U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)
   [X]    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
          ACT OF 1934
                   For the fiscal year ended December 31, 1997


   [ ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
          ACT OF 1934
            For the transition period from __________ to____________
                         Commission file number 0-22132


                          BUCKHEAD AMERICA CORPORATION
                 (Name of small business issuer in its charter)

        DELAWARE                                        58-2023732
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

             4243 DUNWOODY CLUB DRIVE, SUITE 200, ATLANTA, GA 30350
                    (Address of principal executive offices)

Issuer's telephone number.    (770)-393-2662

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

      NONE                                             NONE
(Title of each class)                (Name of each exchange on which registered)

Securities registered under Section 12(g) of the Act:

                          COMMON STOCK, PAR VALUE $.01
                                (Title of Class)

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

     Check  if  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  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-KSB
or any amendment to this Form 10-KSB.[X]

     State issuer's revenues for its most recent fiscal year. $ 18,816,191

     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the stock was
sold,  or the  average  bid and  asked  price  of such  common  equity,  as of a
specified date within the past 60 days. As of February 28, 1998: $ 8,802,038

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest practicable date. As of February 28, 1998:

          COMMON STOCK, PAR VALUE $.01 - 1,897,780 SHARES OUTSTANDING

                       DOCUMENTS INCORPORATED BY REFERENCE

     No  documents  which are  required  to be listed  under  this  caption  are
incorporated by reference.

Transitional Small Business Disclosure Format (Check one): Yes _____; No X .

533311.1

<PAGE>



                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS.

BUSINESS DEVELOPMENT

         FORM AND YEAR OF ORGANIZATION. Buckhead America Corporation ("Buckhead"
or the "Company") and most of its wholly-owned subsidiaries were incorporated in
Delaware on December 17, 1992 in connection  with the bankruptcy  reorganization
of Buckhead America Corporation ("Old Buckhead"), a Georgia corporation formerly
known  as  Days  Inns  of  America,  Inc.  ("Days  Inns"),  and  certain  of its
affiliates.  The  Company,  the  successor-in-interest  to  certain  assets  and
liabilities  of Days Inns,  commenced  operations  on December 29,  1992.  Other
wholly-owned  subsidiaries were subsequently created,  generally for the purpose
of acquiring assets.  Unless the context otherwise  requires,  references to the
Company herein include the Company and its subsidiaries.

         MATERIAL PURCHASES AND SALES OF SIGNIFICANT  ASSETS. In March 1993, the
Company  acquired  through  foreclosure  a 180-room  Days Inn hotel in  Daytona,
Florida  (the  "Daytona  Hotel") and in  September  1994,  the Company  acquired
through  foreclosure  a 150-room  Days Inns hotel in Miami,  Florida (the "Miami
Hotel").

         In  May  1994,  the  Company,  through  a  newly  formed,  wholly-owned
subsidiary, BAC Franchising Inc., a Delaware corporation, acquired the trademark
rights and license agreements comprising the Country Hearth Inn mid-priced hotel
franchise system.

         On May 15, 1995,  Buckhead acquired a fifty-five percent (55%) interest
in Heritage Inn Associates,  Ltd., a partnership  which owns a 150-room hotel in
Orlando,   Florida  formerly  known  as  the  Heritage  Inn.   Immediately  upon
acquisition,  the hotel  (the  "Orlando  Hotel")was  converted  to  operate as a
Country Hearth Inn.

         On  December  7, 1995  Buckhead  purchased  three  Homeplace  Inn hotel
properties  in Texas from  affiliates  of  American  Liberty  Hospitality,  Inc.
("ALH").  Immediately upon acquisition, the acquired hotels (the "Texas Hotels")
along with three other ALH owned  Homeplace  Inn  properties  were  converted to
operate as Country Hearth Inns.

         On March 11,  1996 the Company  acquired  an 82-room  hotel in Atlanta,
Georgia.  During the latter  half of 1996 the hotel (the  "Atlanta  Hotel")  was
renovated and refurbished and presently operates as a Country Hearth Inn.

         On August 30,  1996 the  Company  acquired  a 96-room  hotel in Dalton,
Georgia.  Renovation and  refurbishment  of that hotel was completed in February
1997 and the hotel (the "Dalton Hotel")  presently  operates as a Country Hearth
Inn.

         On December 28, 1996 the Company sold the Miami Hotel.


533311.1

<PAGE>



         On May 8, 1997,  the Company  completed  its  acquisition  of The Lodge
Keeper Group, Inc. of Prospect, Ohio ("Lodge Keeper").  Lodge Keeper operated 18
hotels under long-term leases,  held management  contracts on six Country Hearth
Inn hotels and owned a 186-room independent extended-stay hotel. Simultaneously,
Lodge Keeper assumed the management responsibilities of four hotels previously
owned by the Company.  In December 1997, the Company  entered into long-term
leases with Host Funding,  Inc.  ("Host") on two of the already managed Country
Hearth Inn hotels (the "Host Leases").

         On  September  23,  1997,  the Company  completed  its  acquisition  of
Hatfield  Inns,  LLC.  ("Hatfield").  The  acquisition  was deemed  effective on
September 1, 1997.  The  acquisition  included  eight 40-room  hotel  properties
located in Kentucky  and  Missouri  (the"Kentucky/Missouri  Hotels").  All eight
properties   have  been  converted  to  operate  as  Country  Hearth  Inns.  The
acquisition also included the plans and design rights which the Company believes
have potential for the  development and  construction  of additional properties.
Currently three properties are under development utilizing such plans.

         Additionally, during 1994, 1995, 1996 and 1997 the Company expanded its
Country  Hearth Inn  franchising  operations  by  developing  updated  prototype
hotels,  implementing a franchise sales and marketing  plan, and  establishing a
centralized room reservation system. The Company became licensed to sell Country
Hearth Inn hotel franchises in 50 states.  As of February 28, 1998,  twenty-nine
Country Hearth Inns were open and operating in eleven states,  fourteen of which
were Company owned.

BUSINESS

         PRINCIPAL   PRODUCTS  AND  SERVICES.   The  Company   operates  in  the
hospitality  industry  and its  principal  holdings  include  hotels,  leasehold
interests in hotels, loans and other investments secured by hotels,  franchising
rights,  hotel  management  contracts  and other related  assets.  Its principal
product is the  Country  Hearth Inn  mid-priced  hotel  chain  which the Company
acquired in May 1994. The primary activity of the Company involves the expansion
of the Country Hearth chain and limited-service  hotel management.  Expansion of
the chain  has been  effected  through  direct  acquisition  and  conversion  of
existing hotels and through franchise sales.  Additionally,  the Company manages
36 hotels, 13 of which are Company owned.

         A substantial portion of the Company's assets were transferred to it by
Old Buckhead.  In addition to a significant amount of cash, the principal assets
transferred to the Company were notes  receivable  primarily  secured by limited
service hotel properties, other unsecured receivables, and limited service hotel
properties acquired through  foreclosure.  As a result of the assets transferred
to it, the initial operations of the Company also included mortgage servicing .

         The Daytona Hotel is operated under a Days Inn license  agreement.  The
Daytona Hotel is managed by the Company. The Orlando, Atlanta, Dalton, Texas and
Kentucky/Missouri Hotels, as well as six other properties managed by the Company
operate  under  Country  Hearth Inns license  agreements.  ALH manages the Texas
Hotels under a hotel  management  agreement.  All other Company owned hotels are
managed by the  Company.  Additionally,  the Company  manages  seventeen  leased
properties, ten of which operate under Travelodge franchise license agreements.


