<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                              ------------------

                                    FORM 10-K

 X      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
----    ACT OF 1934
        [FEE REQUIRED]
        FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

----    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
        EXCHANGE ACT OF 1934
        [NO FEE REQUIRED]
        FOR THE TRANSITION PERIOD FROM ____________ TO ____________

                        Commission File Number 34-0-22164

                            RFS HOTEL INVESTORS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            TENNESSEE                                   62-1534743
  (STATE OR OTHER INCORPORATION)         (I.R.S. EMPLOYER IDENTIFICATION NUMBER)

                       850 RIDGE LAKE BOULEVARD, SUITE 220
                            MEMPHIS, TENNESSEE 38120
                                 (901) 767-7005
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
                    INCLUDING ZIP CODE AND TELEPHONE NUMBER)

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

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock $0.01 par value
                                (Title of Class)

                             New York Stock Exchange
                                (Name of Market)
                               
                               -----------------

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

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $425,757,500 based on the last sale price in the
New York Stock Exchange for such stock on March 16, 1998.

The number of shares of the Registrant's Common Stock outstanding was 24,329,000
as of March 16, 1998.

                       Documents Incorporated by Reference
Portions of the RFS Hotel Investors, Inc. Proxy Statement with respect to the
Annual Meeting of Shareholders to be held on April 30, 1998 to be filed with the
Securities and Exchange Commission within 120 days following the end of the year
covered by the Form 10-K (the "Proxy Statement") are incorporated by reference
into Part I and Part III. The financial statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report to Shareholders' for the year ended December 31, 1997
are incorporated into Part II and Part IV.



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

<PAGE>   2

                                     PART I


         This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements containing the
words "believes," "anticipates," "expects" and words of similar import. Such
forward-looking statements relate to future events, the future financial
performance of the Company, and involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward looking statements. Readers should specifically consider the various
factors identified in this report which could cause actual results to differ.
The Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.


ITEM 1.  BUSINESS

(a)      General Development of Business

         RFS Hotel Investors, Inc. (the "Company") was incorporated in Tennessee
on June 1, 1993 and is a self-administered real estate investment trust 
("REIT").

         The Company has contributed substantially all of the net proceeds of
its public offerings to RFS Partnership, L.P. (the "Partnership") and is the
sole general partner of the Partnership. The Partnership began operations in
August 1993. At December 31, 1997, the Company owned an approximately 90.5%
interest in the Partnership.

(b)      Financial Information About Industry Segment

         The Company is in the business of acquiring equity interests in hotel
properties. See the Consolidated Financial Statements and notes thereto included
in Item 8 of this Annual Report on Form 10-K for certain financial information
required in Item 1.

(c)      Narrative Description of Business

         General. At December 31, 1997, the Company owned, through the
Partnership and other subsidiaries, 60 hotels (the "Hotels") containing 8,758
rooms located in 24 states. Reference herein to the "Partnership" includes these
subsidiaries, where the context indicates. In order to qualify as a REIT for
federal income tax purposes, neither the Company nor the Partnership can operate
hotels. As a result, the Partnership leases all of its hotel properties to third
parties (collectively, the "Lessees") pursuant to leases (the "Percentage
Leases") as described in Item 2 below. One Hotel is owned by a non-qualified
REIT subsidiary and is operated by a third party pursuant to a management
agreement.



                                       2
<PAGE>   3

         Strategies.  The Company seeks to increase funds from operations and 
enhance shareholder value through its strategies for internal growth and
acquisitions.

         Internal Growth Strategy. The Company's strategy for internal growth
includes participating in increased revenue at the Hotels through Percentage
Leases, limiting leverage, an extensive renovation program and affiliations with
national franchises.

         The Percentage Leases provide for annual rent equal to the greater of
(i) fixed base rent, or (ii) rent payments based on percentages of the Hotels'
revenues. Base rent is payable monthly. Percentage rent is payable quarterly.
The use of Percentage Leases allows the Company to participate in increased
revenue at the Hotels. See Item 2 for further information with respect to the
Percentage Leases.

         The Company recognizes the potential competitive advantage gained by
owning hotel properties with little or no debt. High leverage may impair the
ability of management to renovate, maintain and effectively manage properties.
The Board of Directors of the Company has adopted a policy limiting the amount
of indebtedness that the Company will incur to an amount not in excess of
approximately 40% of the Company's investment in hotel properties, at cost,
after giving effect to the Company's use of proceeds from any indebtedness and
accounting for all investments in hotel properties under the purchase method of
accounting. The Board of Directors may change the policy relating to the debt
limit at any time without shareholder approval.

         The Company budgeted $26.0 million for capital improvements in 1997 at
the 60 hotels owned at December 31, 1997. At December 31, 1997, the Partnership
had spent $16.1 million of the budgeted amounts. The Company will use cash
generated from operations and borrowings under its Line of Credit to fund the
remaining $9.9 million of budgeted 1997 expenditures. The Company intends to
substantially complete these improvements by the second quarter of 1998. The
Company has budgeted an additional $17.3 million to be spent on capital
improvements at 55 of the Hotels owned at December 31, 1997 during 1998. The
capital improvements are primarily designed to enhance revenues and the guests'
experience and include replacing such items as carpets and drapes, renovating
common areas and hotel exteriors.

         All but one of the Hotels are licensed to operate under nationally
franchised brands. The Company believes that franchised properties generally
have higher levels of occupancy and average daily rate ("ADR") than properties
which are unfranchised due to access to national reservation systems and
advertising and marketing programs provided by franchisors.

         Acquisition Strategy. The Company intends to acquire equity interests
in existing hotel properties, to develop hotels and to enter into contracts to
acquire properties from third parties after development.





                                       3
<PAGE>   4


         The Company considers investments in hotel properties which meet one or
more of the following criteria:

         -    Favorable market characteristics

         -    Long-term asset quality

         -    Prospects of increasing profitability

         -    National franchises

         -    Diversification-geographically, by brand and by segment

         -    Return on investment

         The Company's current investment and acquisition policies provide that
no more than 25% of the Company's total assets may be invested in any one
property at the time of investment. The Company's investment and acquisition
policies may be changed by the Board of Directors without shareholder approval.

         Property Management. The Lessees operate 55 Hotels. Four Hotels are
operated by third parties, (the "Operators"), pursuant to management agreements
with the Lessees, and one hotel is operated by a third party pursuant to a
management agreement with a non-qualified REIT subsidiary. The Operators are
paid a fee equal to 3% of gross revenue of the Hotels, plus reimbursement of
out-of-pocket expenses. The Lessees and the Operators are generally required to
perform all operational and management functions necessary to operate the
Hotels. Such functions include but are not limited to ordering supplies,
advertising and marketing, maid service, laundry and maintenance. The Lessees
and the Operators manage other hotel properties in addition to the Hotels and
are not required to devote all of their time and efforts to the Hotels.

         Competition. Substantially all of the Hotels are located in a developed
area that includes other hotel properties. The number of competitive hotel
properties in a particular area could have a material adverse effect on
occupancy and ADR of the Hotels or at hotel properties acquired in the future.
New, competing hotels may be opened in the Company's markets which could
materially and adversely affect hotel operations.

         Employees.  At December 31, 1997, the Company had a total of 24
employees.

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

         Business Issues. The Hotels are subject to all operating risks common
to the hotel industry. These risks include, among other things: competition from
other hotels; recent over-building in the hotel industry which has adversely
affected occupancy and room rates;




                                       4

<PAGE>   5

increases in operating costs due to inflation and other factors; significant
dependence on business and commercial travelers and tourism; increases in energy
costs and other expenses of travel; and adverse effects of general and local
economic conditions. These factors could adversely affect the Lessees' ability
to make lease payments and therefore the Company's ability to make distributions
to shareholders. Further, decreases in room revenues of the Hotels will result
in decreased revenues to the Partnership under the Percentage Leases.

         The Company must rely on the Lessees to generate sufficient cash flow
from the operation of the Hotels to enable the Lessees to meet the rent
obligations under the Percentage Leases. The rent obligations under the
Percentage Leases are unsecured and are not guaranteed. At December 31, 1997,
the Lessees were in compliance with the provisions of the Percentage Leases.

         The Company's investments are subject to varying degrees of risk
generally incident to the ownership of real property. The underlying value of
the Company's real estate investments and the Company's income and ability to
make distributions to its shareholders is dependent upon the ability of the
Lessees to operate the Hotels in a manner sufficient to maintain or increase
revenues and to generate sufficient income in excess of operating expenses to
make rent payments under the Percentage Leases. Income from the Hotels may be
adversely affected by adverse changes in national economic conditions, adverse
changes in local market conditions due to changes in general or local economic
conditions and neighborhood characteristics, competition from other hotel
properties, the impact of present or future environmental legislation and
compliance with environmental laws, the ongoing need for capital improvements,
particularly in older structures, changes in real estate tax rates and other
operating expenses, adverse changes in governmental rules and fiscal policies,
civil unrest, acts of God, including earthquakes and other natural disasters
(which may result in uninsured losses), acts of war, adverse changes in zoning
laws, and other factors which are beyond the control of the Company and the
Lessees.

         Environmental Issues. Under various federal, state and local laws and
regulations, an owner or operator of real estate may be liable for the costs of
removal or remediation of certain hazardous or toxic substances on such
property. Such laws often impose such liability without regard to whether the
owner knew of, or was responsible for, the presence of hazardous or toxic
substances. Furthermore, a person that arranges for the disposal or transports
for disposal or treatment a hazardous substance at another property may be
liable for the costs of removal or remediation of hazardous substances released
into the environment at the property. The costs of remediation or removal of
such substances may be substantial, and the presence of such substances, or the
failure to promptly remediate such substances, may adversely affect the owner's
ability to sell such real estate or to borrow using such real estate as
collateral. Thus, if such liability were to arise in connection with the
ownership and operation of the Hotels, the Company, the Partnership, the
Lessees, or the Operators, as the case may be, may be potentially liable for
such costs.

         Phase I Environmental Survey Assessments ("ESA's") were obtained on all
of the Hotels from independent environmental engineering firms at the time of
acquisition (and, for some Hotels, in connection with subsequent financing
transactions). The Phase I ESA's were intended 



                                       5

<PAGE>   6

to identify potential sources on contamination for which the Hotels may be
responsible and to assess the status of environmental regulatory compliance. No
assurance can be given that the Phase I ESA's identified all significant
environmental problems or that no additional environmental liabilities exist.
The Phase I ESA's included historical reviews of the Hotels, reviews of certain
public records, preliminary investigations of the sites and surrounding
properties, screening for the presence of asbestos, PCBs, wetlands and
underground storage tanks, and the preparation and issuance of a written report.
The Phase I ESA's did not include invasive procedures, such as soil or ground
water sampling and analysis.

         The Phase I ESA for the Hampton Inn - Airport in Indianapolis,
indicated that the Indianapolis Hotel disposes of approximately 10% of its solid
waste at a facility that is a state Superfund site. Such a site may be subject
to investigation and remediation under the federal and state Superfund laws, and
persons that sent hazardous substances to the site may be jointly and severally
liable for the costs of the that work. The Phase I ESA report states that solid
waste from the Indianapolis Hotel was disposed of into a domestic waste cell of
the facility. A state official informed the engineering firm conducting the
Phase I ESA that this domestic waste cell is segregated by a containment
structure and is adjacent to, but not part of, the Superfund site. The Phase I
audit did not indicate that the Indianapolis Hotel has arranged for the disposal
of any hazardous substances at this facility. If the Indianapolis Hotel in fact
arranged for such disposal, however, it could be found liable for at least a
part of any response costs.

         Each former owner of the Hotels has represented that it knows of no
hazardous substance or PCBs in, on, or under the hotels or the real property
upon which the Hotels are situated. With respect to the Hotels each such former
owner will remain liable for all claims and costs arising from a breach of such
representation. In addition, the seller of the Hotels will remain liable for all
costs and claims incurred by the Partnership arising as a result of (other than
as described above) items with respect to which the Phase I ESA reports
recommended corrective or remedial action, specifically removal by the former
owner of the Hotel in Franklin, Tennessee of debris dumped or buried in a corner
of the real property upon which such Hotel is situated and erection of a fence
around the area to prevent further dumping. The Company believes the former
owners of the Hotels have, and will have, sufficient assets to satisfy their
obligations to the Partnership which might reasonably be expected to arise under
the contracts pursuant to which such properties were acquired by the
Partnership. There can be no assurances, however, that such former owners will
be able to satisfy any of such obligations.

         Except as noted specifically above, the Phase I ESA reports have not
revealed any environmental liability or compliance concerns that the Company
believes would have a material adverse effect on the Company's business, assets
or results of operations, nor is the Company aware of an such liability or
compliance concerns. Nevertheless, it is possible that these reports do not
reveal all environmental liabilities or compliance concerns or that there are
material environmental liabilities or compliance concerns of which the Company
is unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the Hotels will not be affected
by the condition of the properties in the vicinity of the Hotels (such as the
presence of 



                                       6

<PAGE>   7

leaking underground storage tanks) or by third parties unrelated to the
Partnership or the Company.

         The Company believes that the Hotels are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances and other environmental matters. Except
as noted above with respect to the hotel in Indianapolis, Indiana, neither the
Company nor, to the knowledge of the Company, any of the former owners of the
Hotels has been notified by any governmental authority of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
other environmental substances in connection with any of its present or former
properties.

         Tax Status. The Company elected to be taxed as a REIT under Section 856
through 860 of the Internal Revenue Code, commencing with its taxable period
ended December 31, 1993. The Company generally will not be subject to federal
income tax to the extent it distributes at least 95% of its REIT taxable income
to its shareholders. If the Company fails to qualify as a REIT in any taxable
year, the Company will be subject to Federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
tax rates. The Company is subject to certain state and local taxes on its income
and property and to Federal income and excise taxes on its undistributed income.

