages and has control of the joint venture’s assets and operations. The Company reports the third party partner’s share of the net income or loss of the joint venture and its share of the joint venture’s equity as minority interest.

The accounting policies which the Company follows for quarterly financial reporting are the same as those that were disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, except as discussed in Notes 10 and 11.

In Management’s opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting primarily of normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2007, the results of operations for the three and nine months ended September 30, 2007 and September 30, 2006 and cash flows for the nine months ended September 30, 2007 and September 30, 2006. The Company’s results for interim periods are not necessarily indicative of the results for the entire year. You should read these financial statements in conjunction with the consolidated financial statements and related notes included in the Form 10-K.

In the preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP), the Company makes estimates and assumptions which affect:

	•		the reported amounts of assets and liabilities;

	•		the reported amounts of revenues and expenses during the reporting period; and

•

the disclosures of contingent assets and liabilities at the date of the financial statements.

Actual results could differ from those estimates.

3. Stock-Based Compensation

The Company has a Stock Incentive Plan which permits awards to be made to directors, officers, other key employees and consultants. The Stock Incentive Plan is administered by the Compensation Committee of the Board of Directors. The Stock Incentive Plan provides that 3,301,058 shares are available for issuance as stock options, stock appreciation rights, stock awards, performance share awards, Section 162 (m) awards or other awards as determined by the Compensation Committee.

The following schedule summarizes the activity for the nine months ended September 30, 2007:


Available under the plan, less previously issued as of December 31, 2006	2,568,029
Nonvested stock issued January 26, 2007	(63,000	)
Nonvested stock issued February 12, 2007	(46,000	)
Nonvested stock issued March 30, 2007	(18,800	)
Shares of nonvested stock withheld from awards to satisfy tax withholding obligations	6,989
Nonvested shares forfeited in 2007	8,749
Stock options forfeited in 2007	59,155

Available for issuance, September 30, 2007	2,515,122

Stock Options

The outstanding stock options generally vest in three equal annual installments and expire ten years from the grant date. The exercise price of the awards is the average of the high and low market prices on the date of the grant. The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes-Merton option pricing model. There were no stock option grants during the nine months ended September 30, 2007.

A summary of stock option activity during the nine months ended September 30, 2007 is summarized below:


				Weighted Average
	Stock Options			Exercise Price
Balance, December 31, 2006		356,313		$	10.60
Exercised		(26,749	)		9.61
Forfeited		(59,155	)		10.62

Balance, September 30, 2007		270,409		$	10.70

The amount of cash received from the exercise of stock options during the nine months ended September 30, 2007 was $257,000. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2007 was $124,000.

A summary of options outstanding and exercisable (vested), and expected to vest at September 30, 2007 is as follows:


	Options outstanding						Options exercisable
			Weighted average		Weighted				Weighted average		Weighted
			remaining life		average				remaining life		average
Range of prices	Number		(in years)		exercise price		Number		(in years)		exercise price
$7.83 to $9.39		117,830		6.2	$	9.05		79,501		5.6	$	9.05
$9.40 to $10.96		104,591		5.5	$	10.48		102,091		5.5	$	10.50
$10.97 to $15.66		47,988		4.2	$	15.21		47,988		4.2	$	15.21

		270,409		5.6	$	10.70		229,580		5.2	$	10.98


Expected to vest		259,504		5.6	$	10.76


	($ in thousands)
Aggregate intrinsic value of stock options outstanding	$	298

Aggregate intrinsic value of stock options expected to vest	$	269

Aggregate intrinsic value of stock options exercisable	$	188

Restricted Stock

A summary of restricted stock activity during the nine months ended September 30, 2007 is summarized below:


				Weighted Average
	Restricted Stock			Exercise Price
Balance, December 31, 2006		7,694		$	12.88
Expiration of restrictions		(7,694	)		12.88

Balance, June 30, 2007		—		$	—

Nonvested Stock

On January 26, 2007, the Company granted 63,000 shares of nonvested stock awards to certain employees. The shares vest in equal annual installments on the next three anniversary dates. The shares were valued at $12.84, the closing price of the Company’s common stock on the date of the grant. The aggregate value of the grant is being recorded as compensation expense over the vesting period.

On February 12, 2007, the Company granted 46,000 shares of nonvested stock awards to all non-employee members of the Board of Directors. The shares vest in three equal annual installments commencing on January 30, 2008. The shares were valued at $12.95, the closing price of the Company’s common stock on the date of the grant. Two members of the Board of Directors did not stand for reelection at the April 2007 annual meeting of stockholders and the Board elected to accelerate the vesting of the shares for these directors as of April 24, 2007. Therefore, the aggregate value of their grants is being recorded as compensation expense over an accelerated vesting period. The aggregate value of the remaining grant is being recorded as compensation expense over the entire vesting period.

On March 30, 2007, the Company granted 18,800 shares of nonvested stock awards to certain employees. The shares vest in equal annual installments on the next three anniversary dates. The shares were valued at $13.36, the closing price of the Company’s common stock on the date of the grant. The aggregate value of the grant is being recorded as compensation expense over the vesting period.

In August 2007, the Company initiated a restructuring plan which included the elimination of several positions (refer to Footnote 5 for additional information). Two of the affected employees had employment agreements requiring that all nonvested stock awards be accelerated upon termination of employment. As a result, the Company recorded $0.1 million in accelerated stock compensation expense, which is included in restructuring in the Company’s condensed consolidated statement of operations.

In addition, one member of the Board of Directors resigned in August 2007. The Board elected to accelerate the vesting of his outstanding stock awards. As a result, the Company recorded $0.1 million in accelerated stock compensation expense, which is included in corporate and other in the Company’s condensed consolidated statement of operations.

A summary of nonvested stock activity during the nine months ended September 30, 2007 is as follows:


				Weight Average
	Nonvested Stock			Exercise Price
Balance, December 31, 2006		82,607		$	11.63
Granted		127,800			12.96
Forfeited		(8,749	)		13.32
Vested		(81,587	)		11.66

Balance, September 30, 2007		120,071		$	12.90

The aggregate fair value of nonvested stock awards that vested during the nine months ended September 30, 2007 was $1.0 million.

A summary of unrecognized compensation expense and the remaining weighted-average amortization period as of September 30, 2007 is as follows:


	Unrecognized		Weighted-Average
	Compensation		Amortization
Type of Award	Expense ($000’s)		Period (in years)
Stock Options	$	170		0.64
Nonvested Stock		1,173		2.20

Total	$	1,343		2.20

Compensation expense for the three months ended September 30, 2007 and 2006 is summarized below:


	Three Months Ended September 30, 2007				Three Months Ended September 30, 2006
	Compensation		Income Tax		Compensation		Income Tax
Type of Award	Expense		Benefit		Expense		Benefit
	(Unaudited in thousands)
Stock Options	$	102	$	40	$	279	$	108
Nonvested Stock		368		143		133		52

Total	$	470	$	183	$	412	$	160

Compensation expense for the nine months ended September 30, 2007 and 2006 is summarized below:


	Nine Months Ended September 30, 2007				Nine Months Ended September 30, 2006
	Compensation		Income Tax		Compensation		Income Tax
Type of Award	Expense		Benefit		Expense		Benefit
	(Unaudited in thousands)
Stock Options	$	100	$	39	$	695	$	270
Nonvested Stock		1,026		398		365		142
Restricted Stock		—		—		161		62

Total	$	1,126	$	437	$	1,221	$	474

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Accounting for Stock-Based Compensation”, the Company records compensation expense based on estimated forfeitures and revises compensation expense, if necessary, in subsequent periods if actual forfeitures differ from those estimates. During the three months ended June 30, 2007, the Company determined that the estimated forfeiture rate for certain stock option awards was lower than actual. As a result, the Company recorded a $0.4 million adjustment to reduce compensation expense related to stock options. In addition, the Company determined that the estimated forfeiture rate for certain nonvested stock awards was higher than actual, which resulted in a $0.1 million adjustment to increase compensation expense related to nonvested stock.

4. Treasury Stock

During the nine months ended September 30, 2007, 81,587 shares of nonvested stock awards vested, of which 6,989 shares were withheld to satisfy tax obligations and were included in the treasury stock balance of the Company’s balance sheet. The aggregate cost of these shares was approximately $85,000.

In May 2006, the Board of Directors of the Company approved a $15 million share repurchase program which expired in May 2007. Under this program, the Company repurchased 225,267 shares at an aggregate cost of $2.8 million during 2006. During 2007, the Company repurchased 146,625 shares at an aggregate cost of $1.9 million.

In August 2007, the Board of Directors of the Company approved a $30 million share repurchase program which expires on August 22, 2009. Under this program, the Company repurchased 440,880 shares at an aggregate cost of $5.0 million between August 22, 2007, and September 30, 2007. During October 2007, the Company repurchased an additional 228,715 shares at an aggregate cost of $2.8 million, bringing the total number of shares repurchased under this program to 669,595.

The Company may use its treasury stock for the issuance of future stock-based compensation awards or for acquisitions.

5. Restructuring

During the three months ended September 30, 2007, the Company implemented cost-reduction initiatives to improve future operating performance. These initiatives resulted in position eliminations in the Company’s corporate and regional staff as well as reductions in hotel staff at certain locations. As a result, the Company recorded restructuring costs totaling approximately $1.3 million, representing severance and related costs. At September 30, 2007, $1.2 million of the costs had been paid or otherwise settled. The remaining accrued balance of $0.1 million, which is expected to be paid by the end of the year, is included in other accrued liabilities in the Company’s condensed consolidated balance sheet.

6. Dispositions and Discontinued Operations

Dispositions

In November 2006, the Company announced a major strategic initiative to reconfigure its hotel portfolio. The Company redefined its held for use portfolio, which contains 44 hotels with 8,116 rooms (including the Holiday inn Marietta, GA hotel, which is currently closed following a fire). In accordance with this strategy, the Company sold two hotels and identified 12 additional hotels for sale in November and December 2006.

In January 2007, the Company sold the University Plaza Bloomington, IN for a gross sales price of $2.4 million. An impairment charge of $0.1 million was recorded upon the disposition of the hotel. Additionally, in March 2007, the Company sold the Holiday Inn Hamburg, NY for a gross sales price of $3.4 million, realized a gain of $0.8 million, and used $2.0 million to pay down debt. The remaining net proceeds, after paying settlement costs, were used for general corporate purposes.

In June 2007, the Company sold the Holiday Inn Sheffield, AL, which was previously written down to its estimated net selling price, for a gross sales price of $4.1 million. The net proceeds, after paying settlement costs, were used for general corporate purposes. Also in June 2007, the Company sold the following 15 hotels:

	•		Clarion Louisville, KY

	•		Crowne Plaza Cedar Rapids, IA

	•		Augusta West Inn Augusta, GA

	•		Holiday Inn Greentree, PA

	•		Holiday Inn Lancaster East, PA

	•		Holiday Inn Lansing, MI

	•		Holiday Inn Pensacola, FL

	•		Holiday Inn Winter Haven, FL

	•		Holiday Inn York, PA

	•		Holiday Inn Express Dothan, AL

	•		Holiday Inn Express Pensacola, FL

	•		Park Inn Brunswick, GA

	•		Quality Inn Dothan, AL

	•		Ramada Plaza Macon, GA

	•		Ramada Inn North Charleston, SC

These 15 hotels, along with an additional hotel expected to be sold later in the year, were negotiated in a single purchase-sale agreement to an individual buyer. The agreement met the criteria for recognition as a group sale and the aggregate transaction is expected to result in a gain. $60.8 million of the aggregate purchase price was allocated to the 15 hotels and the net proceeds, after paying settlement costs, were used for general corporate purposes. The gain, which will be deferred until the remaining hotel is sold, is included in Liabilities Related to Assets Held for Sale in the Company’s Balance Sheet.

In July 2007, the Company sold the Holiday Inn Clarksburg, WV, which was previously written down to its estimated net selling price, for a gross sales price of $2.9 million. Also in July 2007, the Company sold the Holiday Inn Fort Wayne, IN for a gross sales price of $2.8 million and realized a gain of $1.7 million. In August 2007, the Company sold the Holiday Inn Fairmont, WV for a gross sales price of $2.6 million and realized a gain of $0.1 million. The net proceeds from these three transactions, after paying settlement costs, were used for general corporate purposes.

Assets Held for Sale and Discontinued Operations

Management considers an asset to be held for sale when the following criteria per SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) are met:

	a)		Management commits to a plan to sell the asset;

	b)		The asset is available for immediate sale in its present condition;

	c)		An active marketing plan to sell the asset at a reasonable price has been initiated;

	d)		The sale of the asset is probable within one year; and

	e)		It is unlikely that significant changes to the plan to sell the asset will be made.

Upon designation of a property as an asset held for sale and in accordance with the provisions of SFAS No. 144, the Company records the carrying value of the property at the lower of its carrying value or its estimated fair value, less estimated selling costs, and the Company ceases depreciation of the asset.

In accordance with SFAS No. 144, the Company has included the hotel assets sold as well as the hotel assets held for sale (including any related impairment charges) in Discontinued Operations in the related Condensed Consolidated Statements of Operations. The assets held for sale at September 30, 2007 and December 31, 2006 and the liabilities related to these assets are separately disclosed in the Condensed Consolidated Balance Sheets. All losses and gains on assets sold and held for sale (including any related impairment charges) are included in “Income (loss) from discontinued operations before income taxes” in the Condensed Consolidated Statement of Operations. The amount the Company will ultimately realize on these asset sales could differ from the amount recorded in the financial statements.

Consistent with the accounting policy on asset impairment, and in accordance with SFAS No. 144, the reclassification of assets from held for use to held for sale requires a determination of fair value less costs of sale. The fair values of the assets held for sale are based on the estimated selling prices less estimated costs to sell. The Company engages real estate brokers to assist in determining the estimated selling price. The estimated selling costs are based on the Company’s experience with similar asset sales. The Company records an impairment charge and writes down a hotel asset’s carrying value if the carrying value exceeds the estimated selling price less costs to sell.