533311.1
<PAGE>



         COMPETITION.  There is  significant  competition  in every phase of the
hospitality  industry  including  development,   construction,  management,  and
franchising.  The  Company  competes  in a very  limited  way with  other  hotel
management  companies because the Company generally manages only hotels which it
owns or  operates  under  long  term  leases.  There are many  hotel  management
companies in the United States,  and many of them are significantly  larger than
the Company.

         As a  franchisor,  the Company  competes  with a large  number of hotel
franchise  companies,  most of whom are much  larger  than the  Company  and own
brands which are more nationally recognized than the Company's.

         As a hotel operator,  the Company's owned and leased properties compete
with other hotels in each local  market in which they are  located.  The Company
competes directly with these other hotels for hotel guests.  The Company's rates
and occupancies are directly impacted by activities of these other hotels and by
additions to the supply of competing rooms in each local market.

         The  Company is a  relatively  new  entrant in the hotel  industry.  It
believes  that  its  management  is  experienced  in  hotel  development,  hotel
franchising,  and hotel management.  In addition, the Company may identify other
opportunities in the hospitality industry. However, existing hotel companies and
new entrants to the hotel  industry in markets which the Company may pursue will
present significant competition which may have an adverse effect on the Company.

         REGULATION.  Sales of  franchises  are  principally  regulated  through
fairly uniform state laws. Such laws generally  provide for  registration by the
franchisor  of  standardized  offering  documents and  compliance  with numerous
financial   qualifications.   The  Company  undertook  substantial  registration
activities and is presently licensed to sell Country Hearth Inn franchises in 50
states.

         RESEARCH  AND  DEVELOPMENT.  During 1997 and 1996 the Company  invested
approximately   $63,000   and   $25,000,   respectively,   in  market   studies,
environmental  studies,  and other  feasibility  analyses  relating to potential
hotel acquisitions.

         ENVIRONMENTAL  COMPLIANCE.  The Company's  operations  and  maintenance
policies and procedures at each owned property  include  policies and procedures
regarding  environmental  compliance.  The  costs  of  such  compliance  is  not
significant.

         EMPLOYEES.  As of February 28, 1998, the Company has 36 full-time and 4
part-time  corporate  employees  and  174  full-time  and  431  part-time  hotel
employees.  Three  full-time  hotel  employees  are employed  under a collective
bargaining agreement.

RISK FACTORS

         This Form 10-KSB contains forward looking statements that involve risks
and  uncertainties.  Statements  contained  in this  Form  10-KSB  that  are not
historical  facts are forward  looking  statements  that are subject to the safe
harbor  created by the Private  Securities  Litigation  Reform Act of 1995.  The
Company's actual results may differ  significantly from the results indicated by
such forward looking statements. For a discussion of risk factors, see the "RISK
FACTOR" section  contained in the Company's  Registration  Statement on Form S-3
(File No. 333-05313).


533311.1

<PAGE>



ITEM 2.  DESCRIPTION OF PROPERTY.

CORPORATE OFFICES

         The Company's corporate  headquarters are located at 4243 Dunwoody Club
Drive,  Suite 200,  Atlanta,  Georgia.  The Company leases  approximately  3,600
square  feet as its  corporate  headquarters.  The lease  term  extends  through
October 1998 at an annual rate of  approximately  $55,000.  The Company believes
that its headquarters are adequate for its current needs.

         Hotel management and accounting functions are conducted by Lodge Keeper
which  operates in leased  office  space  located in Prospect,  Ohio.  The Lodge
Keeper  leased  space  includes  approximately  16,800  square  feet and extends
through  November 2001 at an annual rate of approximately  $50,000.  The Company
believes  these offices are adequate for its current needs and provide room
for moderate  expansion.  An officer of the Company is related to  principals of
the lessor - See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

OWNED REAL PROPERTIES

         LAND.  As of February  28,  1997,  the Company  owned seven  parcels of
undeveloped and unencumbered land, with an aggregate book value of $250,889. All
of such parcels are held for sale.

The  following  table sets forth certain 1997 information  for each of the
Company's owned and leased hotels:

<TABLE>
<CAPTION>
                                                                                                   Revenue
                                                                       Average      Average          per
                              No. of          Year         Year     Occupancy         Daily        Available    Total
        Properties             Rooms         Built       Acquired    Rate(1)         Rate(1)        Room(1)    Revenue(2)
---------------------------------------------------------------------------------------------------------------------------
<S>                            <C>        <C>              <C>        <C>          <C>           <C>             <C>
Days Inn
   Daytona, FL                  180           1972         1993       40.7%        $ 46.99       $ 19.12         $1,582,446


Country Hearth Inn
   Orlando, FL                  150           1985         1995       82.5%          66.62         54.96          3,789,147


  3 Country Hearth Inns
         in Texas               120        1984-1986       1995       59.0%          45.84         27.05          1,227,272


  2 Country Hearth Inns
        in Georgia              172        1967-1971       1996       39.6%          47.75         18.91          1,239,740

8 Country Hearth Inns
  in Kentucky & Missouri        319        1993-1997       1997       57.7%          46.51         26.84            937,733

19 Leased Properties           1137        1968-1975       1997       53.9%          40.94         22.07          5,973,624

St. Louis NW Inn                186        1964-1968       1997       92.0%          19.95         18.35            840,782
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

         (1)  Statistical information represents full year of operation.
         (2)  Total revenue represents earned revenues during ownership period.



533311.1

<PAGE>



         DAYTONA  HOTEL.  The Company owns a 180-room Days Inn hotel in Daytona,
Florida  (the  "Daytona  Hotel"),  which was  acquired  by the  Company  through
foreclosure  in March 1993.  The hotel was acquired  subject to a first mortgage
which was in default. The mortgage note was restructured  effective May 15, 1994
and  as  of  December  31,  1997  had  an  unpaid  balance  of  $2,088,599.  The
restructured  note bears interest at 8%, and is due in monthly  installments  of
$15,850  until April 15, 1999 at which time the then  remaining  balance will be
due.

         The market for  comparable  rooms is extremely  competitive  due to the
large  number of  hotels/motels  in the  Daytona  area.  The area does  benefit,
however,  from certain event related  demand peaks.  Average room  occupancy and
average daily rate during 1997 was 40.7% and $46.99, respectively.

          Renovation and environmental programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management,  the property is adequately  covered by insurance and is suitable
and  adequate  for its present use.  Property  taxes in 1997 were  approximately
$69,000.

         Differences  between  financial  reporting  asset bases and federal tax
bases are not significant.  Straight-line depreciation methods are used based on
useful lives of 40 years for  depreciable  real  property and 5-10 years for all
other depreciable property.

         ORLANDO  HOTEL.  On May 15,  1995,  the Company  acquired  the majority
ownership of a 150-room hotel in Orlando,  Florida (the "Orlando Hotel").  Prior
to the  acquisition,  the Company held a second mortgage on the property with an
aggregate principal and interest balance of approximately $2.8 million (the "Old
Second  Mortgage").  The second mortgage  balance was reduced to $1 million (the
"New Second  Mortgage") in exchange for a fifty-five  percent (55%)  interest in
Heritage Inn Associates,  Ltd., the partnership  which owns the hotel. The hotel
was also subject to a first mortgage which collateralized certain Orange County,
Florida industrial development bonds (the "Orlando IRB").