         Executive Officers. Information with respect to Robert M. Solmson 
(age 50), Chairman of the Board, Chief Executive Officer and President of the
Company is incorporated by reference to the Company's Proxy Statement. See Item
10. J. William Lovelace (age 60) is Executive Vice President of the Company.
From 1991 to June 1994, he was an officer of RFS, Inc. and subsidiaries of RFS,
Inc. From 1984 to 1991, Mr. Lovelace served as President of Dominion Hospitality
Management, Inc., a hotel management company. Mr. Lovelace has been active in
the hotel/motel industry for over 30 years. Mr. Lovelace is a graduate of the
University of Missouri. Michael J. Pascal (age 39) is Secretary, Treasurer and
Chief Financial Officer of the Company. From 1991 to June 1994, he was Chief
Financial Officer of RFS, Inc. From 1990 to 1991, he was Controller and General
Counsel for Dominion Hospitality Management, Inc., a hotel management company.
From 1985 to 1990, he was General Counsel and Chief Financial Officer for The
McDowell Company. Mr. Pascal holds a B.S. and a J.D. degree from Memphis State
University. Mr. Lovelace is Mr. Pascal's father-in-law.





                                       7
<PAGE>   8



ITEM 2.  PROPERTIES

         The following table sets forth certain pro forma information for the
year ended December 31, 1997 with respect to the Hotels. For hotels acquired
during 1997, this information includes the actual operating results both prior
and subsequent to acquisition by the Partnership.

<TABLE>
<CAPTION>
                                                           FOR THE YEAR ENDED DECEMBER 31, 1997
                                                      ----------------------------------------------
                                                                                             AVERAGE     REVENUE PER
                                             DATE      NUMBER       ROOM                      DAILY       AVAILABLE
                                            OPENED    OF ROOMS     REVENUE    OCCUPANCY        RATE          ROOM
                                            ------    --------     -------    ---------      -------     -----------
                                                                        (in thousands)
<S>                                         <C>       <C>          <C>        <C>            <C>         <C>      
HAMPTON INN HOTELS:
     Denver, CO (Airport)                    1985       138        $  2,163      77.3%        $55.53      $42.95
     Detroit (Warren), MI                    1988       124           1,734      63.3%         60.50       38.31
     Ft. Lauderdale, FL                      1986       122           2,151      71.0%         68.01       48.30
     Hattiesburg, MS                         1988       154           2,231      73.1%         54.32       39.69
     Houston, TX (Hobby)                     1996       119           1,578      67.0%         54.28       36.34
     Indianapolis, IN                        1988       131           2,383      77.7%         64.15       49.83
     Lakewood (Denver), CO                   1987       150           2,779      76.6%         66.25       50.76
     Lansing, MI                             1985       109           1,503      66.4%         56.89       37.78
     Laredo, TX                              1995       119           2,043      80.7%         58.24       46.98
     Lincoln, NE                             1983       111           1,973      82.0%         59.41       48.70
     Memphis, TN                             1992       120           2,374      83.2%         65.15       54.21
     Minneapolis, MN (Airport)               1985       135           2,846      80.7%         71.61       57.75
     Minneapolis (Minnetonka), MN            1990       127           2,017      66.3%         65.64       43.51
     Oklahoma City, OK                       1986       134           2,409      77.8%         63.33       49.25
     Omaha, NE                               1985       129           2,155      75.5%         60.59       45.77
     Plano, TX                               1996       131           2,070      70.4%         61.46       43.29
     Tulsa, OK                               1986       148           2,049      65.4%         58.01       37.94
     Sedona, AZ (1)                          1997        56             494      49.4%         90.37       44.60
     Chandler, AZ (1)                        1997       101             941      57.3%         69.49       39.81

RESIDENCE INN HOTELS:
     Ann Arbor, MI                           1985       114           2,378      83.5%         91.69       76.53
     Charlotte, NC                           1984        80           2,224      84.0%         90.72       76.17
     Fishkill, NY                            1988       136           4,267      83.4%        103.03       85.97
     Fort Worth, TX                          1983       120           3,490      86.9%         91.75       79.69
     Kansas City, MO                         1987        96           2,477      74.5%         94.95       70.70
     Orlando, FL                             1984       176           5,079      85.9%         91.99       79.06
     Perimeter West (Atlanta), GA            1987       128           3,170      74.4%         91.18       67.86
     Providence, RI                          1989        96           3,117      91.5%         97.23       88.96
     Sacramento, CA                          1987       176           4,691      79.1%         92.30       73.02
     Torrance, CA                            1984       247           7,561      89.7%         93.52       83.86
     Tyler, TX                               1985       128           2,710      89.9%         64.51       58.00
     Wilmington, DE                          1989       120           3,605      92.0%         89.46       82.30
     Jacksonville, FL (1)                    1997       120             402      51.5%         85.73       44.13
</TABLE>






                                       8
<PAGE>   9
<TABLE>
<CAPTION>
                                                           FOR THE YEAR ENDED DECEMBER 31, 1997
                                                      ----------------------------------------------
                                                                                             AVERAGE     REVENUE PER
                                             DATE      NUMBER       ROOM                      DAILY       AVAILABLE
                                            OPENED    OF ROOMS     REVENUE    OCCUPANCY        RATE          ROOM
                                            ------    --------     -------    ---------      -------     -----------
                                                                        (in thousands)
<S>                                         <C>       <C>          <C>        <C>            <C>         <C>      
HOLIDAY INN HOTELS:
     Clayton, MO                             1965       255         $ 5,069      69.7%        $78.13      $54.46
     Columbia, SC                            1969       175           2,413      69.0%         54.76       37.77
     Crystal Lake (Chicago), IL              1988       196           4,761      76.9%         86.50       66.55
     Flint, MI                               1990       171           4,201      77.7%         86.84       67.30
     Lafayette, LA                           1983       242           4,131      78.1%         59.87       46.77
     Louisville, KY                          1970       169           2,249      71.9%         50.71       36.45

COMFORT INN HOTELS:
     Clemson, SC                             1989       122           1,556      66.9%         52.28       34.95
     Conyers, GA                             1989        83           1,087      62.5%         57.44       35.88
     Detroit (Farmington Hills), MI          1987       135           2,188      67.5%         65.80       44.41
     Fort Mill, SC (Charlotte, NC)           1987       153           2,362      72.3%         58.49       42.30
     Grand Rapids, MI                        1982       109           1,547      70.9%         54.85       38.87
     Marietta, GA                            1989       185           2,125      63.8%         49.32       31.46

HOLIDAY INN EXPRESS HOTELS:
     Austin, TX                              1992       125           2,088      71.3%         64.14       45.76
     Chicago (Arlington Heights), IL         1989       125           2,609      77.2%         74.11       57.19
     Chicago (Downers Grove), IL             1984       123           2,390      70.3%         75.72       53.24
     Franklin, TN                            1969       100           1,413      73.5%         52.65       38.71
     Milwaukee (Wauwatosa), WI               1984       122           1,981      77.4%         57.50       44.48
     Minneapolis, MN                         1987       142           2,861      82.4%         67.02       55.21

SHERATON AND SHERATON FOUR POINTS HOTELS:
     Bakersfield, CA                         1983       197           3,412      68.0%         69.79       47.45
     Birmingham, AL                          1984       202           4,471      69.1%         87.87       60.75
     Pleasanton, CA                          1985       214           5,367      73.5%         93.46       68.72
     Milpitas, CA                            1988       229           8,371      74.6%        134.26      100.15
     Sunnyvale, CA                           1980       174           6,192      83.4%        116.93       97.50

HAWTHORN SUITES HOTEL:
     Atlanta, GA                             1984       280           5,667      68.4%         81.03       55.45

DOUBLETREE HOTEL:
     Del Mar, CA                             1990       220           5,828      81.7%         88.94       72.69

EXECUTIVE INN HOTEL:
     Tupelo, MS                              1982       115           1,365      60.0%         54.22       32.51

BEVERLY HERITAGE HOTEL:
     Milpitas, CA                            1988       196           7,125      74.9%        132.95       99.59

COURTYARD BY MARRIOTT HOTEL:
     Flint, MI                               1996       102           1,864      65.0%         77.01       50.07
</TABLE>


                                       9

<PAGE>   10

(1)  Represents operations since the opening of hotel in June 1997 for the
     Hampton Inn in Sedona, AZ, in May 1997 for the Hampton Inn in Chandler, AZ,
     and in October 1997 for the Residence Inn in Jacksonville, FL.

         Recent Acquisitions, Sales and Pending Developments. A 78-suite
Residence Inn in West Palm Beach, FL was opened in February 1998. The
Partnership developed this hotel at a cost of $6.2 million. A 118 room Hampton
Inn in Jacksonville, FL was opened in March 1998. The Partnership developed this
hotel at a cost of $6.2 million. The Partnership is developing the following
hotels:

<TABLE>
<CAPTION>
                                                                           Estimated          Estimated
                                                          Number of       Development          Opening
   Franchise                  Location                  Rooms/Suites        Costs               Quarter
   ---------                  --------                  ------------      -----------         ----------
<S>                           <C>                       <C>               <C>                 <C>  
Homewood Suites               Chandler, AZ                  83            $6.6 million           2Q98
TownePlace Suites             Fort Worth, TX                95            $6.3 million           3Q98
Courtyard                     Crystal Lake, IL              95            $6.5 million           4Q98
TownePlace Suites             Miami, FL                     95            $6.5 million           4Q98
</TABLE>

The Partnership is constructing a 40 room addition to the Beverly Heritage Hotel
in Milpitas, CA. Construction costs are estimated at $3.0 million. Completion of
the addition is expected in the third quarter of 1998. Additionally, the
Partnership is constructing a 36-suite addition to the Residence Inn in
Charlotte, NC. Construction costs are estimated at $3.6 million. Completion of
the addition is expected in the third quarter of 1998.

         The Partnership sold the Executive Inn in Tupelo, MS in February 1998
for $4.6 million.

         Master Agreement. The Company and the Partnership have entered into a
master agreement, (the "Master Agreement"), with one of the Lessees, RFS, Inc.,
a wholly owned subsidiary of Promus Hotel Corporation. Under the Master
Agreement, the Company and the Partnership have granted to RFS, Inc., a right of
first offer and right of first refusal (the "Right of First Refusal") to lease
hotels acquired by the Partnership or the Company prior to February 27, 2006
(the "Term"), subject to certain exceptions described below.

         During the Term, the Partnership and the Company must deliver to RFS,
Inc. a written notice specifying the proposed Base Rent and Percentage Rent upon
which the Partnership would be willing to lease a proposed acquisition or
development hotel to RFS, Inc. In the event RFS, Inc. does not agree within 15
days to lease the particular hotel pursuant to the rent terms set forth in the
notice, the Partnership may seek an alternative lessee; provided, however, that
before executing a lease with such alternative lessee, the Partnership must send
a second notice to RFS, Inc. setting forth the final rent terms of the proposed
lease between the Partnership and such alternative lessee. RFS, Inc. will then
have 5 days to elect to lease the hotel from the Partnership upon the terms set
forth in the second notice. If RFS, Inc. does not make such election, the


                                       10

<PAGE>   11



Partnership may enter into a lease with the alternative lessee upon the terms
set forth in the second notice.

         The Partnership may terminate the Right of First Refusal at any time
following February 27, 2003, in the event the hotels leased by RFS, Inc.
throughout such seven-year period fail to meet certain financial performance
goals. The Partnership may also terminate the Right of First Refusal: (i) upon
the occurrence under the lease of an "Event of Default" by the Lessee; (ii) in
the event the Company's status as a real estate investment trust is terminated
and the leases are terminated by the Company, and the Company (a) redeems all
outstanding Series A Preferred Stock owned by the RFS, Inc. at a price per share
equal to the greater of (A) $19.00 or (B) the average sales prices for the
Company's Common Stock for the ten trading days prior to the closing date, (b)
the Partnership pays RFS, Inc. the fair market value of the remaining terms of
the leases and (c) if such termination occurs prior to February 27, 2006, the
Partnership pays RFS, Inc. an amount equal to $5,000,000 minus $41,667 for each
calendar month which has expired since February 27, 1996; or (iii) if RFS, Inc.
fails to maintain a minimum net worth of $15,000,000 during the term of any
lease or defaults under the terms of the Master Agreement.

         The Right of First Refusal will not apply to hotels acquired or
developed by the Partnership where the seller requires, after the Partnership's
reasonable efforts to obtain a price at which the lease or management of the
hotel could be bought out or to obtain a price for the hotel without the
seller's continued management, that the seller or an affiliate of the seller be
the lessee or the manager of the hotel following acquisition by the Partnership
("Excluded Hotels"). The aggregate purchase prices for the Excluded Hotels
cannot, in the aggregate, exceed 20% of the aggregate purchase prices for all
hotels acquired by the Partnership during the Term.

         The Right of First Refusal also will not apply to the acquisition by
the Partnership of any hotel (a "Subject Hotel") located in proximity to a hotel
(a "Competing Hotel") owned, leased, managed or franchised by RFS, Inc. or an
affiliate of RFS, Inc. such that the ownership, lease, management or franchise
of the Competing Hotel would violate the five-mile radius non-competition
provisions of the lease with respect to the Subject Hotel if a lease were
entered into between the Partnership and RFS, Inc. The foregoing exception to
the Right of First Refusal will not apply if the ownership, lease, management or
franchise of the Competing Hotel is pursuant to a lease or other agreement with
the Partnership. Even if the exception is applicable, the Partnership must
notify RFS, Inc. of its proposed acquisition of the Subject Hotel so that RFS,
Inc. has the opportunity to terminate its ownership, lease, management or
franchise of the Competing Hotel, or take such other action as is necessary, in
order to allow RFS, Inc. to enter into a percentage lease with respect to the
Subject Hotel without violating the non-competition restrictions.

         The Right of First Refusal is also inapplicable to any hotels acquired
by the Partnership from a real estate investment trust other than the Company in
connection with the acquisition by the Partnership of substantially all of the
hotels of such other real estate investment trust, whether by merger, purchase
of assets or otherwise.