The impairment of long-lived assets held for sale of $0.5 million recorded during the three months ended September 30, 2007 related mainly to the Vermont Maple Inn Colchester, VT to reflect the current estimated selling price.

The impairment of long-lived assets held for sale of $2.5 million recorded during the nine months ended September 30, 2007 included the following:

	•		$1.3 million on the Holiday Inn Clarksburg, WV to reflect the estimated selling price;

	•		$0.6 million on the Holiday Inn Jamestown, NY to reflect the estimated selling price;

	•		$0.4 million on the Vermont Maple Inn Colchester, VT to reflect the current estimated selling price;

	•		$0.1 million on the University Plaza Bloomington, IN to record the final disposition of the hotel; and

	•		$0.1 million related to various other held-for-sale properties primarily to write-off the remaining net book value of disposed fixed assets.

The impairment of long-lived assets held for sale of $2.0 million recorded in the three months ended September 30, 2006 included the following:

	•		$1.0 million on the Ramada Plaza Macon, GA hotel, which was classified as held for sale during the third quarter, to reduce the carrying value to estimated selling price less cost to sell; and

	•		$1.0 million on the Holiday Inn Sheffield, AL hotel to reflect the reduced estimated selling price.

The impairment of long-lived assets held for sale of $10.0 million recorded in the nine months ended September 30, 2006 included the following (amounts are individually rounded):

	•		$3.9 million on the Holiday Inn Manhattan, KS hotel to record the loss on disposal of fixed assets;

	•		$2.2 million on the Holiday Inn Lawrence, KS hotel to record the loss on disposal of fixed assets;

	•		$1.4 million on the Holiday Inn Sheffield, AL hotel to reflect the estimated selling costs of the sale as this hotel was identified for sale during the first quarter of 2006 and the reduced estimated selling price in the third quarter;

	•		$0.3 million on the Holiday Inn McKnight, PA hotel to reflect the lowered estimated selling price and to reflect the write-off of capital improvements spent on this hotel for franchisor compliance that did not add incremental value or revenue generating capacity to the property;

	•		$0.2 million on the Holiday Inn Valdosta, GA hotel to reflect the estimated selling costs of the sale as this hotel was identified for sale during the first quarter of 2006;

	•		$0.1 million on the Azalea Inn Valdosta, GA hotel to reflect the estimated selling costs of the sale as this hotel was identified for sale during the first quarter of 2006;

	•		$0.7 million on the University Plaza Bloomington, IN hotel, which was classified as held for sale during the second quarter, to reduce the carrying value to estimated selling price less costs to sell; and

	•		$1.0 million on the Ramada Plaza Macon, GA hotel, which was classified as held for sale during the third quarter, to reduce the carrying value to estimated selling price less cost to sell.

Assets held for sale consist primarily of property and equipment, net of accumulated depreciation. Liabilities related to assets held for sale consist primarily of accounts payable, other accrued liabilities and long term debt. At September 30, 2007, the held for sale portfolio consisted of 4 hotels:

	•		Holiday Inn Frederick, MD

	•		Holiday Inn Jamestown, NY

	•		former Holiday Inn St. Paul, MN (now closed)

	•		Vermont Maple Inn Colchester, VT

Summary balance sheet information for assets held for sale is as follows:


	September 30, 2007		December 31, 2006
	(Unaudited in thousands)
Property and equipment, net	$	12,829	$	83,462
Other assets		868		5,975

Assets held for sale	$	13,697	$	89,437


Other liabilities	$	3,287	$	10,630
Long-term debt		4,029		57,721

Liabilities related to assets held for sale	$	7,316	$	68,351

Summary statement of operations information for discontinued operations is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Unaudited in thousands)
Total revenues	$	3,216		$	22,732		$	38,579		$	70,353
Total expenses		(2,975	)		(21,378	)		(34,815	)		(64,323	)
Impairment of long-lived assets		(452	)		(2,039	)		(2,529	)		(10,063	)
Business interruption proceeds		—			267			—			724
Interest income and other		—			—			1			10
Interest expense		(26	)		(1,499	)		(1,600	)		(4,543	)
Casualty gains, net		—			—			2,658			239
Gain on asset disposition		1,750			—			1,947			1,482
(Loss) gain on extinguishment of debt		(213	)		—			(1,324	)		10,869
(Provision) benefit for income taxes		(356	)		794			(1,976	)		(1,329	)

Income (loss) from discontinued operations	$	944		$	(1,123	)		941			3,419

In addition to the assets held for sale listed above, the hotels that were sold during the nine months ended September 30, 2007, were included in the statement of operations for discontinued operations, as well as the properties that were sold prior to 2007.

Discontinued operations are not segregated in the condensed consolidated statements of cash flows.

7. Income (Loss) Per Share

The computation of basic and diluted income (loss) per share is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(Unaudited in thousands, except per share data)
Numerator:
(Loss) income from continuing operations	$	(897	)	$	1,285		$	(1,314	)	$	2,118
Income (loss) from discontinued operations		944			(1,123	)		941			3,419

Net income (loss) attributable to common stock	$	47		$	162		$	(373	)	$	5,537


Denominator:
Basic weighted average shares		24,457			24,588			24,478			24,619

Diluted weighted average shares		24,457			24,683			24,478			24,702


Basic (loss) income per common share:
Loss from continuing operations	$	(0.04	)	$	0.05		$	(0.05	)	$	0.09
Income from discontinued operations		0.04			(0.05	)		0.04			0.14

Net (loss) income attributable to common stock	$	—		$	0.01		$	(0.02	)	$	0.22


Diluted (loss) income per common share:
Loss from continuing operations	$	(0.04	)	$	0.05		$	(0.05	)	$	0.09
Income from discontinued operations		0.04			(0.05	)		0.04			0.14

Net (loss) income attributable to common stock	$	—		$	0.01		$	(0.02	)	$	0.22

For the three and nine months ended September 30, 2007, the Company did not include the shares associated with the assumed exercise of stock options (options to acquire 270,409 shares of common stock), the assumed conversion of 120,071 shares of nonvested stock, and the assumed conversion of Class A and B warrants (rights to acquire 503,546 and 343,122 shares of common stock, respectively) because their inclusion would have been antidilutive.

For the three and nine months ended September 30, 2006, the Company did not include the shares associated with the assumed exercise of stock options (options to acquire 65,646 shares of common stock), and the assumed conversion of Class A and B warrants (rights to acquire 503,546 and 343,122 shares of common stock, respectively) in the computation of diluted income per share because their inclusion would have been antidilutive.

8. Long-Term Liabilities

As of September 30, 2007, 40 of the 48 hotels were pledged as collateral for mortgage debt. Certain mortgage notes are subject to prepayment, yield maintenance, or defeasance obligations if the Company repays them prior to their maturity. Approximately 55% of the mortgage debt bears interest at fixed rates and approximately 45% of the debt is subject to floating rates of interest. A summary of the Company’s long-term debt by debt pool, along with the applicable interest rates and the related carrying values of the property and equipment which collateralize the debt, is summarized below:


	September 30, 2007									December 31, 2006
	Number			Property, plant			Long-term			Long-term
	of Hotels			and equipment, net			obligations			obligations			Interest rates at September 30, 2007
Mortgage Debt
Merrill Lynch Mortgage Lending, Inc. — Floating										$	58,118
Merrill Lynch Mortgage Lending, Inc. — Fixed		21		$	239,874		$	160,149			239,383			6.58%
Goldman Sachs		10			120,779			130,000			—		LIBOR plus 1.50%; capped at 8.50%
Computer Share Trust Company of Canada		1			16,859			8,600			7,551			7.88%
Lehman Brothers Holdings, Inc.											15,194
Wachovia		4			37,198			35,594			36,081		$9,712 at 6.03%; $3,069 at 5.78%; 22,813 at 6.04%
													$18,823 at LIBOR plus 2.90%, capped at 8.4%; $21,351 at
IXIS		4			37,058			40,174			40,500		LIBOR plus 2.95%, capped at 8.45%

Total		40			451,768			374,517			396,828			7.00% ⁽¹⁾

Long-term liabilities — other
Tax notes issued pursuant to our Joint Plan of Reorganization		—			—			781			1,263
Other		—			—			403			1,038

		—			—			1,184			2,301

Property, plant and equipment — Unencumbered		8			59,397			—			—

		48			511,165			375,701			399,129
Held for sale		(4	)		(12,829	)		(4,112	)		(60,271	)

Total September 30, 2007 (2)		44		$	498,336		$	371,589		$	338,858


(1)		Represents the Company’s annual effective weighted average cost of debt at September 30, 2007.

(2)		Includes the current portion.

In April 2007, the Company entered into a $130 million loan agreement (the “Goldman Loan”) with Goldman Sachs Commercial Mortgage Capital, L.P. The Goldman Loan is secured by ten hotels and has an initial term of two years, with the option to extend the loan for three additional one-year periods. The loan bears interest at LIBOR plus 150 basis points. The loan can be repaid at any time, subject to a prepayment penalty of 1% of the outstanding balance during the first six months and 0.5% of the outstanding balance during the following six months. There is no prepayment penalty after the first anniversary of the loan. The Company purchased an interest rate protection agreement which capped the maximum interest rate at 8.5%.

After paying closing costs and establishing required reserve balances totaling $8.6 million, the loan proceeds were used as follows:

	•		$46.1 million of the loan proceeds, along with $9.7 million in funds held in reserve by Merrill Lynch, were used to pay off the $55.8 million Merrill Lynch Floating Rate Loan, which was secured by 14 hotels (2 hotels were classified as held for use, while 12 hotels were classified as held for sale). The unamortized deferred loan costs of $0.3 million were recorded as a Loss on Debt Extinguishment in the statement of operations. Of this amount, approximately $0.1 million was recorded in continuing operations and approximately $0.3 million was recorded in discontinued operations.

	•		$59.6 million of the loan proceeds, along with $11.7 million of the Company’s cash, were used to defease the Merrill Lynch Fixed Rate #2 Loan, as discussed below.

	•		$15.7 million was held in a restricted cash account, pending resolution or settlement of the terms of a ground lease relating to one of the ten hotels securing the loan. In June 2007, the terms of the ground lease were settled and $15.4 million of the restricted cash balance was transferred into an unrestricted cash account.

In April 2007, the Company defeased the entire $67.7 million balance of the Merrill Lynch Fixed Rate #2 Loan, which was secured by 9 hotels (6 hotels were classified as held for use, while 3 hotels were classified as held for sale). The Company purchased $71.1 million of US Government treasury securities (“Treasury Securities”) to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the nine hotels that had served as collateral for the loan. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations of the defeased debt. The Company has no further obligation with regard to the defeased loan. Accordingly, the defeased loan is no longer reflected on the Company’s balance sheet. As a result of the defeasance, the Company recorded $3.8 million as a Loss on Debt Extinguishment in the statement of operations. Of this amount, $3.3 million was recorded in continuing operations, and $0.5 million was recorded in discontinued operations.

In May 2007, the Company repaid two loans totaling $8.6 million, each of which was secured by one hotel. Both loans had reached their scheduled maturity dates.

Also, in May 2007, the Company defeased $5.7 million of the $60.9 million balance of one of the Company’s mortgage loans, which was secured by seven hotels. The Company purchased $6.0 million of Treasury Securities to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the two hotels that originally served as collateral for the defeased portion of the loan. Both hotels were classified as held for sale and have since been sold. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations under the partially defeased portion of the original debt. The transaction was deemed a partial defeasance because the Company continues to be liable for the remaining (undefeased) portion of the debt. The defeased portion of the debt is no longer reflected in the Company’s Consolidated Balance Sheet. As a result of the defeasance, the Company recorded a $0.4 million Loss on Debt Extinguishment in the statement of operations. The entire amount was recorded in discontinued operations.

In July 2007, the Company repaid two loans totaling $6.4 million, each of which was secured by one hotel. Both loans had reached their scheduled maturity dates.

Also, in July 2007, the Company defeased $3.1 million of the $65.3 million balance of one of the Company’s mortgage loans, which was secured by nine hotels. The Company purchased $3.2 million of Treasury Securities to cover the monthly debt service payments under the terms of the loan agreement. The Treasury Securities were then substituted for the hotel that originally served as collateral for the defeased portion of the loan. The hotel was classified as held for sale and has since been sold. The Treasury Securities and the debt were assigned to an unaffiliated entity, which became liable for all obligations under the partially defeased portion of the original debt. The transaction was deemed a partial defeasance because the Company continues to be liable for the remaining (undefeased) portion of the debt. The defeased portion of the debt is no longer reflected in the Company’s Consolidated Balance Sheet. As a result of the defeasance, the Company recorded a $0.2 million Loss on Debt Extinguishment in the statement of operations. The entire amount was recorded in discontinued operations.

9. Commitments and Contingencies

Franchise Agreements and Capital Expenditures

The Company benefits from the superior brand qualities of Crowne Plaza, Holiday Inn, Marriott, Hilton and other brands. Included in the benefits of these brands are their reputation for quality and service, revenue generation through their central reservation systems, access to revenue through the global distribution systems, guest loyalty programs and brand Internet booking sites. Reservations made by means of these franchisor facilities accounted for approximately 44% of total reservations during the nine months ended September 30, 2007.