         The  Orlando  IRB and the New  Second  Mortgage  were  fully  paid  and
satisfied in November 1996 with proceeds from a new first  mortgage loan secured
by the property  (the "First  Mortgage  Loan").  The First  Mortgage  Loan had a
December 31, 1997 balance of  $4,518,726,  bears  interest at 9.55% and requires
monthly  principal and interest payments of $43,028 until December 2016 at which
time the then remaining balance is due and payable.

         The market for hotel rooms in Orlando is extremely  competitive  due to
the multitude of properties in the area. The Orlando Hotel does benefit from the
large  number  of  local  attractions  and from the  Orlando  Convention  Center
activities.  The hotel is  positioned  as a lower  priced  alternative  property
situated among mega-room high rises.  Occupancy and room rates in 1997 averaged
82.5% and $66.62, respectively.

         Renovation and environmental  programs are continuously ongoing and the
Company  believes  adequate  funds are available for these  purposes.  The First
Mortgage  Loan  required  the  Company  to  expend  approximately  $200,000  for
maintenance and improvements;  as of December 31, 1997, these  requirements were
substantially  completed.  In  the  opinion  of  management,   the  property  is
adequately


<PAGE>



covered by insurance and is suitable and adequate for its present use.  Property
taxes in 1997 were approximately $113,000.

         Differences  between  financial  reporting  asset bases and federal tax
bases are not significant.  Straight-line depreciation methods are used based on
useful lives of 40 years for  depreciable  real  property and 5-10 years for all
other depreciable property.

         TEXAS HOTELS.  On December 7, 1995 Buckhead  purchased  three Homeplace
Inn hotel properties in Texas from affiliates of American  Liberty  Hospitality,
Inc. ("ALH").  The three hotels secure a first mortgage loan with a December 31,
1997 balance of $2,305,258. The remainder of the $3.6 million purchase price was
paid with approximately  $950,000 cash and 41,558 shares of the Company's common
stock.  The first  mortgage  loan matures  December 7, 2002,  bears  interest at
9.056%, and requires monthly payments of $21,680.

         Immediately upon acquisition,  the acquired hotels (the "Texas Hotels")
along with three other ALH owned  Homeplace  Inn  properties  were  converted to
operate as Country Hearth Inns.

         The Texas  Hotels are limited  service  40-room  properties  located in
smaller  southeastern  Texas  cities.   Generally,   comparable  rooms  are  not
immediately  available in their  selected  markets.  Occupancy and room rates in
1997 averaged approximately 59.0% and $45.84, respectively, during 1997.

         Renovation and environmental  programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of  management,  the  properties  are  adequately  covered by insurance  and are
suitable  and adequate for their  present  use.  Property  taxes in 1997 totaled
approximately $42,000.

         Differences  between  financial  reporting  asset bases and federal tax
bases are not significant.  Straight-line depreciation methods are used based on
useful lives of 40 years for  depreciable  real  property and 5-10 years for all
other depreciable property.

         ATLANTA HOTEL. On March 11, 1996, the Company acquired an 82-room hotel
in  Atlanta,  Georgia  formerly  known as the Sandy  Springs  Inn (the  "Atlanta
Hotel"). During the latter half of 1996, the hotel was renovated and refurbished
for  conversion  to  operate  as  a  Country  Hearth  Inn.  The  conversion  was
substantially  completed  in  January  1997  at a total  cost  of  approximately
$800,000,  approximately  half of such was financed through lease  arrangements,
which were subsequently paid off in February 1998.

         The Atlanta  Hotel  secures a first  mortgage  loan with a December 31,
1997 balance of $2,131,037. The loan bears interest at 9.5% and requires monthly
payments of $20,350 until August 11, 2016.

         The market for hotel rooms in Atlanta is extremely  competitive  due to
the  multitude  of  properties  in the  area.  The  hotel  is  positioned  as a
moderately priced property targeted  primarily at business travelers . Occupancy
and room rates in 1997 averaged approximately 45.1% and $57.09 during 1997.

         Renovation and environmental  programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management, the property is

<PAGE>



adequately  covered by  insurance  and is suitable  and adequate for its present
use. Property taxes in 1997 were approximately $37,000.

         Differences  between  financial  reporting  asset bases and federal tax
bases are not significant.  Straight-line depreciation methods are used based on
useful lives of 40 years for  depreciable  real  property and 5-10 years for all
other depreciable property.

         DALTON HOTEL. On August 30, 1996 , the Company acquired a 96-room hotel
in Dalton,  Georgia formerly known as the Sunset Inn (the "Dalton  Hotel").  The
Company immediately  initiated a renovation and refurbishment project to convert
the  hotel  to  operate  as a  90-room  Country  Hearth  Inn.  The  project  was
substantially  completed  in  February  1997  at a total  cost of  approximately
$850,000, including leased equipment which was paid off in February 1998.

         The Dalton Hotel secures a first mortgage loan with a December 31, 1997
balance of  $1,027,845.  The loan bears  interest at 9.15% and requires  monthly
payments  of $9,549  until  September  1, 2001 at which time the then  remaining
balance is due.

         The Dalton  Hotel also secures a second  mortgage  loan with a December
31, 1997  balance of  $262,079.  The loan bears  interest at 8.74% and  requires
monthly  payments  of $2,313  until  September  1, 2001,  at which time the then
remaining balance is due.

         The  property  is  positioned  to  compete  with the  existing  low and
moderately  priced  properties  in the  area.  It will  also  compete  with  new
properties  presently under  development in the area. It is located  adjacent to
and is  highly  visible  from  I-75,  a major  north/south  interstate  highway.
Occupancy  and room  rates  in 1997  averaged  approximately  34.8%  and  $36.92
respectively.

         Renovation and environmental  programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management,  the property is adequately  covered by insurance and is suitable
and  adequate  for its present use.  Property  taxes in 1997 were  approximately
$17,000.

         Differences  between  financial  reporting  asset bases and federal tax
bases are not significant.  Straight-line depreciation methods are used based on
useful lives of 40 years for  depreciable  real  property and 5-10 years for all
other depreciable property.

         KENTUCKY/MISSOURI  HOTELS.  On September 1, 1997, the Company  acquired
eight 40- room hotel  properties  located in Kentucky and Missouri from Hatfield
Inns, LLC. All eight properties (the "Kentucky/Missouri  Hotels") were converted
to Country Hearth Inns. The conversion costs were not significant; approximately
$10,000 to $20,000 per property.

         The  Kentucky/Missouri  Hotels secure first and second  mortgage  notes
payable with December 31, 1997 balances aggregating  $6,849,939.  Three of these
notes with December 31, 1997 balances of  $2,387,964  are cross  collateralized,
bear interest at 9.18%, and require  aggregate monthly payments of $21,826 until
October 1, 2007 at which time the then  remaining  balances are due and payable.
The  remaining  notes bear interest at prime plus 1% (9.5% at December 31, 1997)
and require aggregate



<PAGE>



monthly  payments of $47,188.  The notes mature at various dates  (1999-2015) at
which time the then remaining balances are due and payable.

         The  Kentucky/Missouri  Hotels are  limited  service  40-room  interior
corridor   properties  located  in  smaller  cities  where  they  enjoy  limited
competition in their selected markets. Occupancy and room rates in 1997 averaged
approximately 57.7% and $46.51 respectively.

         Renovation and environmental  programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of  management,  the  properties  are  adequately  covered by insurance  and are
suitable  and  adequate  for  their  present  use.  Property  taxes in 1997 were
approximately $96,000 on an annualized basis.