                                       11

<PAGE>   12


         RFS, Inc. is required to maintain a $15,000,000 tangible net worth 
during the terms of the Leases.  The Master Agreement provides that there can be
no change in control of RFS, Inc. without prior consent of the Partnership.

         The Percentage Leases. All but one of the hotels owned by the 
Partnership are separately leased to the Lessees under a Percentage Lease.

         Effective February 27, 1996, each of the Percentage Leases between the
Partnership and RFS, Inc. was amended to provide the following among other
things: (i) the term of each Percentage Lease was increased to 15 years from the
date of inception; (ii) the non-compete provisions were amended to preclude the
Lessees or its Affiliates from owning, leasing, operating, managing or
franchising any hotel or motel within a five-mile radius of any hotel in which
the Partnership or an Affiliate of the Partnership has an interest, as compared
to a previous 20-mile radius restriction; (iii) events of default shall include,
among others, (a) the failure of the Lessees to pay quarterly percentage rent
when due and payable and continuing for a 10-day period after receipt of notice
from the Partnership, as compared to the previous 90-day period and (b)
occurrence of an event of default under the Master Agreement (iv) the Lessees
shall be required, not later than 60 days prior to commencement of each lease
year, to prepare and submit to the Partnership an operating budget and marketing
plan; (v) the termination of any Percentage Lease due to total condemnation will
not affect any other Percentage Leases then in effect between the Lessee and the
Partnership; (vi) any management fee payable to an Affiliate of the Lessees
shall be subordinate to the payment of rent to the Partnership under the leases;
(vii) future leases entered into between the Lessees and the Partnership will
not be subject to cross-default provisions in regard to the existing percentage
leases or other future leases; (viii) the Lessees will have an extended right
(120 days as compared to 90 days) to cure defaults under the franchise
agreements; (ix) the respective obligations of the parties relating to capital
expenditures and repairs and maintenance were clarified and amended, (x) the
Partnership will have 120 days to tender a substitute lease to the Lessee upon
sale of a hotel by the Partnership, as compared to 90 days previously, and, (xi)
percentage rent is payable within 35 days following the end of the first three
calendar quarters and on or before February 10 with respect to the fourth
calendar quarter.

         Percentage Lease Terms. Each Percentage Lease has an initial term of
fifteen years from the date of inception, and is subject to earlier termination
upon the occurrence of certain contingencies described in the Percentage Lease.

         Amounts Payable Under the Percentage Leases. During the term of each
Percentage Lease, the Lessee is obligated to pay (i) the greater of Base Rent or
Percentage Rent and (ii) certain other amounts, including interest accrued on
any late payments or charges (the "Additional Charges"). Base Rent accrues and
is required to be paid monthly; Percentage Rent is payable quarterly, on or
before the 35th day following the end of each of the first three calendar
quarters in each fiscal year and on or before February 10 of the next year, with
respect to the fourth calendar quarter of each fiscal year, and is calculated by
multiplying fixed percentages by room revenue and, with respect to the full
service Hotels, beverage revenue and food revenue. For the year ended December
31, 1997, room revenue for each of the Hotels exceeded the 



                                       12

<PAGE>   13

amount required to trigger the top tier of room revenue payable as Percentage
Rent. The following table summarizes the percentages of room revenues in excess
of certain levels payable as Percentage Rent under the Percentage Leases.

<TABLE>
<CAPTION>
PROPERTY TYPE                        FIRST TIER            MIDDLE TIER            TOP TIER
-------------                        ----------            -----------            --------
<S>                                 <C>                    <C>                   <C> 
Full Service (1).................   17% to 53.1%           30% to 70%            50% to 75%

Extended Stay....................   24% to 41%             45% to 50%            60% to 72%

Limited Service..................   20% to 47.2%              N/A                50% to 76.5%
</TABLE>

(1) Percentage Rent formula also includes 20% of beverage revenue and 5% of 
    food revenue.

         The specific rent terms for each Percentage Lease for each Hotel are
set forth in Exhibit 10.2(a) to this Form 10-K.

         Under the Percentage Leases for all of the hotels acquired since March
1994, beginning in 1995 and for each year thereafter, the Base Rent and
Percentage Rent thresholds for each year will be adjusted to reflect any
year-to-year changes in the consumer price index ("CPI") in the two preceding
years. Additionally, the Company anticipates the Percentage Leases for hotels
acquired in the future will have a similar provision.

         Other than real estate taxes, casualty insurance and maintenance of
underground utilities and structural elements, which are obligations of the
Partnership, the Percentage Leases require the Lessees to pay rent, personal
property taxes, all costs and expenses and all utility and other charges
incurred in the operation of the Hotels. The Percentage Leases also provide for
rent reductions and abatements in the event of a partial taking of any Hotel or
six months after occurrence of an event causing damage or destruction to any
Hotel.

         Maintenance and Modifications. Under the Percentage Leases, the
Partnership is required to maintain the underground utilities and the structural
elements of the improvements, including exterior walls (excluding plate glass)
and the roof of each Hotel. The Partnership is required to fund capital
improvements at the Hotels subject to (i) the Partnership's right to approve
capital budgets and (ii) the Partnership's right in its sole discretion to
refuse to make any capital expenditures required by a franchisor. Otherwise, the
Lessees are required, at their expense, to maintain the Hotels in good order and
repair, except for ordinary wear and tear, and to make non-structural, foreseen
and unforeseen, and ordinary and extraordinary, repairs which may be necessary
and appropriate to keep the Hotels in good order and repair.

         The Lessees, at their expense and with the Lessor's prior consent, may
make non-capital and capital additions, modifications or improvements to the
Hotels, provided that such action does not significantly alter the character or
purposes of the Hotels or significantly detract from the value or operating
efficiencies of the Hotels. All such alterations, replacements and improvements
are subject to all the terms and provisions of the Percentage Leases and will



                                       13

<PAGE>   14

become the property of the Partnership upon termination of the Percentage
Leases. The Partnership owns substantially all personal property (other than
inventory, linens, and other nondepreciable personal property) not affixed to or
deemed a part of, the real estate or improvements thereon comprising the Hotels,
except to the extent that ownership of such personal property would cause the
rents under the Percentage Leases not to qualify as "rents from real property"
for REIT income test purposes.

         Insurance and Property Taxes. The Partnership is responsible for paying
real estate taxes and casualty insurance premiums on the Hotels. The Lessees are
required to pay or reimburse the Partnership for all other insurance on the
Hotels, which must include extended coverage, comprehensive general public
liability, workers' compensation and other insurance appropriate and customary
for properties similar to the Hotels and name the Partnership as an additional
insured.

         Indemnification. Under each of the Percentage Leases, the Lessees have
agreed to indemnify, and are obligated to hold harmless, the Partnership and its
affiliates, including the Company, from and against all liabilities, costs and
expenses (including reasonable attorneys' fees and expenses) incurred by,
imposed upon or asserted against the Partnership or its affiliates, on account
of, among other things, (i) any accident or injury to person or property on or
about the Hotels; (ii) any misuse by the Lessees or any of its agents of the
leased property; (iii) any environmental liability resulting from conditions
caused or resulting from any action or negligence of the Lessees; (iv) taxes and
assessments in respect of the Hotels (other than real estate taxes and income
taxes of the Company or Partnership on income attributable to the Hotels); (v)
liability resulting from the sale or consumption of alcoholic beverages on or in
the real property or improvements thereon; or (vi) any breach of the Percentage
Leases by Lessees; provided, however, that such indemnification will not be
construed to require the Lessees to indemnify the Company and the Partnership
against the Company's or Partnership's own grossly negligent acts or omissions
or willful misconduct.

         Assignment and Subleasing. The Lessees are not permitted to sublet all
or any part of the Hotels or assign its interest under any of the Percentage
Leases, other than to an affiliate of the Lessees, without the prior written
consent of the Partnership.

         Damage to Hotels. In the event of damage to or destruction of any Hotel
covered by insurance, whether or not such damage or destruction renders the
Hotel unsuitable for the Lessees' use and occupancy, the Lessees are obligated
to the extent of any insurance proceeds made available to the Lessee and any
other sums advanced by the Partnership, to repair, rebuild, or restore the Hotel
on the terms set forth in the applicable Percentage Lease. If the insurance
proceeds are not adequate to restore the Hotel, each of the Lessees and the
Partnership has the right to terminate the Percentage Lease without affecting
any other Percentage Leases in effect between the Lessees and the Partnership,
by giving notice to the other. The Partnership will retain the insurance
proceeds. If the Lessees terminate the Percentage Lease due to the inadequacy of
the insurance proceeds, the Partnership may nullify the termination and keep the
Percentage Lease in full force by providing within 30 days after receipt of
notice of termination the Partnership's unconditional, legally binding
obligation to be responsible for restoration costs 



                                       14

<PAGE>   15

in excess of the insurance proceeds. If the Percentage Lease is terminated by
either the Lessees or the Partnership due to the inadequacy of the insurance
proceeds and the inadequacy of insurance proceeds was the result of the
Partnership's failure to maintain the proper insurance coverage as required, the
Partnership must, within 180 days, pay the Lessee the fair market value of the
applicable Percentage Lease on the date of termination or offer other percentage
leases to the Lessees having an aggregate fair market value of no less than the
fair market value of the applicable Percentage Lease. If damage or destruction
of a Hotel is not covered by insurance, the provisions of the Percentage Lease
which govern inadequacy of coverage apply. The Percentage Lease shall remain in
full force and effect during the first six months of any period required for
repair or restoration of any damaged or destroyed Hotel, after which time, rent
will be equitably abated.

         Condemnation of Hotels. In the event of a total condemnation of a
Hotel, the relevant Percentage Lease will terminate with respect to such Hotel
as of the date of taking the Partnership and the Lessees will be entitled to
their shares of any condemnation award in accordance with the provision of the
Percentage Lease. In the event of a partial taking which does not render the
Hotel unsuitable for the Lessees' use, the Lessees shall restore the untaken
portion of the Hotel to a complete architectural unit but only to the extent of
any condemnation awards made available to the Lessee or amounts advanced by the
Partnership. If the condemnation award is not adequate to restore a Hotel, each
of the Lessees and the Partnership have the right to terminate the Percentage
Lease on the Hotel without affecting the other leases between the Lessees and
the Partnership then in effect.

         Events of Default. Events of Default under the Percentage Leases
include, among others, the following:

         (i) the occurrence of an Event of Default under any other lease between
the Partnership and the Lessees or any Affiliate of the Lessees (with respect to
the leases entered into prior to February 27, 1996);

         (ii) The failure by the Lessees to pay Base Rent when due and the
continuation of such failure for a period of 10 days after receipt by the
Lessees of notice from the Partnership thereof;

         (iii) the failure by the Lessees to pay the excess of Percentage Rent
over Base Rent when due and continuation of such failure for a period of 10 days
after receipt by the Lessee of Notice from the Partnership thereof;

         (iv) the failure by the Lessees to observe or perform any other term of
a Percentage Lease and the continuation of such failure for a period of 30 days
after receipt by the Lessees of notice from the Partnership thereof, unless such
failure cannot be cured within such period and the Lessees commence appropriate
action to cure such failure within said 30 days and thereafter acts, with
diligence, to correct such failure within such time as is necessary;

         (v) if the Lessees shall file a petition in bankruptcy or
reorganization pursuant to any federal or state bankruptcy law or any similar
federal or state law, or shall be adjudicated a



                                       15
<PAGE>   16

bankrupt or shall make an assignment for the benefit of creditors or shall admit
in writing its inability to pay its debts generally as they become due, or if a
petition or answer proposing the adjudication of the Lessees as a bankrupt or
its reorganization pursuant to any federal or state bankruptcy law or any
similar federal or state law shall be filed in any court and the Lessees shall
be adjudicated a bankrupt and such adjudication shall not be vacated or set
aside or stayed within 60 days after the entry of an order in respect thereof,
or if a receiver of the Lessees or of the whole or substantially all of the
assets of the Lessees shall be appointed in any proceeding brought by the
Lessees or if any such receiver, trustee or liquidator shall be appointed in any
proceeding brought against the Lessees shall not be vacated or set aside or
stayed within 60 days after such appointment;

         (vi) if the Lessees voluntarily discontinue operations of a Hotel for
more than 30 days, except as a result of damage, destruction, or condemnation;
or

         (vii) if the franchise agreement with respect to a Hotel is terminated
by the franchisor as a result of any action or failure to act by the Lessees or
its agents, other than a failure to complete a capital improvement required by
the franchisor as a result of the Company's failure to fund the capital
improvement; or

         (viii) if the Lessees default under the Master Agreement.

         If an Event of Default occurs and continues beyond any curative period,
the Partnership will have the option of terminating the Percentage Lease and may
terminate any other Percentage Lease which is subject to a cross-default with
such Percentage Lease by giving the Lessees ten days' written notice of the date
for termination of the Percentage Leases and, unless such Event of Default is
cured prior to the termination date set forth in said notice, the Percentage
Leases shall terminate on the date specified in the Company's notice and the
Lessee is required to surrender possession of the affected Hotels.

         Termination of Percentage Leases on Disposition of the Hotels. In the
event the Partnership enters into an agreement to sell or otherwise transfer a
Hotel, the Partnership will have the right to terminate the Percentage Lease
with respect to such Hotel and either (i) pay the Lessees the fair market value
of the Lessees' leasehold interest in the remaining term of the Percentage Lease
to be terminated or (ii) within 120 days of termination of the lease, offer to
lease to Lessees a substitute hotel on terms that would create a leasehold
interest in such Hotel with a fair market value equal to or exceeding the fair
market value of the Lessees' remaining leasehold interest under the Percentage
Lease to be terminated.