To obtain these franchise affiliations, the Company has entered into franchise agreements with various hotel chains which require annual payments for license fees, reservation services and advertising fees. The license agreements generally have original terms of 10 to 20 years. As part of the franchise agreements, the Company is generally required to pay a royalty fee, an advertising/marketing fee, a fee for the use of the franchisor’s nationwide reservation system and certain ancillary charges. These costs vary with revenues and are not fixed commitments. Franchise fees incurred (which are reported in other hotel operating costs on the Condensed Consolidated Statement of Operations) for the three and nine months ended September 30, 2007 and 2006 were as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
	(Unaudited in thousands)
Continuing operations	$	5,178	$	4,768	$	15,191	$	14,173
Discontinued operations		205		1,597		2,779		5,433

	$	5,383	$	6,365	$	17,970	$	19,606

During the terms of the franchise agreements, the franchisors may require the Company to upgrade facilities to comply with the current standards. The Company’s franchise agreements terminate at various times and have differing remaining terms. For example, the terms of two, eight, and three of the franchise agreements for the held for use hotels are scheduled to expire in 2007, 2008, and 2009, respectively. One franchise agreement for the held for sale hotels is scheduled to expire in 2007 and 2008, respectively. In connection with renewals, the franchisor may require payment of a renewal fee, increased royalty and other recurring fees and substantial renovation of the facilities, or the franchisor may elect not to renew the franchise. The costs incurred in connection with these agreements are primarily monthly payments due to the franchisors based on a percentage of gross room revenues.

When a hotel does not meet the terms of its franchise license agreement, a franchisor reserves the right to issue a notice of non-compliance to the licensee. This notice of non-compliance provides the franchisee with a cure period which typically ranges from three to 24 months. At the end of the cure period, the franchisor will review the criteria for which the non-compliance notice was issued and either acknowledge a cure under the franchise agreement, returning the hotel to good standing, or issue a notice of default and termination, giving the franchisee another opportunity to cure the non-compliant issue. At the end of the default and termination period, the franchisor will review the criteria for which the non-compliance notice was issued and either acknowledge a cure of the default under the franchise agreement, issue an extension which will grant the franchisee additional time to cure, or terminate the franchise agreement.

As of November 1, 2007, the Company has been or expects to be notified that it is not in compliance with some of the terms of two of its franchise agreements, is in default with respect to the agreement for one hotel, and is awaiting cure letters from the franchisor for an additional three hotels, summarized as follows:

	•		Two hotels are in non-compliance of the franchise agreements because of substandard guest satisfaction scores. If the Company does not achieve scores above the required thresholds by the designated dates, these hotels could be subject to termination of the franchise agreements.

	•		One hotel is in default of the franchise agreement for failure to complete a Property Improvement Plan. If the Company does not cure the default by December 31, 2007, the hotel’s franchise agreement could be terminated by the franchisor. However, the Company has met with the franchisor, is in the planning and diligence phase of renovation, and anticipates that it will be given additional time to cure the default.

	•		The Company expects to earn “clean slate” letters for the remaining three hotels in February 2009, August 2009, and February 2010, respectively.

The corporate operations team, as well as each property’s general manager and associates, have focused their efforts to cure each of these instances of non-compliance or default through enhanced service, increased cleanliness, and product improvements by the required cure dates.

The Company believes that it will cure the non-compliance and defaults for which the franchisors have given notice on or before the applicable termination dates, but the Company cannot provide assurance that it will be able to complete the action plans (which are estimated to cost approximately $8.0 million for the capital improvements portion of the action plans) to cure the alleged instances of noncompliance and default prior to the specified termination dates or be granted additional time in which to cure any defaults or noncompliance. If a franchise agreement is terminated, the Company will select an alternative franchisor, operate the hotel independently of any franchisor or sell the hotel. However, terminating or changing the franchise affiliation of a hotel could require the Company to incur significant costs, including franchise termination payments and capital expenditures, and in certain circumstances could lead to acceleration of parts of indebtedness. This could adversely affect the Company.

Letters of Credit

As of September 30, 2007, the Company had four irrevocable letters of credit totaling $6.0 million which were fully collateralized by cash. The cash is classified as restricted cash in the accompanying Condensed Consolidated Balance Sheets and serves as a guarantee for self-insured losses and certain utility and liquor bonds. The letters of credit will expire in October 2007, November 2007, January 2008 and September 2008, but may be renewed beyond those dates.

Self-insurance

The Company is self-insured up to certain limits with respect to employee medical, employee dental, general liability insurance, personal injury claims, workers’ compensation and auto liability. The Company establishes liabilities for these self-insured obligations annually, based on actuarial valuations and its history of claims. If these claims escalate beyond the Company’s expectations, this could have a negative impact on its future financial condition and results of operations. At September 30, 2007 and December 31, 2006, the Company had accrued $13.6 million and $11.5 million, respectively, for these liabilities.

There are other types of losses for which the Company cannot obtain insurance at all or at a reasonable cost, including losses caused by acts of war. If an uninsured loss or a loss that exceeds the Company’s insurance limits were to occur, the Company could lose both the revenues generated from the affected hotel and the capital that it has invested. The Company also could be liable for any outstanding mortgage indebtedness or other obligations related to the hotel. Any such loss could materially and adversely affect the financial condition and results of operations.

The Company believes it maintains sufficient insurance coverage for the operation of the business.

Casualty gains (losses) and business interruption insurance

In August 2005, Hurricane Katrina made landfall in the U.S. Gulf Coast region and two hotels in the New Orleans area were damaged. Additionally, in January 2006, one hotel suffered a fire and remains closed.

All of the Company’s hotels are covered by property, casualty and business interruption insurance. The business interruption coverage begins on the date of closure and continues for six months following the opening date of the hotel, to cover the revenue ramp-up period. Management believes the Company has sufficient coverage for business interruption and to pay claims that may be asserted against the Company by guests or others.

At December 31, 2006, the casualty claims were not finalized for the two hotels that were damaged by Hurricane Katrina and the hotel that was damaged by a fire. Additionally, the business interruption claims were not finalized for the hotel that was damaged by a fire because the hotel remains closed.

During the nine months ended September 30, 2007, the Company finalized the casualty claims for the two hotels that were damaged by Hurricane Katrina. As a result, the Company recorded net casualty gains of $1.9 million in continuing operations for the hotel that is classified as held for use and $2.7 million in discontinued operations for the hotel that was sold in December 2006.

During the nine months ended September 30, 2007, the Company recorded business interruption proceeds of $0.6 million and insurance advances for casualty claims of $1.0 million for the hotel that remains closed. At September 30, 2007, the casualty and business interruption claims were not finalized for this hotel.

Litigation

On January 15, 2006, the Holiday Inn Marietta, GA suffered a fire. There was one death associated with the fire, and certain guests have made claims for various injuries allegedly caused by the fire. As of November 1, 2007, twelve lawsuits have been brought against the Company, including one alleging wrongful death.

All pending litigation claims related to the fire are covered by the Company’s general liability insurance policies, subject to a self-insured retention of $250,000. However, the Company has responsibility to pay all of its legal and other expenses associated with defending these claims.

Management believes that the Company has adequate insurance protection to cover all pending litigation matters, including the claims related to fire at the Marietta, GA property, and that the resolution of these claims will not have a material adverse effect on the Company’s results of operations or financial condition.

10. Income Taxes

For the year ended December 31, 2006, the Company had taxable income of $3.3 million. Because the Company had net operating losses available for federal income tax purposes and preference item deductions related to the sale of properties, no federal income tax or alternative minimum taxes were due for the year ended December 31, 2006. A net loss was reported for federal income tax purposes for the year ended December 31, 2005 and no federal income taxes were paid. At December 31, 2006, net operating loss carryforwards of $331.8 million were available for federal income tax purposes of which $178.4 million were available for use. The net operating losses will expire in years 2019 through 2025, including the utilization of tax net operating loss carryforward of $3.3 million for the year ended December 31, 2006. The 2002 reorganization under Chapter 11 and 2004 secondary stock offering resulted in “ownership changes,” as defined in Section 382 of the Internal Revenue Code. As a result of the most recent Section 382 ownership change, the Company’s ability to utilize net operating loss carryforwards generated prior to June 24, 2004 is subject to an annual limitation of $8.3 million. Net operating loss carryforwards generated during the 2004 calendar year after June 24, 2004 as well as those generated during the 2005 calendar year, are generally not subject to Section 382 limitations to the extent the losses generated are not recognized built in losses. At the June 24, 2004 ownership change date the company had a Net Unrealized Built in Loss “NUBIL” of $150 million. As of December 31, 2006, $87.7 million of the NUBIL had been recognized. The amount of losses subject to Section 382 limitations is $149.7 million; losses not subject to 382 limitations are $28.7 million.

In 2007, the Company may be subject to Federal income tax under the alternative minimum tax system. The current year’s taxable income, if applicable, would be sheltered by net operating loss carryforwards.

Furthermore, at December 31, 2006, a valuation allowance of $120.9 million fully offset the Company’s net deferred tax asset. Approximately $97 million of this balance was attributable to pre-emergence deferred tax assets and may be credited to additional paid-in capital in future periods. At September 30, 2007, the valuation allowance decreased to $71 million. This balance is primarily attributable to pre-emergence deferred tax assets and may be credited to additional paid-in capital in future periods. The release of the valuation allowance relates to net operating losses that will expire unused due to Section 382 limitations. At September 30, 2007, net operating loss carryforwards of $208.5 million were reported for federal income tax purposes, which will expire in years 2019 through 2027 and reflect only those losses available for use.

In July 2006, the FASB issued Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 applies to all tax positions accounted for in accordance with SFAS No. 109 and requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. Subsequent recognition, derecognition, and measurement is based on management’s best judgment given the facts, circumstances and information available at the reporting date. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company was required to adopt the provisions of FIN 48 with respect to all the Company’s tax positions as of January 1, 2007. While FIN 48 was effective on January 1, 2007, the new standards apply to all open tax years. The only major tax jurisdiction in which the Company files income taxes is Federal. The tax years which are open for examination are calendar years ended 1992, 1998, 1999, 2000, 2001 and 2003, due to losses generated that may be utilized in current or future filings. Additionally, the statutes of limitation for calendar years ended 2004, 2005 and 2006 remain open. The Company has no significant unrecognized tax benefits; therefore, the adoption of FIN 48 had no impact on the Company’s financial statements. Additionally, no increases in unrecognized tax benefits are expected in the next twelve months. Interest and penalties on unrecognized tax benefits will be classified as income tax expense if recorded in a future period.

11. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact that the adoption of SFAS No. 157 will have on the results of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115” (“SFAS No. 159”). This Statement provides an opportunity to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact that the adoption of SFAS No. 159 will have on the results of operations and financial condition.

In June 2006, the FASB issued EITF 06-03, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)”. The EITF concluded that disclosures should be applied retrospectively to interim and annual financial statements for all periods presented, if those amounts are significant. The disclosure of those taxes described under the consensus can be made on an aggregate basis. Since the Issue requires only the presentation of additional disclosures, at the date of adoption an entity would not be required to reevaluate its existing policies related to taxes assessed by a governmental authority that are imposed concurrently on a specific revenue-producing transaction between a seller and a customer. If the taxes are reported on a gross basis and the taxes are significant, an entity should disclose its policy of presenting taxes and the amount of taxes. If the taxes are reported on a net basis, disclosure of the amount of taxes collected is not required. An entity that chooses to reevaluate its existing policies and elects to change the presentation of taxes within the scope of this Issue must follow the requirements of SFAS No. 154, which provides that an entity may voluntarily change its accounting principles only to adopt a preferable accounting principle.

EITF 06-03 was effective for interim and annual reporting periods beginning after December 15, 2006. The Company adopted EITF 06-03 on January 1, 2007. The Company records such taxes on a net basis and chooses not to reevaluate its existing policies.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the discussion below in conjunction with the unaudited condensed consolidated financial statements and accompanying notes, set forth in “Item I. Financial Statements” included in this Form 10-Q. Also, the discussion which follows contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in our Form 10-K for the year ended December 31, 2006.

Executive Overview

We are one of the largest independent owners and operators of full-service hotels in the United States in terms of our number of guest rooms, as reported by Hotel Business in the 2007 Green Book issue published in December 2006. We are considered an independent owner and operator because we do not operate our hotels under our own name. We operate substantially all of our hotels under nationally recognized brands, such as “Crowne Plaza”, “Hilton”, “Holiday Inn”, “Marriott” and “Wyndham”. Our hotels are primarily full-service properties that offer food and beverage services, meeting space and banquet facilities and compete in the midscale and upscale market segments of the lodging industry. We believe that these strong national brands afford us many benefits such as guest loyalty and market share premiums.

As of September 30, 2007, we operated 48 hotels with an aggregate of 8,693 rooms, located in 25 states and Canada. Of the 48 hotels, 44 hotels, with an aggregate of 8,116 rooms, were held for use, while 4 hotels with an aggregate of 577 rooms, were held for sale. We consolidated all of these hotels in our financial statements.

Our portfolio of 48 hotels consisted of:

• 47 hotels that were wholly owned and operated through subsidiaries; and

•

one hotel that was operated in a joint venture in which we have a 50% voting equity interest and exercise control.

On March 20, 2007, we acquired our joint venture partner’s 18% interest in the Radisson New Orleans Airport Plaza hotel for $2.9 million. On July 26, 2007, we acquired our joint venture partner’s 50% interest in the Crowne Plaza Melbourne, FL for $13.5 million. As a result, these hotels are now consolidated as wholly-owned subsidiaries.

As of September 30, 2007, we operated all but three of our hotels under franchises obtained from nationally recognized hospitality franchisors. We operated 26 hotels under franchises obtained from InterContinental Hotels Group (“IHG”) as franchisor of the Crowne Plaza, Holiday Inn, Holiday Inn Select, and Holiday Inn Express brands. We operated 12 hotels under franchises from Marriott International as franchisor of the Marriott, Courtyard by Marriott, Fairfield Inn by Marriott, Springhill Suites by Marriott, and Residence Inn by Marriott brands. We operated an additional 7 hotels under other nationally recognized brands.

Overview of Continuing Operations

Below is an overview of our results of operations for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006, which are presented in more detail in “Results of Operations — Continuing Operations:”

	•		Third quarter revenues increased $5.5 million or 8.4%. Rooms revenues increased $3.7 million, or 7.4%, as occupancy and ADR rose 3.3% and 3.9%, respectively. Overall, we gained market share during the third quarter as RevPAR index rose to 99.2%, a 1.4% increase over the same period one year ago. Excluding hotels under renovation in the third quarters of 2007 and/or 2006, RevPAR index grew 3.1%. Food and beverage revenues increased $1.5 million, an increase of 11.4% compared with the same period last year, driven by the successful implementation of our food and beverage sales and profitability initiatives.