         Differences  between personal property financial  reporting asset bases
and federal tax bases are not  significant.  Federal tax bases of real  property
are  approximately  $2.4  million  less than  financial  reporting  asset bases.
Straight-line  depreciation  methods are used based on useful  lives of 40 years
for depreciable real property and 5-10 years for all other depreciable property.

         THE ST. LOUIS NW INN. The Company  acquired the 186-room  Northwest Inn
in St. Louis,  Missouri (the "NW Inn"),  as part of the May 8, 1997 Lodge Keeper
acquisition.  The property is an extended stay  facility  which is positioned to
compete with existing low priced  extended stay  properties in the area. It will
also compete with new extended stay properties  presently  under  development in
the area.  Occupancy  and room rates in 1997  averaged  approximately  92.0% and
$19.95, respectively

         The  property  secures a first  mortgage  loan with a December 31, 1997
balance of  $1,786,268.  The loan bears  interest at 8.5% and  requires  monthly
payments of $13,178  until  February 1, 2004,  at which time the then  remaining
balance is due and payable.

         Renovation and environmental  programs are continuously ongoing and the
Company believes adequate funds are available for these purposes. In the opinion
of management,  the property is adequately  covered by insurance and is suitable
and  adequate  for its present use.  Property  taxes in 1997 were  approximately
$61,000 on an annualized basis.

         Differences  between  financial  reporting  asset bases and federal tax
bases are not significant.  Straight-line depreciation methods are used based on
useful lives of 40 years for  depreciable  real  property and 5-10 years for all
other depreciable property.

         LEASED HOTELS. In addition to the owned properties described above, the
Company leases 19 other  limited-service  hotels (the "Leased Hotels") which are
primarily located in Ohio, Indiana,  and Michigan.  Lease terms range from 10 to
30 years with options to renew at varying  terms.  Certain of the leases provide
for contingent payments based upon a percentage of revenues.

         The Leased Hotels are generally  located along highways and interstates
and compete with similarly situated budget properties.  Occupancy and room rates
in 1997 averaged 53.9% and $40.94, respectively.


<PAGE>


INVESTMENT POLICIES

     Most  of  the  Company's  initial  real  estate  holdings  was  principally
hospitality   related.   Asset  acquisitions  since  inception  have  also  been
predominately hospitality related and made for the primary purpose of generating
additional  income.  Further,  management's  experience  and expertise is in the
hospitality  business.  Accordingly,  the  Company has  determined  that it will
primarily seek out investments in the hospitality  industry. In that regard, the
Board of Directors has determined  that the Company will focus upon  investments
in hospitality related companies with income growth potential.  Such investments
could  take  the  form of (a)  hotel  property  purchases,  (b)  hotel  mortgage
purchases,  (c) hotel mortgage servicing,  (d) hotel management and/or (e) hotel
franchising.  The  Board  of  Directors  has  not  set  any  limitations  on the
percentage of assets which may be invested in any one investment. These policies
may be changed without a vote of security holders.


ITEM 3.  LEGAL PROCEEDINGS.

         The Company is not a party in any pending legal  proceedings other than
routine litigation that is incidental to its business.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
         None.



<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

         The Company's  Common Stock trades on The Nasdaq Stock Market under the
symbol: BUCK.

         The  following  table  presents  the high and low sales  prices for the
Common Stock for each quarter of 1996 and 1997.


                                                                 ($ PER SHARE)
                                                               ----------------
                                                               HIGH         LOW
                                                               ----         ---
         Quarter ended March 31, 1996                          6.62        5.00
         Quarter ended June 30, 1996                           7.75        5.00
         Quarter ended September 30, 1996                      6.87        5.62
         Quarter ended December 31, 1996                       6.87        5.50
         Quarter ended March 31, 1997                          7.37        6.00
         Quarter ended June 30, 1997                           7.25        6.25
         Quarter ended September 30, 1997                      9.12        6.62
         Quarter ended December 31, 1997                       8.87        7.00


         The sales price  amounts have been  supplied by The Nasdaq Stock Market
and do not  include  retail  mark-up,  mark-down,  or  commission  and  may  not
represent actual transactions.

HOLDERS

         As of  February  28,  1998,  the  Company  estimates  that  there  were
approximately 1,000 beneficial holders of its Common Stock.

DIVIDENDS

         On September 23, 1997, the Company issued 30,000 unregistered shares of
$100 par value ten percent (10%) nonvoting  cumulative  Series A Preferred Stock
as partial consideration for the acquisition of Hatfield Inns, LLC. The Series A
Preferred  Stock has certain rights,  privileges and preferences  that limit and
qualify the rights of the Common  Stockholders  of the  Company.  Holders of the
Series A Preferred Stock are entitled to receive, prior and in preference to any
distribution to the holders of Common Stock, cumulative dividends at the rate of
10% per annum, to the extent declared by the Board of Directors. All accrued but
unpaid dividends of the Series A Preferred Stock must be paid in full before any
cash  dividend  may be declared  on the Common  Stock.  Further,  holders of the
Series A Preferred Stock have certain  preferential  distribution  rights in the
event of any liquidation, dissolution or winding-up of the Company.



<PAGE>


         During 1997,  the Board of Directors  declared  dividends of $92,333 on
the Series A Preferred Stock.

         Certain of the Company's debt obligations  contain provisions  relating
to minimum net worth and debt to equity  ratios.  In the opinion of  management,
such  restrictions  are not likely to limit the ability to pay  dividends in the
future.



<PAGE>
Item 6.  Management's Discussion and Analysis of Financial Condition and Results
of Operations.

FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION

         Two  significant  acquisitions  which nearly  doubled the assets of the
Company  highlighted 1997. On May 8, 1997, the Company completed its acquisition
of The Lodge Keeper Group, Inc. of Prospect, Ohio ("Lodge Keeper"). Lodge Keeper
operated 18 hotels under  long-term  leases,  held  management  contracts on six
Country Hearth Inn hotels and owned a 186-room independent  extended-stay hotel.
On September 23, 1997, the Company  completed its  acquisition of Hatfield Inns,
LLC.  ("Hatfield").  The  Hatfield  acquisition  included  eight  40-room  hotel
properties located in Kentucky and Missouri.

     The Lodge Keeper  acquisition  included a  fully-staffed  hotel  management
operations  center  capable  of  additional  capacity.   Simultaneous  with  the
acquisition, Lodge Keeper assumed the management responsibilities of four hotels
previously  owned by the Company.  As of December 31, 1997, Lodge Keeper managed
36 hotel  properties,  including  13 owned by the Company.  Management  believes
there is significant growth potential for its hotel management  business and the
Company  is   aggressively   pursuing   opportunities   to  manage   hotels  for
institutional and individual investors.

         The Lodge Keeper  purchase  price  totaled  approximately  $6.3 million
consisting of $825,000 cash, 106,320 shares of common stock of the Company,  and
the assumption of approximately $4.8 million of debt.  Management  believes that
hotel  management and leasehold  profits will be adequate to service the assumed
debt.

         All eight of the properties  acquired from Hatfield have been converted
to operate as Country Hearth Inns.  Conversion costs were not  significant.  The
acquisition also included the plans and design rights for these 40-room interior
corridor  properties  specifically  designed  for  smaller  markets.  Management
believes  there  is  significant   growth  potential  for  the  development  and
construction  of  these   properties.   Currently  three  properties  are  under
development utilizing such plans.