         Franchise License. The Lessees are the licensee under the franchise
licenses on the hotels currently owned by the Partnership and are expected to
hold the franchise licenses for future hotels leased from the Partnership. Upon
the occurrence of certain events of default by the Lessees under a franchise
license, each franchisor has agreed to transfer the franchise license for the
hotel to the Partnership (or its designee). The Company anticipates that the
franchisors of the hotels currently under contract will agree to a similar
arrangement. In exchange, the Partnership has guaranteed all of the Lessees'
franchise payments under the franchise agreements.



                                       16

<PAGE>   17


         Other Lease Covenants. The Lessees have agreed that during the term of
the Percentage Leases it will maintain a ratio of total debt to consolidated net
worth (as defined in the Percentage Leases) of not more than 50%, exclusive of
capitalized leases. Management fees paid to affiliates of the Lessees are
subordinated to the lease payments.

         Breach by Partnership. If the Partnership fails to cure a breach by it
under a Percentage Lease, the Lessees may purchase the relevant Hotel from the
Partnership for a purchase price equal to the Hotel's then fair market value.
Upon notice from the Lessees that the Partnership has breached the Lease, the
Partnership has 30 days to cure the breach or proceed to cure the breach, which
period may be extended in the event of certain specified, unavoidable delays.

         Inventory. All inventory required in the operation of the Hotels is
purchased and owned by the Lessee at its expense. The Partnership has the option
to purchase all inventory related to a particular Hotel at its fair market value
upon termination of the related Percentage Lease.

         Franchise Agreements. All but one of the Hotels, the Beverly Heritage
in Milpitas, CA, are licensed to operate under a franchise license. Nineteen
Hotels are licensed as Hampton Inn hotels, thirteen are licensed as Residence
Inn hotels, six are licensed as Comfort Inn hotels, six are licensed as Holiday
Inn Express hotels, six are licensed as Holiday Inn hotels, one is licensed as a
Hawthorn Suites hotel, one is licensed as a Doubletree hotel, one is licensed as
a Courtyard by Marriott, one is licensed as a Sheraton hotel and four are
licensed as Sheraton Four Points hotels. Holiday Inn and Holiday Inn Express are
registered trademarks of Holiday Inn, Inc. Comfort Inn is a registered trademark
of Choice Hotels International, Inc. Residence Inn and Courtyard by Marriott are
registered trademarks of Marriott Corporation. Hampton Inn is registered a
trademark of The Promus Companies, Inc. Hawthorn Suites is a registered
trademark of Hawthorn Suites Hotels. Doubletree is a registered trademark of
Doubletree Corporation. Sheraton and Sheraton Four Points are registered
trademarks of ITT Sheraton Corporation.

         The franchise licenses generally specify certain management,
operational, recordkeeping, accounting, reporting and marketing standards and
procedures with which the Lessees or the Operators as applicable, must comply.
The franchise licenses obligate the Lessees to comply with the franchisor's
standards and requirements with respect to training of operational personnel,
safety, maintaining specified insurance, the types of services and products
ancillary to guest room services that may be provided by the Lessee, display of
signage, and the type, quality and age of furniture, fixtures and equipment
included in guest rooms, lobbies and other common areas.

         The Lessees hold the franchise license for each Hotel. The Partnership
paid the franchise license application fees with respect to the Hotels. The
franchisors may require the Partnership to complete certain capital improvements
to certain of the Hotels. The Partnership will fund the costs of the
improvements and will own the improvements. The Company estimates that all of
such required improvements to Hotels will be completed by the middle of 1997.
The franchisors 



                                       17
<PAGE>   18

of any Hotels on which improvements have been required will permit the operation
of such Hotels prior to completion of the improvements under conditional
franchise license.

         Each franchise license gives the Lessees the right to operate the
particular Hotel under a franchise for a period of from ten to 20 years. The
franchise agreements provide for termination at the franchisor's option upon the
occurrence of certain events, including the Lessees' failure to pay royalties
and fees or perform its other covenants under the license agreement, bankruptcy,
abandonment of the franchise, commission of a felony, assignment of the license
without the consent of the franchisor, or failure to comply with applicable law
in the operation of the relevant hotel. The Lessees are entitled to terminate
the franchise license only by giving at least 12 months notice and paying a
specified amount of liquidated damages. The license agreements will not renew
automatically upon expiration. The Lessees are responsible for making all
payments under the franchise agreements to the franchisors. Under the Holiday
Inn franchise agreements, the Lessees are required to pay a franchise fee of 4%
of room revenue (plus additional fees) from the Hotels operating as Holiday Inn
hotels and a franchise fee ranging from 4-5% of room revenue (plus additional
fees) from the Hotels operating as Holiday Inn Express hotels. Under the Comfort
Inn franchise agreements, the Lessees are required to pay a franchise fee
ranging from 4-5% of revenue for the Hotels operating as Comfort Inn hotels plus
fees for use of the reservation system and other miscellaneous fees. Under the
Promus Companies, Inc. franchise agreements, the Lessees are required to pay a
franchise fee ranging from 4-5% of room revenue (plus additional fees) from the
Hotels operating as Hampton Inn hotels and 5% from the Hotels operating as
Homewood Suites hotels. Under the Marriott Corporation franchise agreement, the
Lessees are required to pay a franchise fee ranging from 3-5% of room revenue
(plus additional fees) from the Hotels operating as Residence Inn hotels and 5%
from the Hotels operating as Courtyard by Marriott hotels. Under the Hawthorn
Suites franchise agreement, the Lessees are required to pay a franchise fee of
4% of room revenue (plus additional fees) from the Hotels operating as Hawthorn
Suites. Under the Doubletree Corporation franchise agreement, the Lessees are
required to pay 3% of gross room revenue (plus additonal fees) from the Hotels
operating as Doubletree hotels. Under the ITT Sheraton Corporation franchise
agreements, the Lessees are required to pay a franchise fee of 5% of gross room
sales (plus additional fees) for the hotels operating as Sheraton and Sheraton
Four Points.

         The franchisors have agreed that, in the event of a default by the
Lessees under a franchise agreement with respect to a franchised Hotel currently
owned by the Partnership, the franchise license for that Hotel will be assigned
to the Partnership or a designee of the Partnership acceptable to the
franchisor. The Partnership anticipates that the franchisors of future hotels
acquired will agree to similar arrangements. The Partnership will be obligated
to pay the franchisor's actual costs of investigating the Partnership's designee
and processing the transfer, but will pay no transfer fee. In consideration of
the franchisors' agreements to transfer the franchise licenses upon default by
the Lessees as described above, the Partnership has agreed to guarantee the
Lessees' obligations to make the franchise fee payments to the franchisors under
the franchise agreements.



                                       18
<PAGE>   19


ITEM 3.  LEGAL PROCEEDINGS

         Neither the Company nor the Partnership currently is involved in any
material litigation nor, to the Company's knowledge, is any material litigation
currently threatened against the Company or the Partnership.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to the Company's shareholders during the
fourth quarter of 1997.





                                       19
<PAGE>   20


                                     PART II


ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED        
         SHAREHOLDER MATTERS

(A)      MARKET INFORMATION

         The Company's common stock began trading on the New York Stock Exchange
("NYSE") under the symbol "RFS" on September 7, 1996. It previously traded on
the Nasdaq Stock Market under the symbol "RFSI". The high and low sales prices
for the shares on The Nasdaq Stock Market prior to September 6, 1996 and on the
NYSE subsequent to September 5, 1996 and the dividends declared per share, are
as follows:

<TABLE>
<CAPTION>
                                          Stock Price          Dividend Declared
                                      High          Low            Per Share
                                     -------      -------      -----------------
<S>                                  <C>          <C>          <C>
         First Quarter 1996          $18.50       $15.375            $0.34
         Second Quarter 1996          18.00        14.875             0.36
         Third Quarter 1996           17.125       14.75              0.36
         Fourth Quarter 1996          19.75        14.875             0.36

         First Quarter 1997           19.75        16.75              0.36
         Second Quarter 1997          18.875       17.25              0.36
         Third Quarter 1997           19.9375      17.875             0.375
         Fourth Quarter 1997          21.25        18.125             0.375
</TABLE>

(b)     Holders

        The number of holders of record of shares of common stock was 300 as of
March 16, 1998.

(c)     Dividend

        The Company intends to pay regular quarterly dividends, which are
dependent upon receipt of distributions from the Partnership, in order to
maintain its REIT status under the Internal Revenue Code.






                                       20
<PAGE>   21



ITEM 6.  SELECTED FINANCIAL DATA

        The following tables set forth (i) selected historical financial data
for the Company; (ii) selected historical financial data for RFS, Inc.; and
(iii) selected financial data for the Initial Hotels, the Company's predecessor.

        The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and all of the financial statements and notes thereto
included elsewhere, and incorporated by reference.

<TABLE>
<CAPTION>
                                                            (in thousands, except per share data)
                                                                         THE COMPANY
                                           --------------------------------------------------------------------
                                            1997             1996           1995            1994       1993(1)
                                           -------         -------        --------        --------    ---------
<S>                                        <C>             <C>            <C>             <C>         <C>
OPERATING DATA:
Total revenue                              $83,069         $61,986        $ 48,307        $ 23,354    $   2,011
Income before minority interest             37,847          35,087          31,085          14,351        1,236
Net income                                  34,232          34,587          30,646          14,156        1,208
Diluted earnings per share                    1.34            1.37            1.26            0.94         0.25
Cash dividends declared per share             1.47            1.42            1.23            1.02         0.34
Total assets                               617,128         499,129         376,962         346,870       80,754
Total debt                                 208,909         133,064          30,186           2,420            0
OTHER DATA:
Funds from operations                       55,263          45,723          39,663          18,109        1,576
Cash provided by operating activities       58,590          46,448          38,896          17,321        1,306
Cash used by investing activities         (138,237)        (74,518)        (74,028)       (235,296)     (57,507)
Cash provided (used) by financing
     activities                             28,357          83,325          (7,838)        242,296       77,529

<CAPTION>
                                                                         RFS, INC.
                                          ---------------------------------------------------------------------
                                            1997            1996            1995            1994       1993(1)
                                          --------        --------        --------        --------     --------
<S>                                       <C>             <C>             <C>             <C>          <C>     
Total revenue                             $196,761        $151,503        $122,818        $ 62,616     $ 10,536
Income from continuing operations            8,812           6,668           2,129             759          639
Net income                                   8,812           6,668           2,129             657          565
Total assets                                51,283          40,220          14,134          11,601        5,636
Total debt                                   --                325             672           1,511        1,625

<CAPTION>
                                                              THE INITIAL HOTELS (2)
                                                              ----------------------
                                                                       1993
                                                                     --------
<S>                                                                  <C>
Hotels' total revenue                                                $ 11,668
Income before interest, depreciation and amortization                   2,020
Loss before minority interest or extraordinary gain                      (911)
Net loss                                                                 (911)
Total assets                                                              n/a
Total debt                                                                n/a
</TABLE>

(1)     For the period August 13, 1993 (inception of the Company) through 
        December 31, 1993.
(2)     Information for the Initial Hotels relates to periods prior to August
        13, 1993, the date of acquisition of the Initial Hotels by the Company.
        Under the rules and regulations of the Securities and Exchange
        Commission, the Initial Hotels are deemed to be the predecessor to the
        Company.


                                       21

<PAGE>   22

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED)

THE COMPANY

Incorporated herein by reference to the Company's Annual Report to Shareholders
for the year ended December 31, 1997 filed as Exhibit 13.1 to this Form 10-K.


RFS, INC.

RESULTS OF OPERATIONS

Year Ended December 31, 1997 Compared with Year Ended December 31, 1996

         Total revenues increased $45.3 million or 30% to $196.8 million for the
year ended December 31, 1997 compared to $151.5 million for the year ended
December 31, 1996. The increase in hotel revenues of $44.6 million was
attributable to the net addition of four leased properties in 1996 that
generated a full year of revenues in 1997 and the addition of eight leased
properties in 1997. Additionally, on a same store basis as compared to the 1996
period, the average daily rate increased approximately $2 to $71 while occupancy
declined 1.6 percentage points to 75.4%. The margin on hotel results (hotel
revenues less leased hotel expenses and percentage lease expense) increased $4.1
million or 37% from $11.2 million to $15.2 million, reflecting the addition of
new properties and the improved operating performance of the hotels on a
same-store basis offset by increased percentage lease payments to the lessor
attributable to increased revenues.

         Management and consulting fees increased 97% to $1.6 million
principally reflecting the full year impact of eight management contracts that
commenced in the first half of 1996. Other fees and income decreased nominally.

         General and administrative expenses increased 16% or $0.5 million
primarily due to increased staffing necessary to support the additional hotels.
Depreciation and amortization increased reflecting the amortization of certain
pre-opening costs associated with the leased hotels and a full year of
amortization on the franchise application fees paid in 1996.

         The provision for income taxes in 1997 reflects a 38.3% effective tax
rate (the consolidated effective tax rate for Doubletree Corporation in 1997) as
compared to a 35% effective tax rate in 1996. The Company files a consolidated
tax return with Doubletree Corporation.


                                       22
<PAGE>   23


Year Ended December 31, 1996 Compared with Year Ended December 31, 1995

         Total revenues increased $28.7 million or 23% to $151.5 million for the
year ended December 31, 1996 compared to $122.8 million for the year ended
December 31, 1995. The increase in hotel revenues of $26.4 million was
attributable to the net addition of four leased properties as compared to the
1995 period and an increase of approximately $5 in average daily rate to $68 on
a same store basis while occupancy remained stable at approximately 77%.
Additionally, revenues in the current year include the full year results of
seven hotels that commenced operations in 1995. The margin on hotel results
(hotel revenues less leased hotel expenses and percentage lease expense)
increased $3.0 million or 37% from $8.2 million to $11.2 million reflecting the
improved operating performance of the hotels partially offset by increased
percentage lease payments to the lessor attributable to increased revenues.

         Management and consulting fees increased 81% to $0.8 million reflecting
the net addition of eight management contracts that commenced in the first half
of 1996. Other fees and income increased $1.9 million principally attributable
to interest income earned on invested cash balances and loans made to the owners
of certain of the managed hotels and dividend income generated from the
investment in the convertible preferred stock of the Company.