	•		Third quarter operating income decreased $1.8 million as strong operating performance at our hotels was more than offset by the following:

	o		In the third quarter of 2006, we benefited from casualty gains of $3.1 million related to the settlement of property damage claims at two of our hotels. Similar gains were not recorded in the third quarter of 2007.

	o		In the third quarter of 2007, we implemented cost-reduction initiatives to improve future operating performance. These initiatives resulted in position eliminations in the Company’s corporate and regional staff as well as reductions in hotel staff at certain locations. As a result, we recorded restructuring costs totaling $1.3 million, representing severance and related costs. The majority of the terminations occurred in the third quarter. As of November 1, the remaining terminations had been communicated to the affected employees. We expect corporate and hotel payroll and related costs to decrease beginning in the fourth quarter of 2007.

In January 2007, we announced a review of strategic alternatives to enhance shareholder value. During the third quarter, we incurred $0.6 million in related costs.

Overview of Discontinued Operations

In November 2006, we announced a major strategic initiative to reconfigure our hotel portfolio. We redefined our held for use portfolio, which contains 44 hotels with 8,116 rooms (including the Holiday inn Marietta, GA hotel, which is currently closed following a fire). In accordance with this new strategy, we sold two hotels and identified 12 additional hotels for sale in November and December 2006.

The following dispositions took place during the first quarter of 2007:

	•		In January 2007, we sold the University Plaza Bloomington, IN for a gross sales price of $2.4 million. An impairment charge of $0.1 million was recorded upon the disposition of this hotel.

	•		Additionally, in March 2007, we sold the Holiday Inn Hamburg, NY for a gross sales price of $3.4 million, realized a gain of $0.8 million, and used $2.0 million to pay down debt. The remaining net proceeds, after paying settlement costs, were used for general corporate purposes.

The following dispositions took place during the second quarter of 2007:

	•		In June 2007, we sold the Holiday Inn Sheffield, AL, which was previously written down to its estimated net selling price, for a gross sales price of $4.1 million. The net proceeds, after paying settlement costs, were used for general corporate purposes.

	•		In June 2007, we sold 15 hotels. These hotels, along with an additional hotel expected to be sold later in the year, were negotiated in a single purchase-sale agreement to an individual buyer. The agreement met the criteria for recognition as a group sale and the aggregate transaction is expected to result in a gain. $60.8 million of the aggregate purchase price was allocated to the 15 hotels and the net proceeds, after paying settlement costs, were used for general corporate purposes. The gain, which will be deferred until the remaining hotel is sold, is included in Liabilities Related to Assets Held for Sale in our Balance Sheet.

The following dispositions took place during the third quarter of 2007:

	•		In July 2007, we sold the Holiday Inn Clarksburg, WV, which had previously been written down to its estimated net selling price, for a gross sales price of $2.9 million. The net proceeds, after paying settlement costs, were used for general corporate purposes.

	•		In July 2007, we sold the Holiday Inn Fort Wayne, IN for a gross sales price of $2.8 million and realized a gain of $1.7 million. The net proceeds, after paying settlement costs, were used for general corporate purposes.

	•		Additionally, in August 2007, we sold the Holiday Inn Fairmont, WV for a gross sales price of $2.6 million and realized a gain of $0.1 million. The net proceeds, after paying settlement costs, were used for general corporate purposes.

The condensed consolidated statements of operations for discontinued operations for the three and nine months ended September 30, 2007 and 2006 include the results of operations for the four hotels classified as held for sale at September 30, 2007, as well as all properties that have been sold in accordance with SFAS No. 144.

The assets held for sale at September 30, 2007 and December 31, 2006 and the liabilities related to these assets 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, 2007 remain properly classified in accordance with SFAS No. 144.

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 nine months ended September 30, 2007, we recorded impairment charges of $2.5 million on assets held for sale.

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.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP. As we prepare our financial statements, we make estimates and assumptions which affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. A summary of our significant accounting policies is included in Note 1 of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006. In addition, our critical accounting policies and estimates are discussed in Item 7 of our Form 10-K, and we believe no material changes have occurred except as described below.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company was required to adopt the provisions of FIN 48 with respect to all the Company’s tax positions as of January 1, 2007. While FIN 48 was effective on January 1, 2007, the new standards apply to all open tax years. The only major tax jurisdiction in which the Company files income taxes is Federal. The tax years which are open for examination are calendar years ended 1992, 1998, 1999, 2000 and 2001 due to losses generated that may be utilized in current or future filings. Additionally, the statutes of limitation for calendar years ended 2003, 2004, 2005 and 2006 remain open. The Company has no significant unrecognized tax benefits; therefore, there was no impact and no additional increases are expected in the next twelve months. Interest and penalties on unrecognized tax benefits will be recorded as income tax expense should an unrecognized tax benefit be recorded in a future period to which interest or penalties apply.

Income Statement Overview

The discussion below relates to our 44 continuing operations hotels (including the Holiday Inn Marietta, GA, which is closed following a fire), for the three months ended September 30, 2007. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Income Statement Overview” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for a general description of the categorization of our revenues and expenses.

Results of Operations — Continuing Operations

The analysis below compares the results of operations for the three months ended September 30, 2007
and 2006.

Revenues — Continuing Operations


	Three Months Ended September 30,
	2007			2006			Increase (decrease)
	(unaudited in thousands)
Revenues:
Rooms	$	54,187		$	50,445		$	3,742	7.4	%
Food and beverage		14,381			12,912			1,469	11.4	%
Other		2,417			2,105			312	14.8	%

Total revenues	$	70,985		$	65,462		$	5,523	8.4	%


Occupancy		71.5	%		69.2	%			3.3	%
ADR	$	103.93		$	100.05		$	3.88	3.9	%
RevPar	$	74.34		$	69.20		$	5.14	7.4	%

Revenues for the third quarter of 2007 increased $5.5 million or 8.4% as room revenues increased 7.4%, food & beverage revenues increased 11.4%, and other revenues rose 14.8%. The growth in room revenue was driven by a 3.9% increase in average daily rate and a 3.3% increase in occupancy. Transient revenue increased 7.9%, group revenue increased 7.5% and contract revenue decreased 0.9% for the quarter. A la carte food & beverage revenue increased 4.2% (0.8% on a per occupied room basis) and banquet food revenues increased 17.7%. Other revenues increased 14.8% as telephone revenue declined 20.0%, but was more than offset by an 18.2% increase in all other operating revenues, including parking and new programs offered at our beachfront and resort hotels.

The third quarter of 2007 was adversely affected by displacement. Displacement refers to lost revenues and profits due to rooms being out of service as a result of renovation. Revenue is considered “displaced” only when a hotel has sold all available rooms and denies additional reservations due to rooms out of service. The Company feels this method is conservative, as it does not include estimated “soft” displacement costs associated with a renovation. During a renovation, there is significant disruption of normal business operations. In many cases, renovations result in the relocation of front desk operations, restaurant and bar services, and meeting rooms. In addition, the construction activity itself can be disruptive to our guests. As a result, guests may depart earlier than planned due to the disruption caused by the renovation work, local customers or frequent guests may choose an alternative hotel during the renovation, and local groups may not solicit the hotel to house their groups during renovations. These “soft” displacement costs are difficult to quantify and are excluded from our displacement calculation. Total revenue displacement during the third quarter of 2007 for three hotels under renovation was $0.8 million. The former Holiday Inn Select DFW Airport hotel was recently converted to a Wyndham hotel and is undergoing an extensive renovation. As a result of this renovation, third quarter 2007 revenues declined $0.7 million, or 39.2%, compared to the same period one year ago. There was no revenue displacement in the third quarter of 2006.

Below is a chart that shows our occupancy, ADR, RevPAR and RevPAR Index (market share) for our continuing operations hotels for the three months ended September 30, 2007 and 2006. We have presented this information in eight different subsets to illustrate the impact of the hotel closed due to fire, the hotel that benefited from Hurricane Katrina, renovations underway and completed, and branding.


Hotel	Room			Three Months Ended September 30,
Count	Count			2007			2006			Increase (decrease)
43		7,923	Continuing Operations less one hotel closed in 2006 due to fire
			Occupancy		71.5	%		69.2	%				3.3	%
			ADR	$	103.93		$	100.05		$	3.88		3.9	%
			RevPAR	$	74.34		$	69.20		$	5.14		7.4	%
			RevPAR Index		99.2	%		97.8	%				1.4	%

42		7,679	Continuing Operations less one hotel closed in 2006 due to fire and Radisson New Orleans Airport hotel
			Occupancy		71.6	%		69.5	%				3.0	%
			ADR	$	104.51		$	100.12		$	4.39		4.4	%
			RevPAR	$	74.85		$	69.58		$	5.27		7.6	%
			RevPAR Index		99.2	%		97.9	%				1.3	%

40		7,243	Continuing Operations less one hotel closed in 2006 due to fire and hotels under renovation in the third quarters of 2006 and/or 2007
			Occupancy		73.6	%		69.2	%				6.4	%
			ADR	$	104.57		$	101.93		$	2.64		2.6	%
			RevPAR	$	76.96		$	70.56		$	6.40		9.1	%
			RevPAR Index		99.9	%		96.9	%				3.1	%

10		2,259	Hotels completing major renovations in 2005 and 2006
			Occupancy		75.5	%		67.0	%				12.7	%
			ADR	$	108.86		$	104.83		$	4.03		3.8	%
			RevPAR	$	82.21		$	70.19		$	12.02		17.1	%
			RevPAR Index		102.5	%		96.1	%				6.7	%

12		1,398	Marriott Hotels
			Occupancy		74.9	%		74.6	%				0.4	%
			ADR	$	113.27		$	108.27		$	5.00		4.6	%
			RevPAR	$	84.83		$	80.74		$	4.09		5.1	%
			RevPAR Index		111.3	%		112.2	%				(0.8	)%

4		777	Hilton Hotels
			Occupancy		75.4	%		69.0	%				9.3	%
			ADR	$	106.25		$	104.40		$	1.85		1.8	%
			RevPAR	$	80.12		$	72.08		$	8.04		11.2	%
			RevPAR Index		96.9	%		89.4	%				8.4	%

23		4,958	IHG Hotels
			Occupancy		72.5	%		68.4	%				6.0	%
			ADR	$	103.88		$	100.57		$	3.31		3.3	%
			RevPAR	$	75.34		$	68.78		$	6.56		9.5	%
			RevPAR Index		97.3	%		94.9	%				2.5	%

4		790	Other Brands and Independent Hotels
			Occupancy		55.5	%		64.6	%				(14.1	)%
			ADR	$	78.96		$	75.16		$	3.80		(5.1	)%
			RevPAR	$	43.84		$	48.53		$	(4.69	)	(9.7	)%
			RevPAR Index		84.4	%		98.3	%				(14.1	)%

Direct operating expenses — Continuing Operations


											% of total revenues
	Three Months Ended September 30,										Three Months Ended September 30,
	2007			2006			Increase (decrease)				2007			2006
	(unaudited in thousands)
Direct operating expenses:
Rooms	$	14,157		$	13,297		$	860	6.5	%		19.9	%		20.3	%
Food and beverage		10,651			9,772			879	9.0	%		15.0	%		14.9	%
Other		1,683			1,523			160	10.5	%		2.4	%		2.3	%

Total direct operating expenses	$	26,491		$	24,592		$	1,899	7.7	%		37.3	%		37.6	%


Direct operating margin (by revenue source):
Rooms	$	40,030		$	37,148		$	2,882	7.8	%
Food and beverage		3,730			3,140			590	18.8	%
Other		734			582			152	26.1	%

Total direct operating margin	$	44,494		$	40,870		$	3,624	8.9	%


Direct operating margin % (by revenue source):
Rooms		73.9	%		73.6	%
Food and beverage		25.9	%		24.3	%
Other		30.4	%		27.6	%

Total direct operating margin		62.7	%		62.4	%

We use certain “non-GAAP financial measures,” which are measures of our historical financial performance that are not calculated and presented in accordance with GAAP, within the meaning of applicable SEC rules. For instance, we use the term direct operating margin to mean total revenues less total direct operating expenses as presented in the condensed consolidated statement of operations. We assess profitability by measuring changes in our direct operating margin and direct operating margin percentage, which is direct operating margin as a percentage of the applicable revenue source. These measures assist management in distinguishing whether increases or decreases in revenues and/or expenses are due to growth or decline of operations or from other factors. We believe that direct operating margin, when combined with the presentation of GAAP operating profit, revenues and expenses, provides useful information to management.

Total direct operating expenses increased $1.9 million, or 7.7%, but decreased as a percentage of total revenues from 37.6% in 2006 to 37.3% in 2007. Direct operating margin grew $3.6 million or 8.9%. Direct operating margin as a percentage of total revenues improved 30 basis points from 62.4% in 2006 to 62.7% in 2007.

Rooms expenses increased $0.9 million, or 6.5%. On a cost per occupied room (POR) basis, rooms expenses increased 3.1%, from $25.97 in 2006 to $26.77 in 2007. Direct operating margin for rooms improved 30 basis points from 73.6% in 2006 to 73.9% in 2007. The increase in rooms expenses were driven primarily by the following:

	•		Fee-based expenses including reservations, travel agent and credit card commissions increased $0.3 million, or 13.3%, driven largely by revenue growth.

	•		Payroll costs increased $0.3 million, or 3.9%.

Food and beverage expenses increased $0.9 million, or 9.0%. Direct operating margin for food and beverage grew $0.6 million or 18.8%. Food and beverage profit margin rose 160 basis points, largely driven by labor management initiatives.

Other direct operating expenses increased $0.2 million, or 10.5%. Other direct operating margin grew $0.2 million.