         The  Hatfield   purchase  price  totaled   approximately   $11  million
consisting  primarily  of cash and  payables  of $1.5  million,  $3  million  of
preferred  stock  issued by the  Company,  and the  assumption  or  placement of
approximately $6.5 million of debt. The preferred stock is nonvoting and accrues
cumulative dividends at the rate of 10%, payable when and to the extent declared
by the  Company's  board of directors.  All accrued but unpaid  dividends of the
preferred stock must be paid in full before any cash dividend may be declared on
the  Company's  common  stock.  Management  believes  that the acquired  hotels'
operating  profits will adequately  service the related debt and preferred stock
dividends, if declared.

         The  Company  completed  its third  full  year of  Country  Hearth  Inn
franchising, marketing, and conversion activities in 1997. At the start of 1996,
the Country Hearth chain had 15 properties open and operating in six states.  As
of December  31, 1997,  there were 29  properties  open and  operating in eleven
states.  Further,  the Company  has  executed  Country  Hearth  licenses  for an
additional 18 properties  presently  under  development.  Also during 1997,  the
Company  executed three master license  agreements for the development of 40 new
Country Hearth Inns,  three of which are presently  under  construction.  Future
activities  of the Company are  expected to continue to be focused on the growth
of the Country Hearth system.

     In 1996,  the Company  acquired an 82-room hotel in Atlanta,  Georgia and a
96-room  hotel in  Dalton,  Georgia.  Both of these  properties  have been fully
renovated and  refurbished  and are presently  operating as Country Hearth Inns.
Additionally,   in  1996  the  Company  executed  nine  license  agreements  for
development or conversion of Country Hearth Inns in seven states.



<PAGE>



     A significant  source of  unrestricted  funds during previous years was the
successful  resolution of claims  against the former Days Inns of America,  Inc.
("Old  Buckhead").  The  Company  received  over  $300,000 in 1997 and nearly $1
million in 1996 relating to these  activities.  Further  material  amounts to be
released to the Company are not anticipated.

         During 1997 and 1996, the Company  received  aggregate note  receivable
principal  payments of  approximately  $4.6 million,  including  $1.6 million of
collections on impaired  notes.  The increase in the aggregate  note  receivable
balances in 1997 resulted from notes acquired with the Lodge Keeper acquisition.
Management does not expect to make significant  amounts of loan  originations in
the future and does not expect the notes  receivable  balances to  significantly
change unless as a result of a material business acquisition.

         Most of the 1996 note receipts  were used to reduce the Company's  note
payable to Trilon International,  Inc. ("Trilon"). The Company's note payable to
Trilon had been secured by notes receivable, cash, and the Company's interest in
three hotel properties. The Trilon note was fully paid and satisfied in November
1996.

     Approximately $1.6 million of the December 31, 1996 short-term  investments
were represented by industrial  revenue bonds ("IRB's")  secured by a hotel. The
IRB's were called at par and as a result, the Company's  shareholders' equity at
December 31, 1996 included a $455,000 unrealized gain. Such gain was realized in
February 1997 when the IRB's were liquidated.

     For  operating  purposes,  the  Company  has not  historically  encountered
liquidity shortfalls,  the need for short-term  financing,  or the need to raise
additional equity capital. Significant acquisitions have been financed primarily
by mortgage debt and issuance of equity  securities  to the sellers.  Management
presently intends to pursue additional  multi-property  acquisitions and expects
to finance such acquisitions, if any, in a similar manner. The specific need for
financing  would  be  directly  impacted  by the  size  and  nature  of any such
acquisition.

     On  December  22,  1997,  the  Company  issued  $5,000,000  of  convertible
debentures  to  investment  funds  managed  by  Tower  Investment   Group,  Inc.
("Tower"). Tower manages investment funds which already owned 262,000 (13.8%) of
the outstanding  common shares of the Company.  The related debenture notes bear
interest at 8%, payable quarterly in arrears, and are due December 22, 2002. The
debentures  are  convertible  into  common  shares of the Company at any time at
$9.00 per share. If all such debentures  were converted,  an additional  555,555
shares of common stock would be issued.  The Company intends to use the proceeds
for  conversions of certain leased  properties  into Country Hearth Inns and for
deposits and/or cash portions of potential hotel acquisitions.  A portion of the
proceeds will also be used to defer the need for short term financing  which may
have  otherwise  become  necessary  due to the highly  seasonal  impact of hotel
operations.

         The  Company's  balance  sheet at December 31, 1997 includes a deferred
tax asset of $2,930,000.  In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the  deferred tax assets will not be realized.  The ultimate  realization  of
deferred tax assets is dependent upon the generation of future taxable income by
the  Company  during the  periods in which those  temporary  differences  become
deductible.  Management  considers the projected  future  taxable income and tax
planning  strategies in determining  whether a valuation allowance is necessary.
Some of the various factors considered by management are discussed below.

During 1997, the Company sold a wholly owned subsidiary which held an investment
in Days Inns Mortgage  Trust  ("DIMT").  DIMT was treated as a  partnership  for
income tax  purposes  and had  produced  significant  tax purpose net  operating
losses (NOLs)  totaling  approximately  $34 million  through  December 31, 1996.
These NOLs had no impact on the  Company's  book  provision  for  regular  taxes
because the ultimate  dissolution of the  partnership  would result in immediate
gain  recognition  for a  comparable  amount.  Because of NOL  limitations,  the
Company was  exposed,  however,  to  significant  potential  future  alternative
minimum tax liability. All of these tax attributes accompanied the DIMT interest
with its sale, and the Company's tax position is no longer impacted by DIMT.

     Also during 1997, the Internal  Revenue Service  commenced and completed an
examination of the Company's  1994 federal income tax return.  No changes to the
Company's return, as filed, were made or proposed.

     The Hatfield  acquisition  was structured as a tax-free  merger;  thus, the
Company's tax basis in the assets  acquired  were not  stepped-up to fair market
value. The resulting deferred tax liability was offset,  however, by a reduction
in the Company's deferred tax asset valuation allowance of $930,000.

     The Lodge Keeper  acquisition was similarly  structured;  thus,  there were
deferred tax  liabilities  relating to  differences in book and tax bases of the
assets  acquired.  Lodge  Keeper,  however,  had NOLs  available  to offset such
built-in  gains;  thus,  no net  deferred  tax  impact  from  the  Lodge  Keeper
acquisition was recognized by the Company.

In evaluating the impact of the above events in  conjunction  with recent trends
in the  Company's  operations,  specifically  franchising  activities  and hotel
development,  management has determined that it is more likely than not that the
results of future operations will generate  sufficient taxable income to realize
the deferred tax assets.  Such  determination  was made in the fourth quarter of
1997,  resulting in the recognition of a $2,930,000 deferred income tax benefit.
Although no assurances can be made,  realization  of the Company's  deferred tax
assets  should  occur if the  Company  generates  approximately  $10  million of
taxable income over the next 15 years.



<PAGE>


RESULTS OF OPERATIONS

         Hotel revenues and operating  profits in 1997 amounted to approximately
$15.6  million and $3.7 million,  respectively,  compared with $10.0 million and
$2.6  million in 1996.  These 1997  increases  reflect  the results of the Lodge
Keeper  and  Hatfield  acquisitions.  On  a  pro  forma  basis,  assuming  these
acquisitions  had occurred at the beginning of 1996,  hotel revenues in 1997 and
1996 would have been $23.3  million and $27.8  million,  respectively.  The 1996
amounts  include hotel  revenues of $2.5 million and  operating  profits of $0.9
million relating to a hotel which was sold in December 1996.