         General and administrative expenses decreased 36% or $2.0 million
primarily due to a reduction in headcount realized after the acquisition of the
Lessee by Doubletree Corporation in February 1996. Business combination expenses
of $1.0 million incurred in connection with the acquisition of the Lessee by
Doubletree Corporation principally consisted of legal, professional and
accounting fees, and certain other expenses. The nominal increase in
depreciation and amortization reflects the amortization of the franchise
application fees paid in connection with the acquisition.

         The provision for income taxes in 1996 reflects a 35% effective tax
rate (the consolidated effective tax rate for Doubletree Corporation in 1995 and
1996). Prior to its acquisition by Doubletree Corporation, the Lessee was a
Subchapter S Corporation, and generally was not subject to income taxes.
Excluding the business combination expenses and utilizing an effective tax rate
of 35% for 1995, net income would have increased $4.6 million from $2.1 million
or 223%.

LIQUIDITY AND CAPITAL RESOURCES

         The principal source of cash to the Lessee, other than capital
contributions from Doubletree Corporation, will come from operations. Since
inception, the Lessee has been able to meet its rent obligations under the
Percentage Leases. During 1997, the Lessee generated cash flow from operations
of $10.4 million as compared to $6.0 million during 1996. The increase was
principally attributable to changes in the Lessee's working capital and an
increase of $2.2 million in net income. The Lessee expects that its cash flow
from operations will be sufficient to meet its liquidity and capital
requirements.




                                       23
<PAGE>   24



ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        Pursuant to the general instructions to Rule 305 of SEC Regulation S-K,
the quantitative and qualitative disclosures called for by this Item 7a and by
Rule 305 of Regulation S-K are inapplicable to the Company at this time.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

THE COMPANY

        Incorporated herein by reference to the Company's Annual Report to
Shareholders for the year ended December 31, 1997.

RFS, INC.

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholder
RFS, Inc. and Subsidiary:

We have audited the accompanying consolidated balance sheets of RFS, Inc. and
Subsidiary (a wholly-owned subsidiary of Doubletree Corporation) as of December
31, 1997 and 1996 and the related consolidated statements of operations,
stockholder's equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of RFS, Inc.'s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The financial statements of RFS, Inc. for the
year ended December 31, 1995 were audited by other auditors whose report was
dated February 2, 1996, except for a subsequent events note dated February 27,
1996, expressed an unqualified opinion on those statements.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RFS, Inc. and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.

                                            KPMG Peat Marwick LLP

Memphis, Tennessee
January 23, 1998





                                       24

<PAGE>   25


                            RFS, INC. AND SUBSIDIARY
              (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 1997           1996
                                                                 ----           ----
                                      ASSETS
<S>                                                            <C>            <C>
CURRENT ASSETS:
     Cash and cash equivalents                                 $  7,322       $  7,660
     Trade receivables (net of an allowance for doubtful
         accounts of $11 and $62 at December 31, 1997
         and 1996, respectively)                                  4,300          3,680
     Inventories                                                    206            193
     Prepaid expenses                                               943            387
     Due from Parent                                             13,567          1,749
                                                               --------       --------
                  TOTAL CURRENT ASSETS                           26,338         13,669

Investments in RFS Hotel Investors, Inc.                         20,039         20,032
Note receivable                                                   1,529          3,000
Leasehold improvements and office equipment, net                    284            300
Capitalized franchise costs, net                                  2,303          2,478
Deferred costs and other assets, net                                790            741
                                                               --------       --------
                                                               $ 51,283       $ 40,220
                                                               ========       ========

              LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES:
     Note payable                                              $   --         $    325
     Accounts payable and accrued expenses                        7,723          7,352
     Percentage Lease payable                                     8,901          6,775
                                                               --------       --------
                  TOTAL CURRENT LIABILITIES                      16,624         14,452

Distributions and losses in excess of investment in
     partnerships and ventures                                      315            314
Deferred income taxes                                                70             61
                                                               --------       --------
                  TOTAL LIABILITIES                              17,009         14,827
                                                               --------       --------

STOCKHOLDER'S EQUITY:
     Common stock, no par value; 5,000 shares authorized,
         100 shares issued and outstanding at
         December 31, 1997 and 1996                            $    282       $    282
     Additional paid-in capital                                  18,500         18,500
     Unearned employee compensation                                 (70)          (141)
     Unrealized gain on marketable equity securities,
         net of income taxes                                        112            114
     Retained earnings                                           15,450          6,638
                                                               --------       --------
                  TOTAL STOCKHOLDER'S EQUITY                     34,274         25,393
                                                               --------       --------

Commitments and contingencies                                  
                                                               --------       --------
                                                               $ 51,283       $ 40,220
                                                               ========       ========
</TABLE>



See accompanying notes to consolidated financial statements.


                                       25
<PAGE>   26

                            RFS, INC. AND SUBSIDIARY
              (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                    1997             1996           1995
                                                  ---------       ---------       ---------
<S>                                               <C>             <C>             <C>
REVENUES:
     Hotel revenue                                $ 193,282       $ 148,699       $ 122,253
     Management and consulting fees                   1,611             817             452
     Other                                            1,868           1,987             113
                                                  ---------       ---------       ---------
                  TOTAL REVENUES                    196,761         151,503         122,818
                                                  ---------       ---------       ---------

EXPENSES:
     Hotel expenses:
         Salary and benefits                         43,173          35,355          25,847
         Franchise costs                             13,183          10,153           8,315
         Advertising and promotion                    7,020           5,069           4,294
         Utilities                                    8,368           7,090           6,151
         Repair and maintenance                       8,534           7,088           6,006
         Leases, insurance and taxes                  1,317           1,018           1,603
         Other operating costs                       16,403          11,626          14,624
                                                  ---------       ---------       ---------
                                                     97,998          77,399          66,840
     General and administrative                       3,972           3,430           5,386
     Business combination expenses                     --              --             1,007
     Depreciation and amortization                      460             266             172
     Percentage Lease expense                        80,049          60,148          47,249
                                                  ---------       ---------       ---------
                  TOTAL OPERATING EXPENSES          182,479         141,243         120,654
                                                  ---------       ---------       ---------

                  INCOME BEFORE INCOME TAXES         14,282          10,260           2,164

Income taxes                                         (5,470)         (3,592)            (35)
                                                  ---------       ---------       ---------

                  NET INCOME                      $   8,812       $   6,668       $   2,129
                                                  =========       =========       =========
</TABLE>



See accompanying notes to consolidated financial statements.





                                       26
<PAGE>   27

                            RFS, INC. AND SUBSIDIARY
              (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)

           CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
                     YEARS ENDED DECEMBER 31, 1997 AND 1996

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                  Additional    Unearned                  Retained
                                                       Common      paid-in     employee     Unrealized     earnings
                                                        stock      capital   compensation      Gain       (deficit)        Total
                                                       ------     ---------- ------------   ----------    ---------        -----
<S>                                                    <C>        <C>        <C>            <C>           <C>              <C>
Balances, December 31, 1994                             $  1      $  --         $--          $ --         $  (104)       $  (103)
     Issuance of 12 shares of common stock to 
          employees                                      281         --          (281)         --             --                0
     Distributions ($2,294 per share)                    --          --          --            --           (2,055)        (2,055)
     Amortization of unearned employee compensation      --          --            70          --             --               70
     Unrealized gain on marketable equity
          securities, net of taxes                       --          --          --             22           --                22
     Net income                                          --          --          --            --            2,129          2,129
                                                        ----      -------       -----        -----        --------       --------

Balances, December 31, 1995                              282         --          (211)          22             (30)            63
     Contribution of paid-in capital                     --        18,500        --            --             --           18,500
     Amortization of unearned employee compensation      --          --            70          --             --               70
     Change in unrealized gain on marketable equity
         securities, net of taxes                        --          --          --             92           --                92
     Net income                                          --          --          --            --            6,668          6,668
                                                        ----      -------       -----        -----        --------       --------

Balances, December 31, 1996                              282       18,500        (141)         114           6,638         25,393
     Amortization of unearned employee compensation      --          --            71          --             --               71
     Change in unrealized gain on marketable equity
         securities, net of taxes                        --          --          --             (2)          --                (2)
     Net income                                          --          --          --            --            8,812          8,812
                                                        ----      -------       -----        -----        --------       --------
Balances, December 31, 1997                             $282      $18,500       $ (70)       $ 112        $ 15,450       $ 34,274
                                                        ====      =======       =====        =====        ========       ========
              
</TABLE>

See accompanying notes to consolidated financial statements.


                                       27
<PAGE>   28


                            RFS, INC. AND SUBSIDIARY
              (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                      1997          1996         1995
                                                                    --------      --------      -------
<S>                                                                 <C>           <C>           <C>            
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                                     $  8,812      $  6,668      $ 2,129
     Adjustments to reconcile net income to net cash
         provided by operating activities:
              Depreciation and amortization                              460           290          172
              Equity in loss of partnerships                            --            --            198
              Provision for bad debts                                     48            22           40
              Deferred income tax provision                             --            --           (158)
              (Increase) decrease in accounts receivable                (668)       (1,159)         163
              (Increase) decrease in other assets                       (737)         (127)         121
              Increase in accounts payable and accrued expenses        2,497           270        3,582
                                                                    --------      --------      -------
                   NET CASH PROVIDED BY OPERATING ACTIVITIES          10,412         5,964        6,247
                                                                    --------      --------      -------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Investment in RFS Hotel Investors, Inc.                            --         (18,500)        --
     Investments in partnerships and ventures                           --            (175)        (270)
     Distributions from partnerships and ventures                          1             2            1
     Franchise application fees                                         --          (2,626)        --
     Purchase of furniture and equipment                                 (79)          (79)        (241)
     Loan to owners of managed hotels                                   --          (3,000)        --
     Collection of loan to owners of managed hotels                    1,471          --           --
     Purchase of marketable securities                                  --            --           (516)
     Increase in deferred costs and other assets                        --             (90)         (82)
                                                                    --------      --------      -------
                  NET CASH PROVIDED BY (USED IN)
                       INVESTING ACTIVITIES                            1,393       (24,468)      (1,108)
                                                                    --------      --------      -------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Contribution of paid-in capital from Parent                        --          18,500         --
     Increase in due from Parent                                     (11,818)       (1,749)        --
     Payments on notes payable                                          (325)          175         (839)
     Distributions to common stockholders                               --            --         (2,055)
                                                                    --------      --------      -------
                  NET CASH PROVIDED BY (USED IN) 
                       FINANCING ACTIVITIES                          (12,143)       16,926       (2,894)
                                                                    --------      --------      -------

                  NET INCREASE (DECREASE) IN CASH                   $   (338)     $ (1,578)     $ 2,245

Cash and cash equivalents:
     Beginning of year                                                 7,660         9,238        6,993
                                                                    --------      --------      -------
     End of year                                                    $  7,322      $  7,660      $ 9,238
                                                                    ========      ========      =======

Supplemental Disclosures:
     Interest paid                                                  $      6      $     19      $   100
                                                                    ========      ========      =======
     Income taxes paid                                              $  5,470      $  3,666      $   123
                                                                    ========      ========      =======
</TABLE>



See accompanying notes to consolidated financial statements.


                                       28
<PAGE>   29


                            RFS, INC. AND SUBSIDIARY
              (A WHOLLY-OWNED SUBSIDIARY OF DOUBLETREE CORPORATION)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

(1)      ORGANIZATION AND PRESENTATION

         Effective February 27, 1996, RFS, Inc. became a wholly-owned subsidiary
of Doubletree Corporation ("Doubletree" or "Parent") in a transaction accounted
for as a pooling of interests. RFS, Inc. generates substantially all of its
revenue from operating and managing leased hotels owned by RFS Partnership, L.P.
(the "Partnership"). The Partnership is 90.5% owned by RFS Hotel Investors, Inc.
(the "Company"). On December 19, 1997, Doubletree became a wholly-owned
subsidiary of Promus Hotel Corporation ("Promus") pursuant to a merger
transaction in which each outstanding share of Doubletree common stock was
exchanged for one share of Promus common stock.

         Substantially all of the hotels owned by the Partnership (the "Hotels")
are separately leased by the Partnership to RFS, Inc. under individual lease
agreements (collectively, the Percentage Leases). The Percentage Leases provide
for the payment of annual rent equal to the greater of (i) fixed base rent or
(ii) percentage rent based on a percentage of gross room revenue, food revenue
and beverage revenue at the Hotels. In connection with the February 27, 1996
merger with Doubletree, RFS, Inc. amended each of the individual Percentage
Leases. The significant amendments include extending the terms of the leases,
clarifying the RFS, Inc's and the Partnership's responsibilities with respect to
repairs and maintenance at the hotels and clarifying certain other provisions of
the Percentage Leases. These provisions include the Partnership granting RFS,
Inc. a 10-year right of first refusal to manage and lease future hotels acquired
or developed by the Partnership.

         At December 31, 1997, RFS, Inc. leased 59 hotels from the Partnership
and operated 75 hotels. Four hotels leased by RFS, Inc. are operated by other
third party management companies. Six of the hotels operated by RFS, Inc. are
for unrelated entities. RFS, Inc. leases and/or manages hotel properties in 26
states, primarily in the Southeast and Midwest and substantially all are
affiliated with a nationally recognized franchise.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (A)  REVENUE RECOGNITION

          Revenue is recognized as earned. Ongoing credit evaluations are
          performed and an allowance for potential credit losses is provided
          against the portion of accounts receivable which is estimated to be
          uncollectible.


                                       29
<PAGE>   30


     (B)  PERCENTAGE LEASE EXPENSE

          Lease expense is recognized as due to the Partnership under the
          Percentage Leases commencing on the date a lease is executed between
          the Partnership and RFS, Inc.