Other operating expenses and operating income — Continuing Operations


											% of total revenues
	Three Months Ended September 30,										Three Months Ended September 30,
	2007		2006			Increase (decrease)					2007			2006
	(unaudited in thousands)
Other operating expenses:
Other hotel operating costs
General and administrative	$	4,256	$	3,855		$	401		10.4	%		6.0	%		5.9	%
Advertising and promotion		3,789		3,079			710		23.1	%		5.3	%		4.7	%
Franchise fees		5,178		4,768			410		8.6	%		7.3	%		7.3	%
Repairs and maintenance		3,352		3,324			28		0.8	%		4.7	%		5.1	%
Utilities		4,115		4,042			73		1.8	%		5.8	%		6.2	%
Other expenses		234		10			224		n/m			0.3	%		0.0	%

Other hotel operating costs		20,924		19,078		$	1,846		9.7	%		29.5	%		29.1	%

Property and other taxes, insurance, and leases		4,734		5,862			(1,128	)	(19.2	%)		6.7	%		9.0	%
Corporate and other		5,585		5,592			(7	)	(0.1	%)		7.9	%		8.5	%
Casualty gains, net		—		(3,085	)		3,085		100.0	%		0.0	%		(4.7	%)
Restructuring		1,258		—			1,258		n/m			1.8	%		0.0	%
Depreciation and amortization		8,086		7,886			200		2.5	%		11.4	%		12.0	%
Impairment of long-lived assets		535		323			212		65.6	%		0.8	%		0.5	%

Total other operating expenses	$	41,122	$	35,656		$	5,466		15.3	%		57.9	%		54.5	%



Total operating expenses	$	67,613	$	60,248		$	7,365		12.2	%		95.2	%		92.0	%



Operating income	$	3,372	$	5,214		$	(1,842	)	(35.3	%)		4.8	%		8.0	%

Operating income decreased $1.8 million, or 35.3% in the third quarter of 2007. In the third quarter of 2006, we recorded casualty gains of $3.1 million related to the settlement of property damage claims at two of our hotels. Similar gains were not recorded in the third quarter of 2007. In addition, we recorded $1.3 million of costs associated with the restructuring of our corporate and regional staff, as well as staff reductions at certain hotels. These factors more than offset the positive operating results of our hotels.

Other hotel operating costs increased $1.8 million, or 9.7%, and increased 40 basis points as a percentage of total revenues. The increase in other hotel operating costs was a result of the following factors:

	•		Hotel general and administrative costs increased $0.4 million, or 10.4%, primarily as a result of higher payroll and travel expenses. The increase in payroll costs of $0.4 million was due in large part to fewer vacant positions.

	•		Advertising and promotion costs increased $0.7 million, or 23.1%, due largely to higher sales staffing levels, higher sales bonuses driven by revenue growth, and promotion expenses.

	•		Franchise fees increased $0.4 million, or 8.6%, driven in large part by higher room revenues. As a percentage of total revenues, franchise fees remained constant. As a percentage of room revenues, franchise fees increased 10 basis points from 9.5% to 9.6%.

	•		Repairs and maintenance expenses remained relatively constant. As a percentage of revenues, repairs and maintenance expenses decreased 40 basis points from 5.1% to 4.7%.

	•		Utilities increased 1.8%, primarily because of higher electricity rates. As a percentage of total revenues, utilities decreased 40 basis points.

	•		Other expenses increased $0.2 million due primarily to costs associated with the conversion of one of our hotels to another brand.

Property and other taxes, insurance and leases decreased $1.1 million, or 19.2%. Property and other taxes decreased $0.5 million, primarily because of credits recorded in the third quarter related to the successful appeal of property tax increases at certain locations. Overall, we expect property taxes to increase because of higher assessed values driven by the completion of several major renovation projects in 2005 and 2006. Insurance costs decreased $0.5 million. The annual renewal cycle for our property insurance policies occurred near the end of the second quarter and we were successful in negotiating lower insurance rates.

Corporate and other costs remained constant. In January 2007, we announced a review of strategic alternatives to enhance shareholder value. During the third quarter of 2007, we incurred $0.7 million in costs related to this effort. In the fourth quarter of 2007, we expect corporate costs to decrease compared with the same period last year as a result of our restructuring initiative, excluding costs related to our review of strategic alternatives.

Depreciation and amortization increased $0.2 million, or 2.5%, due to the completion of several renovation projects in 2006 as well as purchases of furniture, fixtures and equipment during the first nine months of 2007. As a percentage of total revenues, depreciation and amortization declined 60 basis points.

Non-operating income (expenses) — Continuing Operations


	Three Months Ended September 30,
	2007			2006			Increase (decrease)
	(unaudited in thousands)
Non-operating income (expenses):
Business interruption proceeds	$	299		$	2,706		$	(2,407	)	(89.0	%)
Interest income and other		1,330			786			544		69.2	%
Interest expense		(6,642	)		(6,482	)		160		2.5	%

The $2.4 million decrease in business interruption proceeds was a result of the settlement of insurance claims in 2006 associated with our two hotels in Florida that were closed in 2005 because of hurricane damage. Business interruption proceeds of $0.3 million in the third quarter of 2007 relate to our hotel in Marietta, Georgia which remains closed following a fire in January 2006. Interest expense increased $0.2 million due to the refinancing that occurred in April 2007. We entered into a $130 million loan agreement with Goldman Sachs Commercial Mortgage Capital, L.P., defeased the entire $67.7 million balance of the Merrill Lynch Fixed Rate #2 Loan, and paid off the $55.8 million Merrill Lynch Floating Rate Loan. The refinancing decreased our overall interest expense, but resulted in higher interest expense for continuing operations and lower interest expense for discontinued operations based on the hotels that were encumbered by the debt facilities.

The analysis below compares the results of operations for the nine months ended September 30, 2007 and September 30, 2006.

Revenues — Continuing Operations


	Nine Months Ended September 30,
	2007			2006			Increase (decrease)
	(unaudited in thousands)
Revenues:
Rooms	$	160,646		$	152,102		$	8,544	5.6	%
Food and beverage		45,004			40,658			4,346	10.7	%
Other		6,931			6,208			723	11.6	%

Total revenues	$	212,581		$	198,968		$	13,613	6.8	%


Occupancy		69.7	%		69.0	%			1.0	%
ADR	$	106.61		$	102.08		$	4.53	4.4	%
RevPar	$	74.27		$	70.43		$	3.84	5.5	%

Revenues for the first nine months of 2007 increased $13.6 million or 6.8%. Room revenues grew $8.5 million, food & beverage revenues increased $4.3 million, and other revenues increased $0.7 million. Higher room revenues were driven by a 4.4% improvement in average daily rate and a 1.0% increase in occupancy. Transient revenue grew 5.0%, group revenue rose 5.4% and contract revenue increased 12.1% for the nine months ended September 30, 2007. A la carte food & beverage revenues increased 5.8% (5.0% on a per occupied room basis) and banquet food revenues grew 13.8%. Other revenues increased 11.6% as telephone revenue declined 20.1%, but was more than offset by a 15.4% increase in all other operating revenues, including parking and new programs offered at our beachfront and resort hotels.

The first nine months of 2007 were adversely affected by displacement. Displacement refers to lost revenues and profits due to rooms being out of service as a result of renovation. Revenue is considered “displaced” only when a hotel has sold all available rooms and denies additional reservations due to rooms out of service. The Company feels this method is conservative, as it does not include estimated other or “soft” displacement associated with a renovation; for example, guests who depart earlier than planned due to the disruption caused by the renovation work, local customers or frequent guests who may choose an alternative hotel during the renovation, or local groups that may not solicit the hotel to house their groups during renovations. Total revenue displacement during the first nine months of 2007 for four hotels under renovation was $1.1 million. The former Holiday Inn Select DFW Airport hotel was recently converted to a Wyndham hotel and is undergoing an extensive renovation.


Hotel	Room			Nine Months Ended September 30,
Count	Count			2007			2006			Increase (decrease)
43		7,923	Continuing Operations less one hotel closed in 2006 due to fire
			Occupancy		69.7	%		69.0	%				1.0	%
			ADR	$	106.61		$	102.17		$	4.44		4.3	%
			RevPAR	$	74.27		$	70.48		$	3.79		5.4	%
			RevPAR Index		99.8	%		98.4	%				1.4	%

42		7,679	Continuing Operations less one hotel closed in 2006 due to fire and Radisson New Orleans Airport hotel
			Occupancy		69.7	%		68.9	%				1.2	%
			ADR	$	107.04		$	101.42		$	5.61		5.5	%
			RevPAR	$	74.63		$	69.91		$	4.72		6.8	%
			RevPAR Index		100.1	%		98.1	%				2.0	%

38		6,790	Continuing Operations less one hotel closed in 2006 due to fire and hotels under renovation in the third quarters of 2006 and/or 2007
			Occupancy		71.0	%		68.5	%				3.6	%
			ADR	$	105.53		$	103.01		$	2.52		2.4	%
			RevPAR	$	74.98		$	70.56		$	4.42		6.3	%
			RevPAR Index		100.7	%		98.1	%				2.7	%

10		2,259	Hotels completing major renovations in 2005 and 2006
			Occupancy		72.7	%		66.5	%				9.3	%
			ADR	$	112.06		$	111.54		$	0.52		0.5	%
			RevPAR	$	81.47		$	74.13		$	7.34		9.9	%
			RevPAR Index		98.9	%		93.6	%				5.7	%

12		1,398	Marriott Hotels
			Occupancy		72.3	%		74.4	%				(2.8	)%
			ADR	$	114.12		$	105.62		$	8.50		8.0	%
			RevPAR	$	82.52		$	78.54		$	3.98		5.1	%
			RevPAR Index		112.2	%		112.2	%				0.0	%

4		777	Hilton Hotels
			Occupancy		69.1	%		66.3	%				4.2	%
			ADR	$	108.02		$	104.33		$	3.69		3.5	%
			RevPAR	$	74.66		$	69.14		$	5.52		8.0	%
			RevPAR Index		95.2	%		90.6	%				5.1	%

23		4,958	IHG Hotels
			Occupancy		70.5	%		67.7	%				4.1	%
			ADR	$	106.60		$	102.57		$	4.03		3.9	%
			RevPAR	$	75.10		$	69.42		$	5.68		8.2	%
			RevPAR Index		98.4	%		95.0	%				3.6	%

4		790	Other Brands and Independent Hotels
			Occupancy		60.5	%		70.3	%				(13.9	)%
			ADR	$	89.29		$	91.28		($	1.99	)	(2.2	)%
			RevPAR	$	54.06		$	64.13		($	10.07	)	(15.7	)%
			RevPAR Index		88.0	%		102.5	%				(14.1	)%

Direct operating expenses — Continuing Operations


											% of total revenues
	Nine Months Ended September 30,										Nine Months Ended September 30,
	2007			2006			Increase (decrease)				2007			2006
	(unaudited in thousands)
Direct operating expenses:
Rooms	$	40,592		$	38,810		$	1,782	4.6	%		19.1	%		19.5	%
Food and beverage		31,656			29,260			2,396	8.2	%		14.9	%		14.7	%
Other		4,837			4,705			132	2.8	%		2.3	%		2.4	%

Total direct operating expenses	$	77,085		$	72,775		$	4,310	5.9	%		36.3	%		36.6	%


Direct operating margin (by revenue source):
Rooms	$	120,054		$	113,292		$	6,762	6.0	%
Food and beverage		13,348			11,398			1,950	17.1	%
Other		2,094			1,503			591	39.3	%

Total direct operating margin	$	135,496		$	126,193		$	9,303	7.4	%


Direct operating margin % (by revenue source):
Rooms		74.7	%		74.5	%
Food and beverage		29.7	%		28.0	%
Other		30.2	%		24.2	%

Total direct operating margin		63.7	%		63.4	%

During the nine months ended September 30, 2007, total direct operating expenses increased $4.3 million, or 5.9%, but decreased as a percentage of total revenues from 36.6% in 2006 to 36.3% in 2007. Direct operating margin rose $9.3 million, or 7.4%. Direct operating margin as a percentage of total revenues expanded 30 basis points from 63.4% in 2006 to 63.7% in 2007.

Rooms expenses increased $1.8 million, or 4.6%. On a cost per occupied room (POR) basis, rooms expenses increased 3.8%, from $25.58 in 2006 to $26.56 in 2007. Direct operating margin for rooms rose 20 basis points from 74.5% in 2006 to 74.7% in 2007. The increase in rooms expenses was caused by the following:

	•		Higher fee-based expenses, including reservations, travel agent and credit card commissions, driven by higher revenues.

	•		Higher payroll costs, up 1.4% on a POR basis.

	•		Increased costs in other operating areas including room promotion, cable television, credit card and other commissions, and guest satisfaction.

Food and beverage expenses increased $2.4 million, or 8.2%. Direct operating margin for food and beverage increased $2.0 million or 17.1%. Food and beverage profit margin expanded 170 basis points, driven in part by labor management initiatives.

Other direct operating expenses increased $0.1 million, while direct operating margin grew $0.6 million.