         For hotel  properties which were owned by the Company in 1997 and 1996,
revenues and  operating  profits  increased  slightly,  primarily as a result of
increases in average daily rates.  Management  expects this trend to continue in
1998.  Average daily rates for the  properties  acquired from Hatfield were also
increased upon their  conversion to Country  Hearth Inns. The leased  properties
acquired with Lodge Keeper  reported  profits after rent in the  aggregate.  The
leasehold  interests  in certain  properties  which are not  budgeted  to report
operating  profits  in 1998 are held for  sale.  No value was  assigned  to such
leasehold interests as part of the Lodge Keeper acquisition.

         The Company experienced an operating loss in the fourth quarter of 1997
which largely reflects the seasonal nature of limited service hotel  operations.
The  increase in the number of  properties  from the Lodge  Keeper and  Hatfield
acquisitions magnified this aspect of the Company's operations.

         Investment  income  declined from  approximately  $1 million in 1996 to
$784,000 in 1997. The 1997 amount  includes the IRB gain  previously  discussed.
Management does not expect investment income to be significant in future periods
due to the reduction in the Company's note receivable portfolio.

         Franchising  activities  generated losses of approximately  $700,000 in
1997 and 1996. The Company has continued  investing in the  establishment of the
Country Hearth Inn brand and expects that  franchising  activities will report a
loss in 1998, as well. However, management continues to believe that substantial
profits will be realized in future  years from its  investments  in  franchising
activities.

         The  Company  recognized  gains on  property  sales in 1997 and 1996 of
approximately $289,000 and $587,000,  respectively.  The Company presently holds
seven  parcels of  undeveloped  land and certain  leasehold  interests for sale.
Ultimate proceeds are not presently ascertainable.

         Other  income  in  1997  and  1996  includes   nonrecurring   gains  of
approximately $1.1 million and $1.5 million,  respectively,  from collections on
impaired notes and favorable settlements of Old Buckhead claims.


         Other  operating  and  administrative  expenses  increased  in  1997 to
approximately $2.6 million from $1.0 million in 1996. The substantial portion of
this  increase  is  attributable  to the  acquisition  of Lodge  Keeper's  hotel
management  operations.  Such  expenses  are  expected  to increase in 1998 as a
result  of owning  the  operations  for a full year and to a lesser  extent as a
result of payroll increases.

         Interest expense in 1997 increased to  approximately  $1.6 million from
$1.5 million in 1996. The increase is  attributable  to the additional debt from
the Lodge  Keeper and  Hatfield  acquisitions  offset  somewhat by the payoff of
Trilon in November 1996 and the release of a debt  obligation in connection with
a sale of a hotel in December 1996. The Company has  approximately  $4.5 million
of debt  obligations  which are floating  rate (prime plus 1%). The remainder of
the Company's debt obligations are fixed rate (8% to 9.55%). Interest expense in
1998 is expected to increase as a result of the obligations  added in 1997 being
outstanding for a full year.  Management  considers the present  borrowing rates
and  availability  of hotel  financing  to be  favorable,  thus  increasing  the
likelihood of further hotel acquisitions.

         Similarly,  depreciation and amortization expenses increased in 1997 as
a result of the hotel  acquisitions  and  should  increase  further in 1998 as a
result of the acquired properties being held for a full year.

     The Company  reported no income tax expense in 1996. This was  attributable
to differences in the book and tax bases of certain assets and  liabilities.  As
previously  discussed,  the Company recognized a $2,930,000  deferred income tax
benefit in 1997.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and displaying  comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No.  130  requires  all items  that are  required  to be  recognized  under
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  in equal  prominence  with  the  other
financial statements.  The term "comprehensive  income" is used in the statement
to describe the total of all components of  comprehensive  income  including net
income.  "Other comprehensive income" refers to revenues,  expenses,  gains, and
losses that are  included in  comprehensive  income but excluded  from  earnings
under  current  accounting  standards.  SFAS No. 130 is effective  for financial
statements for years  beginning  after December 15, 1997. The Company will adopt
SFAS No. 130 effective January 1, 1998. YEAR 2000 ISSUES

The  Company  has  evaluated  the  impact of Year 2000  issues  relating  to its
computer information systems and has determined such impact to be immaterial.




Item 7.  Financial Statements.

ANNUAL FINANCIAL STATEMENTS

     The Company's  consolidated financial statements with independent auditors'
report thereon are included on the pages which follow.


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                        Consolidated Financial Statements

                           December 31, 1997 and 1996


                    With Independent Auditors' Report Thereon



532603.1

<PAGE>
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Buckhead America Corporation:


We have audited the accompanying consolidated balance sheets of Buckhead America
Corporation  and  subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income,  shareholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these consolidated financial statements based on our audits.

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 Buckhead America
Corporation  and  subsidiaries 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



Atlanta, Georgia
February 27, 1998

<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1997 and 1996
<TABLE>
<CAPTION>

                                 Assets                               1997              1996
                                 ------                               ----              ----
<S>                                                                 <C>               <C>
Current assets:
    Cash and cash equivalents, including restricted cash of
      $410,397 in 1997 and $338,882 in 1996 (note 3)                $ 3,281,774      $ 1,801,670
    Investment securities (note 4)                                    3,188,115        3,026,873
    Accounts receivable (note 6)                                      1,049,009          396,870
    Current portions of notes receivable (note 5)                       370,520          466,988
    Other current assets                                                344,207          168,994
                                                                     ----------       ----------
           Total current assets                                       8,233,625        5,861,395

Noncurrent portions of notes receivable (note 5)                        724,307          465,518
Property and equipment, at cost, net of accumulated
    depreciation (notes 6, 8, and 9)                                 34,275,664       18,730,897
Deferred tax assets (note 12)                                         2,930,000                -
Deferred costs, net (note 7)                                          1,933,153        1,650,558
Leasehold interests, net (note 7)                                     2,839,487                -
Other assets (note 7)                                                 1,227,787          326,727
                                                                     ----------        ---------

                                                                    $52,164,023        27,035,095
                                                                     ==========        ==========

                  Liabilities and Shareholders' Equity
                  ------------------------------------

Current liabilities:
    Accounts payable and accrued expenses                           $ 3,291,528      $   933,884
    Current portions of notes payable (note 8)                          933,183          337,567
                                                                     ----------       ----------
           Total current liabilities                                  4,224,711        1,271,451

Noncurrent portions of notes payable (note 8)                        27,648,925       12,081,392
Other liabilities                                                       262,567                -
                                                                     ----------       ----------
           Total liabilities                                         32,136,203       13,352,843
                                                                     ----------       ----------

Minority interest in partnership                                        674,269          598,118

Shareholders' equity (notes 10 and 13):
    Series A preferred stock; par value $100; 200,000 shares
      authorized; 30,000 shares issued and outstanding in 1997        3,000,000                -
    Common stock; $.01 par value; 3,000,000 shares
      authorized; 1,949,630 and 1,817,977 shares issued
      and 1,897,780 and 1,771,127 shares outstanding in
      1997 and 1996, respectively                                        19,496           18,180
    Additional paid-in capital                                        6,963,024        6,288,574
    Retained earnings                                                 9,793,352        6,712,073
    Unrealized gain on investment securities                                  -          455,128
    Treasury stock, 51,850 and 46,850 common shares
      in 1997 and 1996, respectively                                   (422,321)        (389,821)
                                                                     ----------       ----------
           Total shareholders' equity                                19,353,551       13,084,134

Commitments (notes 6 and 9)
                                                                     ----------       ----------
                                                                    $52,164,023      $27,035,095
                                                                     ==========       ==========
</TABLE>


See accompanying notes to consolidated financial statements.