     (C)  CAPITALIZED FRANCHISE COSTS

          In connection with RFS, Inc.'s acquisition by Doubletree, franchise
          application fees were paid to various franchisors of the Hotels. These
          fees are amortized over the remaining lives of the franchise
          agreements. The recoverability of the franchise application fees are
          periodically evaluated to determine whether such costs will be
          recovered from future operations.

          The initial cost of obtaining the franchise licenses is paid by the
          Partnership, and the ongoing franchise fees are paid by RFS, Inc.
          These fees are generally computed as a percentage of room revenue for
          each respective hotel in accordance with the franchise agreements and
          are expensed as incurred.

     (D)  LEASEHOLD IMPROVEMENTS AND OFFICE EQUIPMENT

          Maintenance and repairs are charged to operations as incurred; major
          renewals and betterments at the hotels are the responsibility of the
          Partnership.

          Improvements to office leaseholds are amortized over the shorter of
          the lives of the assets or the terms of the related leases. Office
          furniture and equipment is depreciated using the straight-line basis
          over their estimated useful lives, which is 7 years for furniture and
          5 years for equipment. Accumulated depreciation at December 31, 1997
          and 1996 was approximately $526,000 and $431,000, respectively.

     (E)  INVENTORIES

          Inventories consisting of food and beverages are stated at the lower
          of cost (generally first-in, first-out) or market.

     (F)  INVESTMENTS

          Investments in partnerships and joint ventures are accounted for using
          the equity method when RFS, Inc. has a general partnership interest or
          its limited partnership interest exceeds 5% and RFS, Inc. does not
          exercise control over the venture. Profits and losses of these joint
          ventures are allocated in accordance with the joint venture
          agreements. All other investments are accounted for using the cost
          method with the exception of the marketable equity securities which
          are classified as available-for-sale and recorded at fair value with
          unrealized gains or losses 



                                       30

<PAGE>   31

          reflected in stockholder's equity pursuant to Statement of Financial
          Accounting Standards No. 115, "Accounting for Certain Investments in
          Debt and Equity Securities." See note 3. If a joint venture
          experiences operating losses which reduce the other joint venture
          partner's equity to a zero balance, the loss which would otherwise be
          attributable to the other joint venturer is absorbed within RFS,
          Inc.'s operating results.

     (G)  INCOME TAXES

          Under the asset and liability method of accounting for income taxes,
          deferred tax assets and liabilities are recognized for the estimated
          future tax consequences attributable to differences between the
          financial statement carrying amounts of existing assets, including net
          operating loss carryforwards, and liabilities and their respective tax
          bases. Deferred tax assets and liabilities are measured using enacted
          tax rates in effect for the year in which those temporary differences
          are expected to be recovered or settled. The effect on deferred tax
          assets and liabilities of a change in tax rates is recognized in
          income in the period that includes the enactment date.

          RFS, Inc.'s parent, Doubletree, files a consolidated federal income
          tax return. Beginning in 1996, the intercompany settlement of taxes
          paid is based on an informal tax sharing agreement which allocates
          taxes to RFS, Inc. based upon a proportionate allocation of
          Doubletree's consolidated current and deferred tax expenses. Prior to
          its acquisition by Doubletree, RFS, Inc. elected Subchapter S
          corporation status for federal income tax purposes and certain states
          effective January 1, 1995. RFS, Inc.'s Subchapter S corporation
          election was revoked upon RFS, Inc.'s acquisition by Doubletree.

     (H)  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

          RFS, Inc. considers all highly liquid investments with a maturity of
          three months or less when purchased to be cash equivalents for
          purposes of the statement of cash flows.

     (I)  USE OF ESTIMATES

          The preparation of financial statements in conformity with generally
          accepted accounting principles requires management to make estimates
          and assumptions that affect the reported amounts of assets and
          liabilities and 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 those estimates.




                                       31
<PAGE>   32


     (J)  RECLASSIFICATIONS

          Certain prior period amounts have been reclassified to conform to 1997
          presentation.

     (K)  RECENT ACCOUNTING PRONOUNCEMENTS

          Effective December 31, 1997, RFS, Inc. adopted the provisions of
          Statement of Financial Accounting Standards No. 129, "Disclosure of
          Information About Capital Structure." This statement specifies the
          disclosure requirements about the capital structure of an entity that
          has issued securities addressed by the statement. The adoption of this
          statement did not have a material effect on the consolidated financial
          statements.

          In June 1997, the Financial Accounting Standards Board issued
          Statement of Financial Accounting Standards No. 130, "Reporting on
          Comprehensive Income." This statement establishes standards for
          reporting and display of comprehensive income and its components
          (revenues, expenses, gains and losses) in financial statements. This
          statement is effective for fiscal years beginning after December 15,
          1997. The adoption of this statement will not have a material effect
          on the consolidated financial statements.

          Also in June 1997, Statement of Financial Accounting Standards No.
          131, "Disclosure about Segments of an Enterprise and Related
          Information," was issued, effective for years beginning after December
          15, 1997. This statement requires companies to identify segments
          consistent with the manner in which management makes decisions about
          allocating resources to segments and measuring their performance.
          Disclosures for the newly identified segments are similar to those
          required under current standards, with the addition of certain
          quarterly disclosure requirements. It also establishes standards for
          related disclosures about products and services, geographic areas and
          major customers.

(3)  INVESTMENTS IN RFS HOTEL INVESTORS, INC.

     RFS, Inc. has the following investments in the Company and the Partnership
(in thousands):

<TABLE>
<CAPTION>
                                                      1997        1996
                                                    -------     -------
      <S>                                           <C>         <C>
      RFS HOTEL INVESTORS, INC
      Series A Convertible Preferred Stock          $18,500     $18,500
      Common Stock                                      698         691

      RFS PARTNERSHIP, L.P. 
      Partnership Units                                 841         841
                                                    -------     -------
                                                    $20,039     $20,032
                                                    =======     =======
</TABLE>


                                       32

<PAGE>   33


         On February 27, 1996, RFS, Inc. received from the Company 973,684
         shares of the Company's Series A Convertible Preferred Stock ("Series A
         Preferred Stock") for an aggregate purchase price of $18.5 million or
         $19.00 per share. The Series A Preferred Stock has an initial
         preference value of $19.00 per share ("Stated Value"), a par value of
         $.01, and is senior to the Company's common stock as to dividends and
         upon liquidation of the Company. Each share of Series A Preferred Stock
         has one vote and is convertible into one share of the Company's common
         stock after the seventh anniversary of the issuance. The shares of
         Series A Preferred Stock are entitled to a $1.45 annual cumulative
         dividend per share. The Series A Preferred Stock has mandatory
         redemption rights upon the occurrence of certain events which are under
         the Company's control. The Company can redeem the Series A Preferred
         Stock after the seventh anniversary of issuance at the Stated Value,
         together with all accrued and unpaid dividends.

         RFS, Inc.'s investment in the Partnership units is carried at the
         amount of cash consideration RFS, Inc. could have received in lieu of
         Partnership units which is approximately $841,000 on 77,904 units
         owned. At present, there is no market for the Partnership units.
         However, the Partnership units are convertible into Company common
         stock. RFS, Inc. owns 35,000 shares of the Company's common stock
         carried at their market value.

(4)      INVESTMENTS IN PARTNERSHIPS

         Information with respect to RFS, Inc.'s investments in partnerships at
         December 31, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
                                                                                    CARRYING VALUE
                                                    %             TYPE OF           (IN THOUSANDS)
         ENTITY                                 OWNERSHIP        INTEREST        1997           1996
         ------                                 ---------        --------       -------        ------
         <S>                                    <C>              <C>            <C>            <C>  
         Devonshire Associates                     10%           General        $     1         $   1
         SF Partners                                2%           General            -             -
         Highland Plaza Partners, Ltd.              5%           General              1             1
         DDP Partners, L.P.                         5%           General             12            13
                                                                                  -----         -----
                                                                                     14            15
         Shelby Distribution Partners, L.P.        46%           General           (329)         (329)
                                                                                  -----         -----
                                                                                  $(315)        $(314)
                                                                                  =====         =====
</TABLE>

(5)      NOTE RECEIVABLE

         In June 1996, RFS, Inc. obtained management agreements for eight hotel
         properties owned by entities unrelated to RFS, Inc. In connection with
         obtaining these contracts, RFS, Inc. loaned $3 million to the owners,
         principally for renovations. The note receivable was reduced by
         approximately $1.5 million primarily as a result of new debt financing
         and two hotel property sales by the owners. The note is unsecured, 
         bears


                                       33

<PAGE>   34
         interest at 10% and is repayable as follows: $300,000 on December 31,
         1998, $600,000 on December 31, 1999, $300,000 on December 31, 2000,
         $329,000 on December 31, 2001.

(6)      NOTE PAYABLE

         At December 31, 1996, RFS, Inc. had a note payable on premium financing
         contracts totaling $325,000. The note payable was unsecured, required
         monthly payments of approximately $47,000 including interest at 5.25%
         and was paid in full in September 1997.

(7)      PREFERRED AND COMMON STOCK

         In connection with RFS, Inc.'s acquisition by Doubletree, RFS, Inc.
         retired all its issued and outstanding common stock and issued 100 new
         shares of common stock to Doubletree. In addition, Doubletree made a
         $18,500,000 capital contribution to RFS, Inc. The proceeds from this
         capital contribution were used to acquire Series A Preferred Stock
         issued by the Company as discussed in note 3.

         In 1995, RFS, Inc. granted a total of 12 shares of common stock to
         certain employees. These shares were recorded at the estimated fair
         value on the date of grant. These shares vest ratably over the next
         four years. Such vesting requirements are contingent upon the
         employees' continued employment with RFS, Inc. The value of such shares
         at the grant date is being charged to compensation expense over the
         four-year period.

(8)      INCOME TAXES

         Effective February 27, 1996, RFS, Inc.'s results of operations are
         included in Doubletree's consolidated U.S. Federal income tax return.
         Prior to RFS, Inc.'s acquisition by Doubletree, income taxes were the
         responsibility of the RFS, Inc. Under the terms of an informal
         agreement, RFS, Inc. makes payments to Doubletree for a proportionate
         allocation of Doubletree's consolidated current and deferred income tax
         expense. RFS, Inc. recorded income tax expense of approximately
         $5,470,000 and $3,592,000 (based on an effective tax rate of 38.3% and
         35% for the years ended December 31, 1997 and 1996, respectively) and
         remitted $5,470,000 and $3,666,000 to Doubletree for income tax
         payments for the years ended December 31, 1997 and 1996, respectively.





                                       34
<PAGE>   35


         
         The following represents the significant components of income tax
         expense and the effect of recognizing deferred tax assets and
         liabilities on various temporary differences for 1995 (in thousands):

<TABLE>
<S>                                                                   <C>
                  Federal:                                          
                     Change in tax status                             $(161)
                                                                      -----
                  State:
                     Current                                            193
                     Deferred                                             3
                                                                      -----
                                                                        196
                                                                      -----
                                                                      $  35
                                                                      =====
</TABLE>

         RFS, Inc.'s income tax provision for 1995 was calculated as follows (in
         thousands):

<TABLE>
<S>                                                                   <C>

                  State income taxes, net of federal benefit          $ 196
                  Reduction in federal deferred tax liability
                  due to change in tax status                          (161)
                                                                      -----
                        Income tax provision                          $  35
                                                                      =====
</TABLE>

(9)      COMMITMENTS AND CONTINGENCIES

         RFS, Inc. leases office space and equipment under noncancelable
         operating lease agreements expiring at varying intervals through 2002.
         The future minimum rental payments required under these leases as of
         December 31, 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
                     YEAR                                 AMOUNT
                     ----                                 -------
<S>                                                       <C>
                     1998                                 $   301
                     1999                                     312
                     2000                                     315
                     2001                                     315
                     2002                                      79
                     Thereafter                               -
                                                          -------
                                                          $ 1,322
                                                          =======
</TABLE>

         Rental expense, except for the lease expense described below, was
         approximately $301,000, $301,000 and $431,000 for the years ended
         December 31, 1997, 1996 and 1995, respectively.



                                       35
<PAGE>   36


         RFS, Inc. has future lease commitments to the Partnership under the
         Percentage Leases through 2015. At December 31, 1997, minimum future
         rental payments under the Percentage Leases are as follows (in
         thousands):

<TABLE>
<CAPTION>
                     YEAR                                 AMOUNT
                     ----                               ---------
<S>                                                     <C>
                     1998                               $  33,905
                     1999                                  33,905
                     2000                                  33,905
                     2001                                  33,905
                     2002                                  33,905
                     Thereafter                           116,249
                                                        ---------
                                                        $ 285,774
                                                        =========
</TABLE>

         RFS, Inc. paid base rents of approximately $34,956,000, $25,255,000 and
         $21,995,000 and percentage rents in excess of base rents of
         approximately $45,093,000, $34,893,000 and $25,254,000 for the years
         ended December 31, 1997, 1996 and 1995, respectively. At December 31,
         1997 and 1996, RFS, Inc. had a net payable to the Partnership of
         $8,901,000 and $6,775,000, respectively, for percentage rents and other
         transactions.

         RFS, Inc. has management agreements with two hotel operators to manage
         four of the leased hotels. The management agreements have terms ranging
         from ten to twenty years and provide for a fee based on a percentage of
         each hotel's revenue.

(10)     RELATED PARTY TRANSACTIONS

         RFS, Inc. has an intercompany receivable from its Parent subject to an 
         informal agreement where excess cash of RFS, Inc. is transferred to the
         Parent.  No interest is earned on this receivable.

         Certain of the partnerships in which RFS, Inc. has an interest and
         certain former stockholders owed RFS, Inc. approximately $321,000 and
         $439,000 for advances and other transactions at December 31, 1997 and
         1996, respectively. Such advances are recorded in distributions and
         losses in excess of investment in partnerships and ventures in the
         accompanying consolidated financial statements.

         RFS, Inc. has recognized, as income, approximately $1,564,092 and
         $1,340,956 of distributions received from the Partnership with respect
         to Series A Preferred Stock, Partnership units and Company common stock
         owned by RFS, Inc. for the years ended December 31, 1997 and 1996,
         respectively.