Other operating expenses and operating income — Continuing Operations


												% of total revenues
	Nine Months Ended September 30,											Nine Months Ended September 30,
	2007			2006			Increase (decrease)					2007			2006
	(unaudited in thousands)
Other operating expenses:
Other hotel operating costs General and administrative	$	13,111		$	11,518		$	1,593		13.8	%		6.2	%		5.8	%
Advertising and promotion		11,328			9,473			1,855		19.6	%		5.3	%		4.8	%
Franchise fees		15,191			14,173			1,018		7.2	%		7.1	%		7.1	%
Repairs and maintenance		9,888			9,946			(58	)	(0.6	%)		4.7	%		5.0	%
Utilities		11,444			11,101			343		3.1	%		5.4	%		5.6	%
Other expenses		453			184			269		146.2	%		0.2	%		0.1	%

Other hotel operating costs		61,415			56,395		$	5,020		8.9	%		28.9	%		28.3	%

Property and other taxes, insurance, and leases		15,557			14,980			577		3.9	%		7.3	%		7.5	%
Corporate and other		17,197			15,801			1,396		8.8	%		8.1	%		7.9	%
Casualty gains, net		(1,867	)		(2,888	)		1,021		35.4	%		(0.9	%)		(1.5	%)
Restructuring		1,258			—			1,258		n/m			0.6	%		0.0	%
Depreciation and amortization		23,848			22,948			900		3.9	%		11.2	%		11.5	%
Impairment of long-lived assets		1,022			533			489		91.7	%		0.5	%		0.3	%

Total other operating expenses	$	118,430		$	107,769		$	10,661		9.9	%		55.7	%		54.2	%



Total operating expenses	$	195,515		$	180,544		$	14,971		8.3	%		92.0	%		90.7	%



Operating income	$	17,066		$	18,424		$	(1,358	)	(7.4	%)		8.0	%		9.3	%

Operating income decreased $1.4 million, or 7.4% during the first nine months of 2007. $1.3 million of the decrease was related to costs associated with the restructuring of our corporate and regional staff, as well as staff reductions at certain hotels.

Other hotel operating costs increased $5.0 million, or 8.9%, an increase of 60 basis points as a percentage of total revenues. The increase in other hotel operating costs was a result of the following factors:

	•		Hotel general and administrative costs increased $1.6 million, or 13.8%, driven largely by higher payroll, legal, professional fees, moving costs, training and travel costs.

	•		Advertising and promotion costs increased $1.9 million, or 19.6%, due primarily to increased sales staffing and travel expense.

	•		Franchise fees increased $1.0 million, or 7.2%, driven largely by higher room revenues. As a percentage of room revenues, franchise fees increased 20 basis points from 9.3% to 9.5%.

	•		Repairs and maintenance expenses decreased $58,000, or 0.6%, resulting from improved preventive maintenance programs and execution of our capital expenditures plan. Repairs and maintenance expenses declined 30 basis points as a percentage of revenues.

	•		Utilities increased $0.3 million, or 3.1% (2.3% on a cost POR basis), primarily as a result of higher electricity rates. As a percentage of total revenues, utilities decreased 20 basis points.

	•		Other expenses increased $0.3 million due primarily to costs associated with the conversion of one of our hotels to another brand.

Property and other taxes, insurance and leases increased $0.6 million, or 3.9%, but decreased 20 basis points as a percentage of total revenue. The increase was largely attributable to higher property insurance costs. The annual renewal cycle for our property insurance policies occurred near the end of the second quarter and we negotiated lower insurance rates, the effects of which were experienced beginning in June 2007.

Corporate and other costs increased $1.4 million, due largely to the following:

•

In January 2007, we announced a review of strategic alternatives to enhance shareholder value. During the first nine months of 2007, we incurred $1.3 million in related costs.

	•		Costs associated with our corporate operations team increased $0.6 million. In November 2006, we announced a major strategic initiative to reconfigure our hotel portfolio and dispose of our non-core hotels. In conjunction with this initiative, we reorganized our operations team to focus on the different needs of our core and non-core (held for sale) hotels.

	•		$0.3 million was related to the amortization of non-vested stock awards granted to our Board of Directors in February 2007. Two members of the Board did not stand for reelection at the April 2007 annual meeting of stockholders and the Board elected to accelerate the vesting of the awards for those individuals as of April 24, 2007. In addition, one Board member resigned during August 2007 and the Board elected to accelerate the vesting of the award as of August 8, 2007. The stock awarded to the remaining members of our Board of Directors is being amortized over a three-year vesting period at an annualized rate of $0.1 million.

Casualty gains of $1.9 million in the first nine months of 2007 related to the settlement of a property damage claim at our Radisson New Orleans Airport hotel, which was damaged by Hurricane Katrina.

Depreciation and amortization increased $0.9 million, or 3.9%, due to the completion of several renovation projects in 2006 as well as purchases of furniture, fixtures and equipment during the first nine months of 2007. As a percentage of total revenues, depreciation and amortization declined 30 basis points.

Non-operating income (expenses) — Continuing Operations


	Nine Months Ended September 30,
	2007			2006			Increase (decrease)
	(unaudited in thousands)
Non-operating income (expenses):
Business interruption proceeds	$	571		$	3,401		$	(2,830	)	(83.2	%)
Interest income and other		3,077			1,943			1,134		58.4	%
Interest expense		(19,607	)		(19,051	)		556		2.9	%
Loss on debt extinguishment		(3,411	)		—			3,411		n/m

The decrease in business interruption proceeds was a result of the settlement of insurance claims in 2006 associated with our two hotels in Florida that were closed in 2005 because of hurricane damage. Business interruption proceeds of $0.6 million in 2007 relate to our hotel in Marietta, Georgia which remains closed following a fire in January 2006. Interest income and other increased $1.1 million, driven by higher balances in our interest-bearing cash and escrow accounts and higher interest rates. Interest expense increased $0.6 million due to the refinancing that occurred in April 2007. We entered into a $130 million loan agreement with Goldman Sachs Commercial Mortgage Capital, L.P., defeased the entire $67.7 million balance of the Merrill Lynch Fixed Rate #2 Loan, and paid off the $55.8 million Merrill Lynch Floating Rate Loan. The refinancing decreased our overall interest expense, but resulted in higher interest expense for continuing operations and lower interest expense for discontinued operations based on the hotels that were encumbered by the debt facilities. The $3.4 million loss on debt extinguishment was a result of the refinancing.

Results of Operations — Discontinued Operations

During the nine months ended September 30, 2007, 21 hotels were sold for an aggregate sales price of approximately $79.0 million, of which $2.0 million was used to pay down debt. The remaining proceeds, after paying selling costs, were used for general corporate purposes.

Impairment was recorded on assets held for sale in the nine months ended September 30, 2007 and 2006. 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.

The impairment of long-lived assets held for sale of $2.5 million recorded during the nine months ended September 30, 2007 included the following:

	•		$1.3 million on the Holiday Inn Clarksburg, WV to reflect the estimated selling price;

	•		$0.6 million on the Holiday Inn Jamestown, NY to reflect the estimated selling price;

	•		$0.4 million on the Vermont Maple Inn Colchester, VT to reflect the current estimated selling price;

	•		$0.1 million on the University Plaza Bloomington, IN to record the final disposition of the hotel; and

	•		$0.1 million related to various other held-for-sale properties primarily to write-off the remaining net book value of disposed fixed assets.

The impairment of long-lived assets held for sale of $2.0 million recorded in the three months ended September 30, 2006 included the following:

	•		$1.0 million on the Ramada Plaza Macon, GA hotel, which was classified as held for sale during the third quarter, to reduce the carrying value to estimated selling price less cost to sell; and

	•		$1.0 million on the Holiday Inn Sheffield, AL hotel to reflect the reduced estimated selling price.

The impairment of long-lived assets held for sale of $10.0 million recorded in the nine months ended September 30, 2006 included the following (amounts are individually rounded):

	•		$3.9 million on the Holiday Inn Manhattan, KS hotel to record the loss on disposal of fixed assets;

	•		$2.2 million on the Holiday Inn Lawrence, KS hotel to record the loss on disposal of fixed assets;

	•		$1.4 million on the Holiday Inn Sheffield, AL hotel to reflect the estimated selling costs of the sale as this hotel was identified for sale during the first quarter of 2006 and the reduced estimated selling price in the third quarter;

	•		$0.3 million on the Holiday Inn McKnight, PA hotel to reflect the lowered estimated selling price and to reflect the write-off of capital improvements spent on this hotel for franchisor compliance that did not add incremental value or revenue generating capacity to the property;

	•		$0.2 million on the Holiday Inn Valdosta, GA hotel to reflect the estimated selling costs of the sale as this hotel was identified for sale during the first quarter of 2006;

	•		$0.1 million on the Azalea Inn Valdosta, GA hotel to reflect the estimated selling costs of the sale as this hotel was identified for sale during the first quarter of 2006;

	•		$0.7 million on the University Plaza Bloomington, IN hotel, which was classified as held for sale during the second quarter, to reduce the carrying value to estimated selling price less costs to sell; and

	•		$1.0 million on the Ramada Plaza Macon, GA hotel, which was classified as held for sale during the third quarter, to reduce the carrying value to estimated selling price less cost to sell.

During the nine months ended September 30, 2007, the Company finalized the casualty claim for the one hotel that was sold in December 2006 which was damaged by Hurricane Katrina. As a result, the Company recorded a net casualty gain of $2.7 million in discontinued operations.

During the nine months ended September 30, 2007, the Company recorded a net gain on asset disposition of $1.9 million, which included a $0.8 million gain on the sale of the Holiday Inn Hamburg, NY in the first quarter, a $1.7 million gain on the sale of the Holiday Inn Fort Wayne, IN in the third quarter, and a $0.1 million gain on the sale of the Holiday Inn Fairmont, WV in the third quarter. These gains were partially offset by a $0.6 million loss recorded in the second quarter related to the sale of the Quality Inn Metairie, LA, which was sold in December 2006, because it is unlikely that the Company will recover the remaining net receivable balance.

During the nine months ended September 30, 2007, the Company recorded a $1.3 million loss on debt extinguishment related to the refinancing that occurred in April 2007 and the partial defeasance of debt in July 2007.

Income Taxes

For the year ended December 31, 2006, we had taxable income of $3.3 million. Because we had net operating losses available for federal income tax purposes and preference item deductions related to the sale of properties, no federal income tax or alternative minimum taxes were due for the year ended December 31, 2006. A net loss was reported for federal income tax purposes for the year ended December 31, 2005 and no federal income taxes were paid. At December 31, 2006, net operating loss carryforwards of $331.8 million were available for federal income tax purposes of which $178.4 million were available for use. The net operating losses will expire in years 2019 through 2025, including the utilization of tax net operating loss carryforward of $3.3 million for the year ended December 31, 2006. The 2002 reorganization under Chapter 11 and 2004 secondary stock offering resulted in “ownership changes,” as defined in Section 382 of the Internal Revenue Code. As a result of the most recent Section 382 ownership change, our ability to utilize net operating loss carryforwards generated prior to June 24, 2004 is subject to an annual limitation of $8.3 million. Net operating loss carryforwards generated during the 2004 calendar year after June 24, 2004 as well as those generated during the 2005 calendar year, are generally not subject to Section 382 limitations to the extent the losses generated are not recognized built in losses. At the June 24, 2004 ownership change date the company had a Net Unrealized Built in Loss “NUBIL” of $150 million. As of December 31, 2006 $87.7 million of the NUBIL has been recognized.

The amount of losses subject to Section 382 limitations is $149.7 million; losses not subject to 382 limitations are $28.7 million.

In 2007, we may be subject to Federal income tax under the alternative minimum tax system. The current year’s taxable income, if applicable, would be sheltered by net operating loss carryforwards.

Furthermore, at December 31, 2006, a valuation allowance of $120.9 million fully offset our net deferred tax asset. Approximately $97 million of this balance was attributable to pre-emergence deferred tax assets and may be credited to additional paid-in capital in future periods. At September 30, 2007, the valuation allowance decreased to $71 million. This balance is primarily attributable to pre-emergence deferred tax assets and may be credited to additional paid-in capital in future periods. The release of the valuation allowance relates to net operating losses that will expire unused due to Section 382 limitations. At September 30, 2007, net operating loss carryforwards of $208.5 million were reported for federal income tax purposes, which will expire in years 2019 through 2027 and reflect only those losses available for use.

We were required to adopt the provisions of FIN 48 with respect to all of our tax positions as of January 1, 2007. While FIN 48 was effective on January 1, 2007, the new standards apply to all open tax years. The only major tax jurisdiction in which we file income taxes is Federal. The tax years which are open for examination are calendar years ended 1992, 1998, 1999, 2000, 2001 and 2003, due to losses generated that may be utilized in current or future filings. Additionally, the statutes of limitation for calendar years ended 2004, 2005 and 2006 remain open. We have no significant unrecognized tax benefits; therefore, the adoption of FIN 48 had no impact on the Company’s financial statements. Additionally, no increases in unrecognized tax benefits are expected in the next twelve months. Interest and penalties on unrecognized tax benefits will be classified as income tax expense if recorded in a future period.