<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                        Consolidated Statements of Income

                     Years ended December 31, 1997 and 1996



                                                     1997              1996
                                                     ----              ----


Revenues:
    Hotel revenues                                 $15,590,744      $ 9,979,477
    Investment income                                  784,090        1,042,869
    Franchise fee income                               538,632          554,073
    Gains on property sales (note 6)                   289,300          586,864
    Other income (notes 11 and 14)                   1,613,425        1,709,522
                                                    ----------       ----------
           Total revenues                           18,816,191       13,872,805
                                                    ----------       ----------

Expenses:
    Hotel operations                                11,919,512        7,404,412
    Franchise operations                             1,265,505        1,254,943
    Other operating and administrative (note 14)     2,582,297          934,543
    Depreciation and amortization                    1,204,082          956,900
    Interest                                         1,601,183        1,505,163
                                                    ----------       ----------
           Total operating, administrative, and
               interest expenses                    18,572,579       12,055,961
                                                    ----------       ----------

           Income before income taxes                  243,612      $ 1,816,844

Deferred income tax benefit (note 12)               (2,930,000)               -
                                                    ----------       ----------

           Net income                              $ 3,173,612      $ 1,816,844
                                                    ==========       ==========

Net income per common share (note 10):
    Basic                                          $  1.67          $  1.03
                                                      ====             ====

    Diluted                                        $  1.56          $  1.00
                                                      ====             ====


See accompanying notes to consolidated financial statements.



<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                 Consolidated Statements of Shareholders' Equity

                     Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
                                                                                             Unrealized
                                                                    Additional                gain on                    Total
                                              Common    Preferred     paid-in    Retained    investment    Treasury   shareholders'
                                               stock      stock       capital    earnings    securities      stock       equity
                                               -----      -----       -------    --------    ----------      -----       ------

<S>                                           <C>       <C>           <C>         <C>          <C>        <C>          <C>
Balances at December 31, 1995                 $18,080           -     6,254,274   4,895,229      51,717    (389,821)   $10,829,479
Issue of 10,000 common shares
    pursuant to exercise of option                100           -        34,300           -           -           -         34,400
Change in unrealized gain on
    investment securities                           -           -             -           -     403,411           -        403,411
Net income                                          -           -             -   1,816,844           -           -      1,816,844
                                               ------   ---------     ---------   ---------    --------   ---------     ----------
Balances at December 31, 1996                  18,180           -     6,288,574   6,712,073     455,128    (389,821)    13,084,134

Issue of 106,320 common shares
    for business acquisition, net of
    5,000 treasury shares acquired              1,063           -       690,017           -           -     (32,500)       658,580
Issue of 25,333 common shares
    pursuant to exercise of options               253           -        97,239           -           -           -         97,492
Issue of 30,000 preferred shares for
    business acquisition, net of
    $112,806 issuance costs                         -   3,000,000      (112,806)          -           -           -      2,887,194
Change in unrealized gain on
    investment securities                           -           -             -           -    (455,128)          -       (455,128)
Preferred stock dividends                           -           -             -     (92,333)          -           -        (92,333)
Net income                                          -           -             -   3,173,612           -           -      3,173,612
                                               ------   ---------     ---------   ---------    --------   ---------     ----------

Balances at December 31, 1997                 $19,496   3,000,000     6,963,024   9,793,352           -    (422,321)   $19,353,551
                                               ======   =========     =========   =========    ========    =========    ==========
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                     Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
                                                                               1997              1996
                                                                               ----              ----
<S>                                                                           <C>              <C>

Cash flows from operating activities:
    Net income                                                                $3,173,612       $1,816,844
    Adjustments to reconcile net income to net cash (used in)
      provided by operating activities:
        Depreciation and amortization                                          1,204,082          956,900
        Sales (purchases) of trading securities, net                          (1,631,470)         417,525
        Realized gains on trading securities                                    (146,527)         (24,748)
        Unrealized holding losses (gains) on trading securities                   51,755         (163,103)
        Realized gains on available-for-sale securities                         (455,128)               -
        Gains on property sales                                                 (289,300)        (586,864)
        Gain on note sale                                                       (800,000)        (700,000)
        Minority interest in partnership income                                  121,154          174,725
        Equity in joint venture losses                                           125,487                -
        Deferred income tax benefit                                           (2,930,000)               -
        Change in assets and liabilities, net of effect of acquisitions:
             Accounts receivable                                                (415,596)          19,437
             Accounts payable and accrued expenses                              (162,000)        (753,250)
             Other, net                                                           79,267         (207,514)
                                                                               ---------        ---------
              Net cash (used in) provided by operating activities             (2,074,664)         949,952
                                                                               ---------        ---------

Cash flows from investing activities:
    Note receivable principal receipts                                         1,188,566        3,419,472
    Originations of notes receivable                                            (440,000)        (282,389)
    Acquisitions of businesses and hotels                                     (1,601,815)      (1,163,457)
    Capital expenditures                                                      (1,364,478)      (1,681,306)
    Investments in joint ventures                                               (648,525)        (291,727)
    Investment maturities                                                      1,565,000           90,000
    Proceeds from property sales                                                 348,000        1,342,859
                                                                               ---------        ---------
              Net cash (used in) provided by investing activities               (953,252)       1,433,452
                                                                               ---------        ---------

Cash flows from financing activities:
    Proceeds from notes payable                                                5,396,353          376,769
    Repayments of notes payable                                                 (848,489)      (4,143,064)
    Distribution to minority interest partners                                   (45,003)         (22,500)
    Issuance of common shares                                                     97,492           34,400
    Preferred stock dividends                                                    (92,333)               -
                                                                               ---------        ---------
              Net cash provided by (used in) financing activities              4,508,020       (3,754,395)
                                                                               ---------        ---------

              Net increase (decrease) in cash and cash equivalents             1,480,104       (1,370,991)

Cash and cash equivalents at beginning of year                                 1,801,670        3,172,661
                                                                               ---------        ---------

Cash and cash equivalents at end of year                                      $3,281,774       $1,801,670
                                                                               =========        =========
</TABLE>

                                                                     (Continued)


<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows



Supplemental disclosure of cash flow information -
    cash paid for interest, net of interest capitalized
    of $32,843 in 1997 and $110,412 in 1996             $1,615,431     1,476,618
                                                         =========     =========

Supplemental disclosures of noncash investing and financing activities:

    In May 1997,  the Company  recorded the  following  amounts  relating to the
    acquisition of The Lodge Keeper Group, Inc.:

        Costs:
          Cash                                                      $   825,000
          Common stock issued, net of treasury stock acquired           658,580
          Debt assumed                                                4,784,754
                                                                       --------
                                                                    $ 6,268,334
                                                                      =========
           Allocated to:
               Property and equipment                               $ 4,489,490
               Other assets                                           3,127,860
               Working capital deficit                               (1,349,016)
                                                                      ---------

                                                                    $ 6,268,334
                                                                      =========

    In September 1997, the Company  recorded the following  amounts  relating to
    the acquisition of Hatfield Inns, LLC:

           Costs:
               Cash and payables                                    $ 1,464,293
               Preferred stock issued, net of issuance costs          2,887,194
               Debt assumed or placed                                 6,547,911
                                                                      ---------

                                                                    $10,899,398
                                                                     ==========

           Allocated to:
               Property and equipment                               $10,740,632
               Other assets                                             158,766
                                                                     ----------

                                                                    $10,899,398
                                                                     ==========

                                                                     (Continued)


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows


    In 1996, the Company recorded the following  activity related to noncash and
    partial cash transactions:

           Acquisition of two hotels through partial cash transactions:
                  Cash paid                                         $ 1,163,457
                  Debt issued                                         3,450,000
                                                                      ----------

                  Property and equipment acquired                   $ 4,613,457
                                                                      ==========

           Sale of two hotels through partial cash transactions:
               Book value of properties sold                        $ 6,297,614
               Debt retired                                          (5,541,619)
                                                                      ----------
                                                                        755,995
               Gains on property sales                                  586,864
                                                                      ----------

               Proceeds from property sales                         $ 1,342,859
                                                                      ==========

           Refinanced debt relating to hotel property:
               New debt issued                                      $ 4,600,000
               Old debt retired                                      (4,000,000)
                                                                      ----------
                                                                        600,000
               New debt issuance costs                                 (223,231)
                                                                      ----------
               Proceeds from property refinancing                   $   376,769
                                                                     ===========



See accompanying notes to consolidated financial statements.