         On December 31, 1994, RFS, Inc. entered into a consulting agreement
         ("Agreement") with Hospitality Advisory Services, Inc. ("HAS"). The
         Agreement requires monthly payments of $40,000 to HAS beginning January
         1, 1995 through December 31, 1995 with the term of the Agreement
         extended for one additional year. The Agreement also provides for
         incentive fees at the discretion of RFS, Inc. The owners of HAS are
         officers 


                                       36


<PAGE>   37


         of the Company and were stockholders of RFS, Inc. Total fees paid 
         to HAS during 1995 were approximately $780,000. The Agreement was
         terminated effective February 27, 1996 and was replaced with new
         consulting agreements with two former officers of RFS, Inc. These
         consulting agreements were terminated by RFS, Inc. on February 27,
         1997. Total fees paid on these consulting agreements were $35,000 and
         $175,000 in 1997 and 1996, respectively.

(11)     EMPLOYEE BENEFIT PLANS

         In January 1995, RFS, Inc. adopted an employee savings plan under
         Section 401(k) of the Internal Revenue Code. This plan covers all
         full-time employees of RFS, Inc. who are 21 years of age and have
         completed at least one year of continuous service. The participants'
         maximum contributions, limited under applicable IRS regulations, were
         $9,500 per participant. RFS, Inc. currently contributes 50% of employee
         contributions to the plan, up to a maximum of 2% of employee
         compensation. RFS, Inc. contributions generally vest at 20% per year
         becoming fully vested in the seventh year of service. Contribution
         expense related to this plan was approximately $151,000 and $166,000
         for the years ended December 31, 1997 and 1996, respectively.

(12)     FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards No. 107, "Disclosures About
         Fair Value of Financial Instruments," defines the fair value of a
         financial instrument as the amount at which the instrument could be
         exchanged in a current transaction between willing parties. RFS, Inc.'s
         financial instruments consist primarily of cash and cash equivalents,
         trade receivables, note receivable, due from Parent, investments in RFS
         Hotel Investors, Inc., investments in partnerships and ventures,
         accounts payable and accrued expenses and Percentage Lease payable,
         each as included in the balance sheets under such captions.

         With the exception of note receivable, investments in partnerships and
         ventures and the investments in RFS Partnership, L.P. units, the
         carrying amounts of all other classes of financial instruments
         approximate fair value due to the short maturity of those instruments
         or, in the case of marketable equity securities they are carried at
         their estimated fair value.

         RFS, Inc. has determined that the fair value of its note receivable is
         not significantly different from its carrying value based on interest
         rate and payment terms RFS, Inc. would currently offer on notes with
         similar security to borrowers of similar creditworthiness. The fair
         value of the partnership interests, which is carried at cost, is
         estimated based upon the residual value to the Company in the
         respective partnership's net assets. RFS Partnership, L.P. units, which
         are convertible into Company common shares, have a carrying value of
         $841,000 and an estimated fair value of approximately $1,553,000 and
         $1,539,000 at December 31, 1997 and 1996, respectively.




                                       37
<PAGE>   38
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

        None.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Incorporated herein by reference to the sections entitled "Election of
Class II Directors" and "Executive Compensation" in the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days following the end of the year covered by this Form 10-K with respect to
its Annual Meeting of Shareholders to be held on April 30, 1998 (the "Proxy
Statement"). See also Item 1. Business-Executive Officers.


ITEM 11.  EXECUTIVE COMPENSATION

        Incorporated herein by reference to the section entitled "Executive
Compensation" in the Proxy Statement.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        Incorporated herein by reference to the sections entitled "Ownership of
the Company's Common Stock" in the Proxy Statement.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Incorporated herein by reference to the section entitled "Certain
Relationships and Related Transactions" in the Proxy Statement.






                                       38
<PAGE>   39


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)     Financial Statements

        The following financial statements included in the Company's Annual
Report to Shareholders for the year ended December 31, 1997 are incorporated by
reference:
             Report of Independent Accountants
             Consolidated Balance Sheets as of December 31, 1997 and 1996
             Consolidated Statements of Income for the years ended December 31,
               1997, 1996 and 1995 
             Consolidated Statements of Shareholders' Equity for the years ended
               December 31, 1997, 1996 and 1995 Consolidated
             Statements of Cash Flows for the years ended December 31, 1997,
               1996 and 1995 
             Notes to Consolidated Financial Statements

        The following financial statement schedules and report of independent
accountants on the financial statement schedules are included in this report on
Form 10-K:
             Report of Independent Accountants on the Financial Statement
             Schedules Schedule III - Real Estate and Accumulated Depreciation
               for RFS Hotel Investors, Inc.

        The following financial statements of RFS, Inc. are included in this
          report on Form 10-K: 
             Independent Auditors' Report Consolidated
             Balance Sheets as of December 31, 1997 and 1996 
             Consolidated Statements of Operations for the years ended
               December 31, 1997, 1996 and 1995 
             Consolidated Statements of Stockholder's Equity (Deficit) for the 
               years ended December 31, 1997, 1996 and 1995 
             Consolidated Statements of Cash Flows for the years ended 
               December 31, 1997, 1996 and 1995 
             Notes to Consolidated Financial Statements

(b)     Reports on Form 8-K

        No filings on Form 8-K were made during the last quarter of 1997.





                                       39
<PAGE>   40


(c)     Exhibits

<TABLE>
<CAPTION>
        Exhibit
        Number          Exhibit
        -------         -------
<S>                     <C>
         3.1      -     Second Restated Charter of the Registrant (previously filed as Exhibit 3.1 to 
                           the Company's Current Report on Form 8-K dated March 6, 1995 and 
                           incorporated herein by reference).

         3.1(a)   -     Articles of Amendment to Second Restated Charter of the Registrant 
                           (previously filed as Exhibit 3.1 to the Company's Current Report on
                           Form 8-K dated March 14, 1996 and incorporated herein by reference).

         3.1(b)   -     Second Articles of Amendment to Second Restated Charter of the Registrant 
                           (previously filed as Exhibit 3.1 to the Company's Current Report on Form 
                           8-K dated July 8, 1996 and incorporated herein by reference).

         3.2      -     By-Laws of the Registrant (previously filed as Exhibit 3.2 to the Company's 
                           Form S-11 Registration Statement, Registration No. 33-63696 and 
                           incorporated herein by reference).

         3.3      -     Second Amended and Restated Agreement of Limited Partnership of RFS 
                           Partnership, L.P., (previously filed as Exhibit 3.3 to the Company's Form
                           S-3 Registration Statement, Registration No. 33-83450 and incorporated 
                           herein by reference).

         3.3(a)   -     Third Amended and Restated Agreement of Limited Partnership of RFS 
                           Partnership, L.P., (previously filed as Exhibit 4.3 to the Company's Form 
                           S-3 Registration Statement, Registration No. 333-3307 and incorporated 
                           herein by reference).

         3.3(b)   -     Fourth Amended and Restated Agreement of Limited Partnership (previously 
                           filed as Exhibit 3.3(b) to the Company's Form 10-K for the
                           year ended December 31, 1996 and incorporated herein by reference).

       10.1       -     Consolidated Lease Amendment (previously filed as Exhibit 10.3 to the 
                           Company's current report on Form 8-K, dated February 27, 1996
                           and incorporated herein by reference).

       10.2       -     Form of Future Percentage Lease (previously filed as Exhibit 10.4 to the
                           Company's Current Report on Form 8-K, dated February 27, 1996
                           and incorporated herein by reference).

     *10.2(a)     -     Schedule of terms of Percentage Leases
</TABLE>


                                       40

<PAGE>   41
<TABLE>
<S>                     <C>
      10.3        -     Form of Sale and Purchase Agreement (previously filed as Exhibit 10.2 to the 
                           Company's Form 10-K for the year ended December 31, 1994 and 
                           incorporated herein by reference).

     *10.3(a)     -     Schedule of terms of Sale and Purchase Agreements

     *10.4        -     Second Amended and Restated Employment Agreement between
                           RFS Managers, Inc. and Robert M. Solmson

     *10.6        -     Second Amended and Restated Employment Agreement between RFS
                           Managers, Inc. and  J. William Lovelace

     *10.7        -     Second Amended and Restated Employment Agreement between RFS
                           Managers, Inc. and  Michael J. Pascal

      10.9        -     Master Agreement, dated February 1, 1996 (previously filed as Exhibit 10.2 
                            to the Company's Current Report on Form 8-K dated February
                            27, 1996 and incorporated herein by reference).

      10.9(a)     -     First Amendment to Master Agreement dated as of November 21, 1996
                           (previously filed as Exhibit 10.9(a) to the Company's Form 10-K for the
                           year ended December 31, 1996 and incorporated herein by reference).

      10.10       -     Indenture dated as of November 21, 1996 (previously filed as Exhibit 10.10
                           to the Company's Form 10-K for the year ended December 31, 1996 and
                           incorporated herein by reference).

      10.11       -     Form of Deed of Trust dated as of November 21, 1996 (previously filed as
                           Exhibit 10.11 to the Company's Form 10-K for the year ended December
                           31, 1996 and incorporated herein by reference).

     *10.12       -     Second Amended and Restated Revolving Credit and Term Loan
                           Agreement

      *13.1       -     Annual Report to Shareholders for the year ended December 31, 1997

      *21.1       -     List of Subsidiaries of the Registrant

      *23.1       -     Consent of Coopers & Lybrand L.L.P.

      *23.2       -     Consent of KPMG Peat Marwick LLP

      *27.1       -     Financial Data Schedule (for SEC use only)
</TABLE>

     ----------------
     * Filed herewith


                                       41
<PAGE>   42


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant as duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                          RFS HOTEL INVESTORS, INC.

                          By: /s/ Robert M. Solmson
                              -------------------------------------------------
                              Robert M. Solmson
                              Chairman of the Board and Chief Executive Officer

                              Date: March 23, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURES                          TITLE                             DATE
<S>                                 <C>                               <C>
/s/ Robert M. Solmson               Chairman of the Board,            March 23, 1998
---------------------------         Chief Executive Officer
Robert M. Solmson                   and President
                                    
                                    
/s/ Michael J. Pascal               Chief Financial Officer           March 23, 1998
---------------------------         Secretary and Treasurer
Michael J. Pascal                   (principal financial and
                                    accounting officer)
                                    
/s/ H. Lance Forsdick
---------------------------
H. Lance Forsdick, Sr.              Director                          March 23, 1998

/s/ Bruce E. Campbell, Jr.
---------------------------
Bruce E. Campbell, Jr.              Director                          March 23, 1998

/s/ Michael E. Starnes
---------------------------
Michael E. Starnes                  Director                          March 23, 1998

/s/ John W. Stokes, Jr.
---------------------------
John W. Stokes, Jr.                 Director                          March 23, 1998

/s/ Harry W. Phillips, Sr.
---------------------------
Harry W. Phillips, Sr.              Director                          March 23, 1998

/s/ R. Lee Jenkins
---------------------------
R. Lee Jenkins                      Director                          March 23, 1998
</TABLE>





                                       42
<PAGE>   43


                        REPORT OF INDEPENDENT ACCOUNTANTS

         Our report on the consolidated financial statements of RFS Hotel
Investors, Inc. and subsidiaries has been incorporated by reference in this Form
10-K from page 24 of the 1997 Annual Report to Shareholders of RFS Hotel
Investors, Inc. In connection with our audits of such financial statements, we
have also audited the related financial statement schedule listed in the index
on page 39 of this Form 10-K.

         In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material aspects, the information required to be
included therein.

                                       Coopers & Lybrand L.L.P.

Memphis, Tennessee
January 20, 1998, except for
  Note 13 as to which the
  date is February 28, 1998






                                       43
<PAGE>   44
                           RFS HOTEL INVESTORS, INC.
             SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
                                 (in thousands)
                            as of December 31, 1997
                                        

<TABLE>
<CAPTION>
                                                                                                Gross Amount
                                                                   Cost Capitalized           at Which Carried       
                                          Initial Cost         Subsequent to Acquisition      at end of Period            
                                    -----------------------   ---------------------------  ---------------------          
                                              Buildings and               Buildings and            Buildings and          
 Description          Encumbrances   Land     Improvements     Land       Improvements     Land     Improvements      Total
<S>                   <C>           <C>       <C>             <C>         <C>             <C>      <C>               <C> 
Holiday Inn
  Franklin, TN            (1)       $  737       $2,094       $     1        $  353       $   738      $ 2,447       $ 3,185
Holiday Inn
  Clayton, MO             (1)        1,599        4,968                       1,376         1,599        6,344         7,943
Holiday Inn
  Columbia, SC            (1)          790        3,573                         456           790        4,029         4,819
Holiday Inn Express
  Louisville, KY          (1)        1,328        3,808                         770         1,328        4,578         5,906
Executive Inn
  Tupelo, MS             none          686        2,603                         186           686        2,789         3,475
Comfort Inn
  Conyers, GA             (1)          440        2,866           (37)           27           403        2,893         3,296
Comfort Inn
  Marietta, GA            (2)          989        5,509                         108           989        5,617         6,606
Holiday Inn
  Lafayette, LA           (1)          700        8,858                         756           700        9,614        10,314
Residence Inn
  Kansas City, MO         (1)          392        5,344                          80           392        5,424         5,816
Comfort Inn
  Ft Mill, SC             (2)          763        6,612                         109           763        6,721         7,484
Comfort Inn
  Clemson, SC             (1)          201        4,901                          61           201        4,962         5,163
Hampton Inn
  Ft Lauderdale, FL       (1)          590        4,664                         119           590        4,783         5,373
Holiday Inn Express
  Arlington Heights, IL   (1)          350        4,121                         393           350        4,514         4,864
Hampton Inn
  Denver, CO             none          500        8,098                         350           500        8,448         8,948
Holiday Inn Express
  Downers Grove, IL       (1)          400        5,784                         294           400        6,078         6,478
Comfort Inn
  Farmington Hills, MI    (1)          525        4,118                         186           525        4,304         4,829
Comfort Inn
  Grand Rapids, MI        (1)          400        3,176                          42           400        3,218         3,618
Hampton Inn
  Indianapolis, IN        (1)          475        8,008                         262           475        8,270         8,745
Hampton Inn
  Lansing, MI             (1)          500        3,647                         285           500        3,932         4,432