Additional Financial Information Regarding Quarterly Results of Our Continuing Operations

The following table presents certain quarterly data for our continuing operations for the eight quarters ended September 30, 2007. The data were derived from our unaudited condensed consolidated financial statements for the periods indicated. Our unaudited condensed consolidated financial statements were prepared on substantially the same basis as our audited consolidated financial statements and include all adjustments, consisting primarily of normal recurring adjustments we consider to be necessary to present fairly this information when read in conjunction with our consolidated financial statements. The results of operations for certain quarters may vary from the amounts previously reported on our Forms 10-Q filed for prior quarters due to timing of our identification of assets held for sale during the course of the previous eight quarters. The allocation of results of operations between our continuing operations and discontinued operations, at the time of the quarterly filings, was based on the assets held for sale, if any, as of the dates of those filings. This table represents the comparative quarterly operating results for the 44 hotels classified as held for use at September 30, 2007:


	2007									2006												2005
	Third			Second			First			Fourth			Third			Second			First			Fourth
	Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter			Quarter
	(Unaudited in thousands)
Revenues:
Rooms		54,187		$	56,216		$	50,243		$	45,617		$	50,445		$	53,788		$	47,869		$	40,957
Food and beverage		14,381			16,779			13,844			15,134			12,912			15,636			12,110			11,973
Other		2,417			2,453			2,061			2,066			2,105			2,154			1,949			1,849

		70,985			75,448			66,148			62,817			65,462			71,578			61,928			54,779

Direct operating expenses:
Rooms		14,157			13,756			12,679			12,462			13,297			13,310			12,203			11,253
Food and beverage		10,651			11,021			9,984			10,363			9,772			10,469			9,019			8,444
Other		1,683			1,642			1,512			1,456			1,523			1,657			1,525			1,484

		26,491			26,419			24,175			24,281			24,592			25,436			22,747			21,181

		44,494			49,029			41,973			38,536			40,870			46,142			39,181			33,598
Other operating expenses:
Other hotel operating costs		20,924			20,478			20,013			18,304			19,078			18,755			18,562			17,265
Property and other taxes, insurance and leases		4,734			5,212			5,611			5,813			5,862			4,717			4,401			3,937
Corporate and other		5,585			5,930			5,682			4,959			5,592			5,292			4,917			4,314
Casualty (gain) losses, net		—			—			(1,867	)		—			(3,085	)		31			166			(28,754	)
Restructuring		1,258
Depreciation and amortization		8,086			7,960			7,802			7,770			7,886			7,704			7,358			7,002
Impairment of long-lived assets		535			222			265			225			323			16			194			1,018

Other operating expenses		41,122			39,802			37,506			37,071			35,656			36,515			35,598			4,782

		3,372			9,227			4,467			1,465			5,214			9,627			3,583			28,816
Other income (expenses):
Business interruption insurance proceeds		299			272			—			530			2,706			695			—			1,772
Interest income and other		1,330			822			925			664			786			848			309			271
Other interest expense		(6,642	)		(6,767	)		(6,198	)		(6,297	)		(6,482	)		(6,227	)		(6,342	)		(5,485	)
Loss on debt extinguishment		—			(3,411	)		—			—			—			—			—			—

(Loss) income before income taxes and minority interests		(1,641	)		143			(806	)		(3,638	)		2,224			4,943			(2,450	)		25,374
Minority interests (net of taxes, nil)		—			(56	)		(365	)		335			100			(136	)		(4	)		(8,486	)

(Loss) income before income taxes — continuing operations		(1,641	)		87			(1,171	)		(3,303	)		2,324			4,807			(2,454	)		16,888
Benefit (provision) for income taxes — continuing operations		744			(19	)		686			(9,082	)		(1,039	)		(2,245	)		725			(8,383	)

(Loss) income from continuing operations		(897	)		68			(485	)		(12,385	)		1,285			2,562			(1,729	)		8,505

Discontinued operations:
Income (loss) from discontinued operations before income taxes		1,300			(565	)		2,182			(12,765	)		(1,917	)		1,853			4,812			(1,014	)
(Provision) benefit for income taxes		(356	)		234			(1,854	)		4,437			794			(414	)		(1,709	)		313

Income (loss) from discontinued operations		944			(331	)		328			(8,328	)		(1,123	)		1,439			3,103			(701	)

Net income (loss) attributable to common stock	$	47		$	(263	)	$	(157	)	$	(20,713	)	$	162		$	4,001		$	1,374		$	7,804

Hotel data by market segment and region

Hotel data by market segment

The following two tables present data on occupancy, ADR and RevPAR for hotels in our portfolio for the three and nine months ended September 30, 2007 and 2006, by market. The tables exclude the Holiday Inn Marietta, GA since it was closed on January 15, 2006 due to fire damage and the (former) Holiday Inn St. Paul, MN, which is closed.

The categories in the following tables are based on the Smith Travel Research Chain Scales and are defined as:

	•		Upper Upscale: Hilton and Marriott;

	•		Upscale: Courtyard by Marriott, Crowne Plaza, Radisson, Residence Inn by Marriott, Springhill Suites by Marriott and Wyndham;

	•		Midscale with Food & Beverage: Doubletree Club, Holiday Inn, Holiday Inn Select; and

	•		Midscale without Food & Beverage: Fairfield Inn by Marriott and Holiday Inn Express.

Combined Continuing and Discontinued Operations — 46 hotels (excludes 2 hotels)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Upper Upscale
Number of properties		4			4			4			4
Number of rooms		825			825			825			825
Occupancy		78.6	%		71.8	%		73.4	%		69.2	%
Average daily rate	$	117.97		$	113.98		$	119.68		$	113.49
RevPAR	$	92.72		$	81.86		$	87.85		$	78.52

Upscale
Number of properties		21			20			21			20
Number of rooms		3,859			3,577			3,859			3,577
Occupancy		67.5	%		65.9	%		68.8	%		69.6	%
Average daily rate	$	102.60		$	101.46		$	109.12		$	106.74
RevPAR	$	69.23		$	66.90		$	75.13		$	74.25

Midscale with Food & Beverage
Number of properties		17			18			17			18
Number of rooms		3,193			3,475			3,193			3,475
Occupancy		75.4	%		72.9	%		69.4	%		68.5	%
Average daily rate	$	102.60		$	96.40		$	100.36		$	94.90
RevPAR	$	77.37		$	70.26		$	69.62		$	64.97

Midscale without Food & Beverage
Number of properties		2			2			2			2
Number of rooms		245			245			245			245
Occupancy		55.2	%		54.9	%		58.5	%		59.6	%
Average daily rate	$	75.20		$	77.69		$	90.83		$	87.43
RevPAR	$	41.50		$	42.67		$	53.10		$	52.07

Independent Hotels
Number of properties		2			2			2			2
Number of rooms		222			222			222			222
Occupancy		55.8	%		63.7	%		46.9	%		54.5	%
Average daily rate	$	62.76		$	60.14		$	57.35		$	60.16
RevPAR	$	35.03		$	38.31		$	26.90		$	32.81

All Hotels
Number of properties		46			46			46			46
Number of rooms		8,344			8,344			8,344			8,344
Occupancy		70.9	%		69.0	%		68.6	%		68.4	%
Average daily rate	$	102.82		$	98.95		$	105.45		$	100.98
RevPAR	$	72.94		$	68.30		$	72.35		$	69.04

Continuing Operations — 43 hotels (excludes 1 hotel and held for sale hotels)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Upper Upscale
Number of properties		4			4			4			4
Number of rooms		825			825			825			825
Occupancy		78.6	%		71.8	%		73.4	%		69.2	%
Average daily rate	$	117.97		$	113.98		$	119.68		$	113.49
RevPAR	$	92.72		$	81.86		$	87.85		$	78.52

Upscale
Number of properties		21			20			21			20
Number of rooms		3,861			3,579			3,861			3,579
Occupancy		67.5	%		65.9	%		68.8	%		69.6	%
Average daily rate	$	102.60		$	101.46		$	109.12		$	106.74
RevPAR	$	69.23		$	66.90		$	75.13		$	74.25

Midscale with Food & Beverage
Number of properties		15			16			15			16
Number of rooms		2,889			3,171			2,889			3,171
Occupancy		76.8	%		73.4	%		71.0	%		69.3	%
Average daily rate	$	104.74		$	97.90		$	102.39		$	96.51
RevPAR	$	80.41		$	71.83		$	72.72		$	66.91

Midscale without Food & Beverage
Number of properties		2			2			2			2
Number of rooms		245			245			245			245
Occupancy		55.2	%		54.9	%		58.5	%		59.6	%
Average daily rate	$	75.20		$	77.69		$	90.83		$	87.43
RevPAR	$	41.50		$	42.67		$	53.10		$	52.07

Independent Hotels
Number of properties		1			1			1			1
Number of rooms		105			105			105			105
Occupancy		58.9	%		64.6	%		58.9	%		59.2	%
Average daily rate	$	46.34		$	47.09		$	47.38		$	50.86
RevPAR	$	27.28		$	30.42		$	27.89		$	30.13

All Hotels
Number of properties		43			43			43			43
Number of rooms		7,925			7,925			7,925			7,925
Occupancy		71.5	%		69.2	%		69.7	%		69.0	%
Average daily rate	$	103.93		$	100.05		$	106.61		$	102.17
RevPAR	$	74.34		$	69.20		$	74.27		$	70.48

Combined Continuing and Discontinued Operations — 46 hotels (excludes 2 hotels)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Northeast Region
Number of properties		20			20			20			20
Number of rooms		3,884			3,884			3,884			3,884
Occupancy		73.1	%		71.0	%		67.3	%		67.6	%
Average daily rate	$	104.32		$	100.67		$	103.79		$	100.52
RevPAR	$	76.29		$	71.44		$	69.83		$	67.97

Southeast Region
Number of properties		11			11			11			11
Number of rooms		1,729			1,729			1,729			1,729
Occupancy		73.0	%		68.6	%		71.7	%		68.8	%
Average daily rate	$	108.84		$	108.81		$	112.32		$	113.24
RevPAR	$	79.43		$	74.66		$	80.50		$	77.94

Midwest Region
Number of properties		8			8			8			8
Number of rooms		1,415			1,415			1,415			1,415
Occupancy		63.1	%		68.6	%		63.2	%		69.4	%
Average daily rate	$	97.72		$	87.79		$	99.11		$	88.58
RevPAR	$	61.69		$	60.22		$	62.64		$	61.50

West Region
Number of properties		7			7			7			7
Number of rooms		1,316			1,316			1,316			1,316
Occupancy		70.2	%		64.3	%		74.3	%		68.9	%
Average daily rate	$	94.95		$	92.33		$	106.98		$	99.85
RevPAR	$	66.62		$	59.37		$	79.48		$	68.75

All Hotels
Number of properties		46			46			46			46
Number of rooms		8,344			8,344			8,344			8,344
Occupancy		70.9	%		69.0	%		68.6	%		68.4	%
Average daily rate	$	102.82		$	98.95		$	105.45		$	100.98
RevPAR	$	72.94		$	68.30		$	72.35		$	69.04

Continuing Operations — 43 hotels (excludes 1 hotel and held for sale hotels)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Northeast Region
Number of properties		17			17			17			17
Number of rooms		3,463			3,463			3,463			3,463
Occupancy		74.7	%		71.5	%		69.5	%		68.9	%
Average daily rate	$	106.89		$	103.28		$	106.32		$	103.19
RevPAR	$	79.90		$	73.87		$	73.93		$	71.11

Southeast Region
Number of properties		11			11			11			11
Number of rooms		1,731			1,731			1,731			1,731
Occupancy		73.0	%		68.6	%		71.7	%		68.8	%
Average daily rate	$	108.84		$	108.81		$	112.32		$	113.24
RevPAR	$	79.43		$	74.66		$	80.50		$	77.94

Midwest Region
Number of properties		8			8			8			8
Number of rooms		1,415			1,415			1,415			1,415
Occupancy		63.1	%		68.6	%		63.2	%		69.4	%
Average daily rate	$	97.72		$	87.79		$	99.11		$	88.58
RevPAR	$	61.69		$	60.22		$	62.64		$	61.50

West Region
Number of properties		7			7			7			7
Number of rooms		1,316			1,316			1,316			1,316
Occupancy		70.2	%		64.3	%		74.3	%		68.9	%
Average daily rate	$	94.95		$	92.33		$	106.98		$	99.85
RevPAR	$	66.62		$	59.37		$	79.48		$	68.75

All Hotels
Number of properties		43			43			43			43
Number of rooms		7,925			7,925			7,925			7,925
Occupancy		71.5	%		69.2	%		69.7	%		69.0	%
Average daily rate	$	103.93		$	100.05		$	106.61		$	102.17
RevPAR	$	74.34		$	69.20		$	74.27		$	70.48

Liquidity and Capital Resources

Working Capital

We use our cash flows primarily for operating expenses, debt service, capital expenditures and share repurchases. Currently, our principal sources of liquidity consist of cash flows from operations, proceeds from the sale of assets, and existing cash balances.

Cash flows from operations may be adversely affected by factors such as a reduction in demand for lodging or displacement from large scale renovations being performed at our hotels. To the extent that significant amounts of our accounts receivable are due from airline companies, a further downturn in the airline industry also could materially and adversely affect the collectibility of our accounts receivable. At September 30, 2007, airline receivables represented approximately 15% of our consolidated gross accounts receivable. A further downturn in the airline industry could also affect our revenues by decreasing the aggregate levels of demand for travel. We expect that the sale of certain assets will provide additional cash to pay down outstanding debt, fund a portion of our capital expenditures and provide additional working capital. At September 30, 2007, we had four hotels classified as held for sale.

Our ability to make scheduled debt service payments and fund operations and capital expenditures depends on our future performance and financial results, the successful implementation of our business strategy, and to a certain extent, the general condition of the lodging industry and the general economic, political, financial, competitive, legislative and regulatory environment. In addition, our ability to refinance our indebtedness depends to a certain extent on these factors as well. Many factors affecting our future performance and financial results, including the severity and duration of macro-economic downturns, are beyond our control. See Item 1A, “Risk Factors” of our Form 10-K for the year ended December 31, 2006.

We intend to continue to use our cash flow to fund operations, scheduled debt service payments, capital expenditures, and share repurchases. At this point in time, we do not intend to pay dividends on our common stock.

In accordance with GAAP, all assets held for sale, including assets that would normally be classified as long-term assets in the normal course of business, were reported as “assets held for sale” in current assets. Similarly, all liabilities related to assets held for sale were reported as “liabilities related to assets held for sale” in current liabilities, including debt that would otherwise be classified as long-term liabilities in the ordinary course of business.

At September 30, 2007, we had working capital (current assets less current liabilities) of $75.0 million compared to $32.7 million at December 31, 2006. The increase in working capital was primarily the result of the April 2007 refinancing, which resulted in a reclassification of debt from current to long-term. The refinancing reallocated our debt portfolio, resulting in a lower portion of our debt being secured by held for sale assets. The debt balances secured by our held for sale assets are included in current liabilities (Liabilities related to assets held for sale) in the consolidated balance sheets, while the debt balances secured by our held for use assets are included in long-term liabilities (excluding the current portion).

We believe that the combination of our current cash, cash flows from operations, capital expenditure escrows and asset sales will be sufficient to meet our working capital needs for the next 24 months.