<CAPTION>
                                                                          Life upon Which
                          Accumulated       Net Book                      Depreciation in
                          Depreciation        Value                        Latest Income
                         Buildings and    Buildings and       Date of       Statement is
Description               Improvements     Improvements      Acquisition     Calculated  
<S>                      <C>              <C>                <C>          <C>     
Holiday Inn
  Franklin, TN                 $253            $2,194            1993            40
Holiday Inn
  Clayton, MO                   653             5,691            1993            40
Holiday Inn
  Columbia, SC                  434             3,595            1993            40
Holiday Inn Express
  Louisville, KY                460             4,118            1993            40
Executive Inn
  Tupelo, MS                    299             2,490            1993            40
Comfort Inn
  Conyers, GA                   312             2,581            1993            40
Comfort Inn
  Marietta, GA                  570             5,047            1993            40
Holiday Inn
  Lafayette, LA                 978             8,636            1993            40
Residence Inn
  Kansas City, MO               528             4,896            1994            40
Comfort Inn
  Ft Mill, SC                   625             6,096            1994            40
Comfort Inn
  Clemson, SC                   463             4,499            1994            40
Hampton Inn
  Ft Lauderdale, FL             445             4,338            1994            40
Holiday Inn Express
  Arlington Heights, IL        388             4,126            1994            40
Hampton Inn
  Denver, CO                    736             7,712            1994            40
Holiday Inn Express
  Downers Grove, IL             527             5,551            1994            40
Comfort Inn
  Farmington Hills, MI          374             3,930            1994            40
Comfort Inn
  Grand Rapids, MI              286             2,932            1994            40
Hampton Inn
  Indianapolis, IN              728             7,542            1994            40
Hampton Inn
  Lansing, MI                   337             3,595            1994            40
</TABLE>


                                    continued



<PAGE>   45

                            RFS HOTEL INVESTORS, INC.
        SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION, continued
                                 (in thousands)
                             as of December 31, 1997

<TABLE>
<CAPTION>
                                                                                                  Gross Amount
                                                                    Cost Capitalized            at Which Carried   
                                             Initial Cost          Subsequent to Acquisition    at end of Period            
                                      -----------------------     -------------------------   --------------------
                                                Buildings and               Buildings and            Buildings and 
 Description             Encumbrances   Land     Improvements     Land       Improvements     Land    Improvements    Total  
<S>                      <C>           <C>       <C>             <C>         <C>             <C>      <C>             <C> 
Hampton Inn
  Lincoln, NE                  (1)       $  350       $ 4,829                 $  328       $  350       $ 5,157       $ 5,507
Hampton Inn
  Bloomington, MN              (1)          375         8,657                    110          375         8,767         9,142
Holiday Inn Express
  Bloomington, MN              (1)          780         6,910      $ 25          181          805         7,091         7,896
Hampton Inn
  Minnetonka, MN               (1)          475         5,066                    111          475         5,177         5,652
Hampton Inn
  Oklahoma City, OK            (2)          530         6,826                    408          530         7,234         7,764
Hampton Inn
  Omaha, NE                    (2)          450         6,362                    377          450         6,739         7,189
Hampton Inn
  Tulsa, OK                    (1)          350         5,715                    376          350         6,091         6,441
Hampton Inn
  Warren, MI                   (1)          500         2,814                    205          500         3,019         3,519
Holiday Inn Express
  Wauwatosa, WI                (1)          700         4,926                    436          700         5,362         6,062
Residence Inn
  Fishkill, NY            $ 1,820         2,280        10,484                    131        2,280        10,615        12,895
Residence Inn
  Providence, RI               (2)        1,385         7,742                    206        1,385         7,948         9,333
Residence Inn
  Tyler, TX                    (1)          855         6,212                    219          855         6,431         7,286
Hampton Inn
  Memphis, TN                  (1)          980         6,157                     51          980         6,208         7,188
Residence Inn
  Ft Worth, TX                 (2)          985        10,726                     39          985        10,765        11,750
Residence Inn
  Wilmington, DE               (1)        1,100         8,488                    362        1,100         8,850         9,950
Residence Inn
  Torrance, CA                 (1)        2,600        17,789                    745        2,600        18,534        21,134
Residence Inn
  Ann Arbor, MI                (2)          525         4,461       227        3,062          752         7,523         8,275
Holiday Inn
  Flint, MI                    (1)        1,220        11,994                    254        1,220        12,248        13,468
Residence Inn
  Charlotte, NC                (2)          850         3,844       159          153        1,009         3,997         5,006
Hawthorn Suites
  Atlanta, GA                  (1)        3,000        12,886                    693        3,000        13,579        16,579

<CAPTION>
                                                                          Life upon Which
                            Accumulated       Net Book                      Depreciation in
                            Depreciation        Value                        Latest income
                          Buildings and    Buildings and       Date of       Statement is
Description                 Improvements     Improvements      Acquisition     Calculated 
<S>                        <C>              <C>                <C>          <C>     
Hampton Inn
  Lincoln, NE                  $  446            $ 4,711            1994            40
Hampton Inn
  Bloomington, MN                 778              7,989            1994            40
Holiday Inn Express
  Bloomington, MN                 624              6,467            1994            40
Hampton Inn
  Minnetonka, MN                  457              4,720            1994            40
Hampton Inn
  Oklahoma City, OK               623              6,611            1994            40
Hampton Inn
  Omaha, NE                       585              6,154            1994            40
Hampton Inn
  Tulsa, OK                       529              5,562            1994            40
Hampton Inn
  Warren, MI                      258              2,761            1994            40
Holiday Inn Express
  Wauwatosa, WI                   454              4,908            1994            40
Residence Inn
  Fishkill, NY                    899              9,716            1994            40
Residence Inn
  Providence, RI                  666              7,282            1994            40
Residence Inn
  Tyler, TX                       537              5,894            1994            40
Hampton Inn
  Memphis, TN                     502              5,706            1994            40
Residence Inn
  Ft Worth, TX                    873              9,892            1994            40
Residence Inn
  Wilmington, DE                  709              8,141            1994            40
Residence Inn
  Torrance, CA                  1,479             17,055            1994            40
Residence Inn
  Ann Arbor, MI                   392              7,131            1994            40
Holiday Inn
  Flint, MI                       958             11,290            1994            40
Residence Inn
  Charlotte, NC                   309              3,688            1994            40
Hawthorn Suites
  Atlanta, GA                     989             12,590            1994            40
</TABLE>

                                    continued



<PAGE>   46

                            RFS HOTEL INVESTORS, INC.
        SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION, continued
                                 (in thousands)
                             as of December 31, 1997

<TABLE>
<CAPTION>
                                                                                                    Gross Amount
                                                                        Cost Capitalized           at Which Carried   
                                               Initial Cost         Subsequent to Acquisition      at end of Period            
                                         -----------------------    -------------------------   ---------------------          
                                                   Buildings and               Buildings and            Buildings and          
 Description               Encumbrances   Land     Improvements     Land       Improvements     Land    Improvements    Total  
<S>                        <C>           <C>       <C>             <C>         <C>             <C>      <C>             <C> 
Holiday Inn Express
  Austin, TX                     (2)       $  500       $ 4,737               $    79       $  500      $ 4,816      $ 5,316
Hampton Inn
  Lakewood, CO                   (2)          957         6,790                    71          957        6,861        7,818
Hampton Inn
  Hattiesburg, MS                (2)          785         4,653                 1,504          785        6,157        6,942
Hampton Inn
  Laredo, TX                     (1)        1,037         4,116                    (6)       1,037        4,110        5,147
Residence Inn
  Atlanta, GA               $ 5,829         1,306        10,200                   128        1,306       10,328       11,634
Holiday Inn
  Crystal Lake, IL               (2)        1,685        10,932                    85        1,685       11,017       12,702
Residence Inn
  Orlando, FL                    (2)        1,045         8,880                    64        1,045        8,944        9,989
Residence Inn
  Sacramento, CA                 (2)        1,000        13,122                    61        1,000       13,183       14,183
Doubletree Hotel
  Del Mar, CA                    (2)        1,500        13,535                              1,500       13,535       15,035
Hampton Inn
  Plano, TX                      (1)          959         5,178                    17          959        5,195        6,154
Courtyard by Marriott
  Flint, MI                      (1)          600         4,852                   143          600        4,995        5,595
Hampton Inn
  Sedona, AZ                   none         1,464         3,858                              1,464        3,858        5,322
Hampton Inn
  Chandler, AZ                 none           485         3,950                                485        3,950        4,435
Hampton Inn
  Houston, TX                    (1)          606         4,919                                606        4,919        5,525


<CAPTION>
                                                                          Life upon Which
                            Accumulated       Net Book                      Depreciation in
                            Depreciation        Value                        Latest Income
                           Buildings and    Buildings and       Date of       Statement is
Description                 Improvements     Improvements      Acquisition     Calculated                  
<S>                        <C>              <C>                <C>          <C>     
Holiday Inn Express
  Austin, TX                     $358         $   4,458            1995            40
Hampton Inn
  Lakewood, CO                    483             6,378            1995            40
Hampton Inn
  Hattiesburg, MS                 379             5,778            1995            40
Hampton Inn
  Laredo, TX                      248             3,862            1995            40
Residence Inn
  Atlanta, GA                     576             9,752            1995            40
Holiday Inn
  Crystal Lake, IL                616            10,401            1995            40
Residence Inn
  Orlando, FL                     501             8,443            1995            40
Residence Inn
  Sacramento, CA                  657            12,526            1996            40
Doubletree Hotel
  Del Mar, CA                     562            12,973            1996            40
Hampton Inn
  Plano, TX                       194             5,001            1996            40
Courtyard by Marriott
  Flint, MI                       134             4,861            1996            40
Hampton Inn
  Sedona, AZ                       40             3,818            1997            40
Hampton Inn
  Chandler, AZ                     57             3,893            1997            40
Hampton Inn
  Houston, TX                     114             4,805            1997            40
</TABLE>

                                    continued




<PAGE>   47

                            RFS HOTEL INVESTORS, INC.
        SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION, continued
                                 (in thousands)
                             as of December 31, 1997

<TABLE>
<CAPTION>
                                                                                                    Gross Amount
                                                                        Cost Capitalized           at Which Carried   
                                               Initial Cost         Subsequent to Acquisition      at end of Period            
                                         -----------------------    -------------------------   ---------------------          
                                                   Buildings and               Buildings and            Buildings and          
 Description               Encumbrances   Land     Improvements     Land       Improvements     Land    Improvements    Total  
<S>                        <C>           <C>       <C>             <C>         <C>             <C>      <C>             <C> 
Sheraton Hotel
  Milpitas, CA                    (1)    $ 5,253     $ 23,169                                  $ 5,253     $ 23,169    $ 28,422
Sheraton Four Points
  Sunnyvale, CA                   (1)        785       22,401                                      785       22,401      23,186
Sheraton Four Points
  Pleasant, CA                    (1)      1,935       19,251                                    1,935       19,251      21,186
Sheraton Four Points
  Bakersville, CA                 (1)      1,390        7,554                                    1,390        7,554       8,944
Beverly Heritage
  Milpitas, CA                  none       5,250       25,118                                    5,250       25,118      30,368
Sheraton Hotel
  Birmingham, AL            $  5,525       3,108       13,491                                    3,108       13,491      16,599
Residence Inn
  Jacksonville, FL              none       1,339        4,990                                    1,339        4,990       6,329
Unimproved land
  Crystal Lake, IL              none         252                                                   252            0         252
Unimproved land
  Chandler, AZ                  none         485                                                   485            0         485
Unimproved land
  West Palm Beach, FL           none       1,268                                                 1,268            0       1,268
Unimproved land
  Miami, FL                     none          16                                                    16            0          16
Unimproved land
  Jacksonville, FL              none       1,047                                                 1,047            0       1,047
                            --------     -------     --------      ------      -------         -------     --------    --------
  Totals                    $ 13,174     $68,712     $461,336      $  375      $16,806         $69,087     $478,142    $547,229
                            ========     =======     ========      ======      =======         =======     ========    ========


<CAPTION>
                                                                              Life upon Which
                               Accumulated       Net Book                      Depreciation in
                              Depreciation        Value                        Latest Income
                             Buildings and    Buildings and       Date of       Statement is
Description                  Improvements     Improvements      Acquisition     Calculated                  
<S>                           <C>              <C>                <C>          <C>    
Sheraton Hotel
  Milpitas, CA                  $   579            $ 22,590            1997            40
Sheraton Four Points
  Sunnyvale, CA                     560              21,841            1997            40
Sheraton Four Points
  Pleasant, CA                      481              18,770            1997            40
Sheraton Four Points
  Bakersville, CA                   189               7,365            1997            40
Beverly Heritage
  Milpitas, CA                      367              24,751            1997            40
Sheraton Hotel
  Birmingham, AL                     84              13,407            1997            40
Residence Inn
  Jacksonville, FL                   20               4,970            1997            40
Unimproved land
  Crystal Lake, IL                  n/a                   0            1995            n/a
Unimproved land
  Chandler, AZ                      n/a                   0            1995            n/a
Unimproved land
  West Palm Beach, FL               n/a                   0            1997            n/a
Unimproved land
  Miami, FL                         n/a                   0            1997            n/a
Unimproved land
  Jacksonville, FL                  n/a                   0            1996            n/a
                                -------            --------
  Totals                        $29,662            $448,480
                                =======            ========
</TABLE>

(1) Property is collateral for the Line of Credit.
(2) Property is collateral for commercial Mortgage Bonds Payable.