Our ability to meet our long-term cash needs is dependent on the market conditions of the lodging industry, improved operating results, the successful implementation of our portfolio improvement strategy, and our ability to obtain third party sources of capital on favorable terms when and as needed. In the short term, we continue to diligently monitor our costs. Our future financial needs and sources of working capital are, however, subject to uncertainty, and we can provide no assurance that we will have sufficient liquidity to be able to meet our operating expenses, debt service requirements, including scheduled maturities, and planned capital expenditures. We could lose the right to operate certain hotels under nationally recognized brand names, and furthermore, the termination of one or more franchise agreements could trigger defaults and acceleration under one or more loan agreements as well as obligations to pay liquidated damages under the franchise agreements if we are unable to find a suitable replacement franchisor.

Cash Flow

Discontinued operations were not segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the balance sheets and related statements of operations.

Operating activities

Operating activities generated cash of $26.8 million in the first nine months of 2007, which is comparable to $27.5 million for the same period in 2006.

Investing activities

Investing activities generated cash of $28.0 million in the first nine months of 2007. We generated $72.3 million in net proceeds from the sale of 21 hotels in accordance with our planned disposition program. We expended $31.0 million for capital improvements and $16.4 million to acquire the minority partner’s interest in two of our hotels. In addition, we withdrew $3.9 million in capital expenditure reserves, with our lenders collected $0.7 million in insurance receipts related to casualty claims, and deposited $1.5 million in restricted cash.

Investing activities used $1.2 million of cash in the first nine months of 2006. Capital improvements in the first nine months of 2006 were $31.3 million. We received $9.4 million in proceeds from sale of assets in 2006. Additionally, in the first nine months of 2006, we withdrew $15.6 million and $1.4 million from capital expenditure reserves and restricted cash, respectively, and received $3.7 million in insurance receipts related to casualty claims.

Financing activities

Financing activities used cash of $34.1 million in the first nine months of 2007. We received $130.0 million in gross proceeds associated with the April 2007 refinancing and used the net proceeds to payoff existing debt. We made principal payments of $152.5 million, including the payoff of four loans which had reach their scheduled maturity dates and the payoff of existing debt in conjunction with the refinancing. We also purchased $6.4 million of treasury stock, paid defeasance costs of $3.8 million, and paid deferred financing costs of $1.7 million.

Financing activities provided cash of $6.9 million in the first nine months of 2006. We refinanced the mortgages on five hotels, with gross proceeds of $45.0 million. The proceeds from these loans were used to paydown existing debt and for general corporate purposes. As a result of these refinancings, four hotels were unencumbered. We paid deferred financing costs of $0.9 million associated with these refinancings. Additionally, we made principal payments of $35.9 million, including the previously mentioned paydown, and purchased $2.2 million of treasury stock.

Debt and Contractual Obligations

See discussion of our Debt and Contractual Obligations in our Form 10-K for the year ended December 31, 2006 and Notes 8 and 9 to our Condensed Consolidated Financial Statements in this report.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

Market Risk

We are exposed to interest rate risks on our variable rate debt. At September 30, 2007 and December 31, 2006, we had outstanding variable rate debt (including debt secured by assets held for sale) of approximately $170.2 million and $98.6 million, respectively. Without regard to additional borrowings under those instruments or scheduled amortization, the annualized effect of a twenty-five basis point increase in LIBOR would be a reduction in income before income taxes of approximately $0.3 million.

We have interest rate caps in place for all of our variable rate debt loan agreements in an effort to manage our exposure to fluctuations in interest rates. The combined fair value of the interest rate caps totaled $5,000 and is recorded on the balance sheet in other assets. Adjustments to the carrying values of the interest rate caps are recorded in interest expense. As a result of having interest rate caps, we believe that our interest rate risk at September 30, 2007 and December 31, 2006 was not material. The impact on annual results of operations of a hypothetical one-point interest rate reduction on the interest rate caps as of September 30, 2007 would be a reduction in income before income taxes of approximately $3,000.

The nature of our fixed rate obligations does not expose us to fluctuations in interest payments. The impact on the fair value of our fixed rate obligations of a hypothetical one-point interest rate increase on the outstanding fixed-rate debt at September 30, 2007 would be approximately $3.7 million.

Forward-looking Statements

We make forward looking statements in this report and other reports we file with the SEC. In addition, management may make oral forward-looking statements in discussions with analysts, the media, investors and others. These statements include statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believes,” “anticipates,” “expects,” “intends,” “plans,”

“estimates,” “projects,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current views with respect to future events and the impact of these events on our business, financial condition, results of operations and prospects. Our business is exposed to many risks, difficulties and uncertainties, including the following:

	•		The effects of regional, national and international economic conditions;

	•		Competitive conditions in the lodging industry and increases in room supply;

	•		The effects of actual and threatened terrorist attacks and international conflicts in the Middle East and elsewhere, and their impact on domestic and international travel;

	•		The effectiveness of changes in management and our ability to retain qualified individuals to serve in senior management positions;

	•		Requirements of franchise agreements, including the right of franchisors to immediately terminate their respective agreements if we breach certain provisions;

	•		Our ability to complete planned hotel dispositions;

	•		Seasonality of the hotel business;

	•		The effects of unpredictable weather events such as hurricanes;

	•		The financial condition of the airline industry and its impact on air travel;

	•		The effect that Internet reservation channels may have on the rates that we are able to charge for hotel rooms;

	•		Increases in the cost of debt and our continued compliance with the terms of our loan agreements;

	•		The effect of the majority of our assets being encumbered on our borrowings and future growth;

	•		Our ability to meet the continuing listing requirements of the American Stock Exchange;

	•		The effect of self-insured claims in excess of our reserves, or our ability to obtain adequate property and liability insurance to protect against losses, or to obtain insurance at reasonable rates;

	•		Potential litigation and/or governmental inquiries and investigations;

	•		Laws and regulations applicable to our business, including federal, state or local hotel, resort, restaurant or land use regulations, employment, labor or disability laws and regulations;

	•		A downturn in the economy due to several factors, including but not limited to, high energy costs, natural gas and gasoline prices; and

	•		The risks identified in our Form 10-K for the year ended December 31, 2006 under “Risks Related to Our Business” and “Risks Related to Our Common Stock”.

Any of these risks and uncertainties could cause actual results to differ materially from historical results or those anticipated. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained and caution you not to place undue reliance on such statements. We undertake no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances or their impact on our business, financial condition, results of operations and prospects.

Inflation

We have not determined the precise impact of inflation. However, we believe that the rate of inflation has not had a material effect on our revenues or expenses in recent years. It is difficult to predict whether inflation will have a material effect on our results in the long-term.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk.”

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Based on an evaluation of our disclosure controls and procedures carried out as of September 30, 2007, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. There were no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the foregoing evaluation that occurred during the quarter ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

EXHIBIT INDEX


Exhibit
Number		Description

2.1		Disclosure Statement for Joint Plan of Reorganization of Lodgian, Inc., et al (other than the CCA Debtors), Together with the Official Committee of Unsecured Creditors under Chapter 11 of the Bankruptcy Code, dated September 26, 2002) (Incorporated by reference to Exhibit 10.6 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

2.2		First Amended Joint Plan of Reorganization of Lodgian, Inc., et al (Other than CCA Debtors), Together with the Official Committee of Unsecured Creditors under Chapter 11 of the Bankruptcy Code, dated September 26, 2002) (Incorporated by reference to Exhibit 10.7 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

2.3		Order Confirming First Amended Joint Plan of Reorganization of Lodgian, Inc., et al issued on November 5, 2002 by the United States Bankruptcy Curt for the Southern District of New York (Incorporated by reference to Exhibit 10.8 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

2.4		Disclosure Statement for Joint Plan of Reorganization of Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C. Together with the Official Committee of Unsecured Creditors Under Chapter 11 of the Bankruptcy Code (Incorporated by reference to Exhibit 10.13.1 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

2.5		Joint Plan of Reorganization of Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C. Together with the Official Committee of Unsecured Creditors under Chapter 11 of the Bankruptcy Code (Incorporated by reference to Exhibit 10.13.2 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

2.6		Order Confirming Joint Plan of Reorganization of Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C. Together with the Official Committee of Unsecured Creditors under Chapter 11 of the Bankruptcy Code (Incorporated by reference to Exhibit 10.13.3 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

2.7		Post Confirmation Order and Notice for Joint Plan of Reorganization of Impac Hotels III, L.L.C. Together with the Official Committee of Unsecured Creditors under Chapter 11 of the Bankruptcy Code (Incorporated by reference to Exhibit 10.13.4 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

3.1		Certificate of Correction to the Second Amended and Restated Certificate of Incorporation and Second Amended and Restated Certificate of Incorporation of Lodgian, Inc. (Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-113410), filed on June 4, 2004).

3.2		Amended and Restated Bylaws of Lodgian, Inc. (Incorporated by reference to Exhibit 3.4 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

4.1		Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-113410), filed on June 6, 2004).

4.2		Class A Warrant Agreement, dated as of November 25, 2002, between Lodgian, Inc. and Wachovia Bank, N.A. (Incorporated by reference to Exhibit 10.9 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

4.3		Class B Warrant Agreement, dated as of November 25, 2002, between Lodgian, Inc. and Wachovia Bank, N.A. (Incorporated by reference to Exhibit 10.10 to the Company’s Annual Report for the period ended December 31, 2003 (File No. 1-14537), filed on March 9, 2004).

10.1		Amended and Restated Executive Employment Agreement between Lodgian, Inc. and Daniel E. Ellis, dated March 29, 2007 (Incorporated be reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 1-12537), filed with the Commission on March 30, 2007).

10.2		Participation Form for Daniel E. Ellis under the Lodgian, Inc. Executive Incentive Plan (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 1-14537), filed with the Commission on February 6, 2006).


Exhibit
Number		Description

10.3		Amended and Restated Executive Employment Agreement between Edward J. Rohling and Lodgian, Inc., dated April 23, 2007 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 1-14537). Filed with the Commission on April 26, 2007).

10.4		Restricted Stock Award Agreement between Edward J. Rohling and Lodgian, Inc., dated July 15, 2005 (Incorporated by reference to Exhibit 10.36 to the Company’s Quarterly Report for the period ended June 30, 2005 (File No. 1-14537), filed with the Commission on August 9, 2005).

10.5		Amended and Restated Executive Employment Agreement between Lodgian, Inc. and James A. MacLennan dated March 29, 2007 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No.1-14537), filed with the Commission on March 30, 2007).

10.6		Restricted Stock Award Agreement between Lodgian, Inc. and James A. MacLennan dated March 1, 2006 (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 1-14537), filed with the Commission on March 3, 2006).

10.7		Participation Form for James A. MacLennan under the Lodgian, Inc. Executive Incentive Plan (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 1-14537), filed with the Commission on March 3, 2006).

10.8		Amended and Restated 2002 Stock Incentive Plan of Lodgian, Inc. (as amended through April 24, 2007 (Incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report for the period ended June 30, 2007 (File No. 1-14537), filed with the Commission on August 8, 2007).

10.9		Form of Stock Option Award Agreement (Incorporated by reference to Exhibit 10.37 to the Company’s Annual Report for the period ended December 31, 2004 (File No. 1-14537), filed with the Commission on March 23, 2005).

10.10		Lodgian, Inc. 401(k) Plan, As Amended and Restated Effective as of January 1, 2006 (Incorporated by reference to Exhibit 10.13 to the Company’s Quarterly Report for the period ended June 30, 2007 (File No. 1-14537), filed with the Commission on August 8, 2007).

10.11		Amended and Restated Executive Employment Agreement between Mark D. Linch and Lodgian, Inc. dated March 29, 2007 (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 1-14537), filed with the Commission on March 30, 2007).

10.12		Separation Agreement and General Release between Mark D. Linch and Lodgian, Inc. dated September 11, 2007. **

10.13		Executive Employment Agreement between Donna B. Cohen and Lodgian, Inc. dated March 29, 2007 (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 1-14537), filed with the Commission on March 30, 2007).

10.14		Lodgian, Inc. Executive Incentive Plan (Covering the calendar years 2006-2008). (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 1-14537), filed with the Commission on February 6, 2006).

10.15		Form of Restricted Stock Award Agreement for Employees (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A (File No. 1-14537), filed with the Commission on March 6, 2007).

10.16		Form of Restricted Stock Award Agreement for Non-Employee Directors (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A (File No. 1-14537), filed with the Commission on March 6, 2007).

31.1		Sarbanes-Oxley Section 302 Certification by the CEO.**

31.2		Sarbanes-Oxley Section 302 Certification by the CFO.**

32		Sarbanes-Oxley Section 906 Certification by the CEO and CFO.**


**		Filed herewith.


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited)		3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and September 30, 2006 (unaudited)		4
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2007 (unaudited)		5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and September 30, 2006 (unaudited)		6
Notes to Condensed Consolidated Financial Statements (unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		44
Item 4. Controls and Procedures		44

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		45
Item 6. Exhibits		45
Signatures		46
EX-10.12 SEPARATION AGREEMENT AND GENERAL RELEASE BETWEEN LODIGAN AND MARK D. LINCH
EX-31.1 SECTION 302 CERTIFICATION BY THE CEO
EX-31.2 SECTION 302 CERTIFICATION BY THE CFO
EX-32 SECTION 906 CERTIFICATIONS BY THE CEO AND CFO

	•		Northeast: Canada, Connecticut, Massachusetts, Maryland, New Hampshire, New York, Ohio, Pennsylvania, Vermont;

	•		Southeast: Florida, Georgia, Kentucky, Louisiana, North Carolina, South Carolina, Tennessee;

	•		Midwest: Arkansas, Indiana, Michigan, Oklahoma, Texas; and

	•		West: Arizona, California, Colorado, New Mexico.


	LODGIAN, INC.

	By:	/s/ EDWARD J. ROHLING Edward J. Rohling
		President and
Date: November 8, 2007		Chief Executive Officer

	By:	/s/ JAMES A. MACLENNAN James A. MacLennan
		Executive Vice President and
Date: November 8, 2007		Chief Financial Officer