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996


(1)       THE COMPANY
          -----------

          Buckhead  America  Corporation  (the  Company) was created in December
          1992 and  effectively  commenced  operations  on January 1, 1993.  The
          Company  operates  in  the  hospitality  industry  and  its  principal
          holdings  include  hotels,  loans and  other  investments  secured  by
          hotels,  hotel management  contracts,  hotel franchising  rights,  and
          other related assets.  Its principal product is the Country Hearth Inn
          midpriced  hotel  franchise  system which the Company  acquired in May
          1994.

          The primary activities of the Company involve hotel management,  hotel
          franchising, and hotel development/ownership. Expansion of the Country
          Hearth franchise  system is being effected through direct  acquisition
          and conversion of existing hotels and through franchise sales.

          The Company also owns and manages other hotel  properties not included
          in  the  Country  Hearth  system.  Hotel  management   operations  are
          conducted  through the Company's  wholly owned  subsidiary,  The Lodge
          Keeper Group, Inc.

(2)       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
          ------------------------------------------

          (a)  PRINCIPLES OF CONSOLIDATION
               ---------------------------

          The  accompanying  financial  statements  include the  accounts of the
          Company and its  consolidated  wholly  owned  subsidiaries.  They also
          include,  on  a  consolidated  basis,  the  accounts  of  a  55%-owned
          partnership which owns a hotel subject to a nonrecourse mortgage.  The
          accounts of the partnership are consolidated on a gross basis with the
          minority partners' interest reflected separately on a net basis.

          (b)  CASH AND CASH EQUIVALENTS
               -------------------------

          Cash and cash  equivalents  include  demand and savings  deposits with
          financial  institutions,  cash on hand, and funds held by trustees for
          the benefit of the Company or its creditors. The Company considers all
          highly liquid instruments with maturities of less than three months to
          be cash equivalents.

          (c)  NOTES RECEIVABLE
               ----------------

          Notes receivable are recorded at cost, less the related  allowance for
          impaired   notes   receivable.   The  Company,   considering   current
          information and events regarding the borrowers' ability to repay their
          obligations,  values its notes  receivable,  for which it is  probable
          that the  Company  will be unable to  collect  the full  amount due in
          accordance  with  the  note  agreement,  at the  present  value of the
          expected future cash flows, market price of the loan, if available, or
          the value of the underlying  collateral,  if any. The Company does not
          accrue interest for notes receivable  considered to be impaired.  Cash
          receipts  on  impaired  notes  receivable  is either  applied  against
          principal  or  may  be  reported  as  interest  income   depending  on
          management's judgment as to the collectibility of principal.


                                                                     (Continued)


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


      (d)   PROPERTY AND EQUIPMENT
            ----------------------

            Property  and  equipment is stated at cost,  including  interest and
            taxes incurred during construction,  less accumulated  depreciation.
            Properties acquired by foreclosure are recorded at the lower of cost
            or fair value at the time of foreclosure.

            Depreciation   on  property  and  equipment  is  calculated  on  the
            straight-line  method over the estimated useful lives of the assets.
            Property  and  equipment  held under  capital  leases and  leasehold
            improvements  are  amortized  over the  shorter of the lease term or
            estimated useful life of the asset.

            Property and equipment is reviewed for impairment whenever events or
            changes in  circumstances  indicate  that the carrying  amount of an
            asset  may  not be  recoverable.  Recoverability  is  measured  by a
            comparison  of the  carrying  amount of the asset to future net cash
            flows  expected  to be  generated  by the asset.  If such assets are
            considered  to be  impaired,  the  impairment  to be  recognized  is
            measured  by the amount by which the  carrying  amount of the assets
            exceeds the fair value of the assets.

      (e)   DEFERRED COSTS
            --------------

            Deferred  costs  primarily  consist  of  costs  associated  with the
            acquisition  of  trademark  rights and  franchise  licenses  and are
            amortized over the estimated useful lives of the assets, which range
            from 10 - 20 years.  Deferred  costs also include  unamortized  debt
            issue costs which are amortized on the interest method over the term
            of the related debt.

      (f)   INVESTMENT SECURITIES
            ---------------------

            The Company  classifies its debt and marketable equity securities in
            one of three  categories:  trading,  available  for sale, or held to
            maturity.  The  Company has  classified  all of its  investments  as
            either  "trading"  or  "available  for  sale."  Available  for  sale
            securities  are  recorded  at fair value with  unrealized  gains and
            losses,  net of the  related  tax  effect,  reported  as a  separate
            component of shareholders' equity until realized. Trading securities
            are also recorded at fair value. Unrealized holding gains and losses
            on trading  securities  are  included  in  investment  income in the
            consolidated statements of income.

      (g)   LEASEHOLD INTERESTS
            -------------------

            Leasehold   interests   are   stated  at  cost,   less   accumulated
            amortization. Amortization is calculated on the straight-line method
            over the expected life of the lease.

      (h)   OTHER ASSETS
            ------------

            Other  assets  primarily  consist of  deposits  and  investments  in
            partnerships  or corporate joint ventures other than those which are
            consolidated due to control.  Investees in which the Company has the
            ability to exercise  significant  influence  are accounted for using
            the equity method.



                                                                     (Continued)


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


      (i)  INCOME TAXES
           ------------

           Income taxes are accounted for under the asset and liability  method.
           Deferred tax assets and liabilities are recognized for the future tax
           consequences   attributable  to  differences  between  the  financial
           statement  carrying  amounts of existing  assets and  liabilities and
           their  respective  tax  bases  and  operating  loss  and  tax  credit
           carryforwards. Deferred tax assets and liabilities are measured using
           enacted tax rates expected to apply to taxable income in the years 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.

           A valuation allowance is recognized when it appears it is more likely
           than  not  that  some  or all of  deferred  tax  assets  will  not be
           realized.

      (j)  TREASURY STOCK
           --------------

           Treasury  stock is stated at cost. In noncash  exchanges,  fair value
           represents cost.

      (k)  REVENUE RECOGNITION
           -------------------

           Hotel revenue is recognized as earned,  which is generally defined as
           the date upon which a guest  occupies a room and utilizes the hotel's
           services.

           Initial hotel franchise fees are recognized as income upon receipt as
           the Company  has no future  obligations  associated  with the initial
           fees. The Company also receives  continuing royalty,  marketing,  and
           other fees based upon a percentage  of each hotel's  gross  revenues.
           These continuing fees are recognized when earned.

           Investment income is recognized as earned.

      (l)  MARKETING COSTS
           ---------------

           The  Company  incurs  costs for  various  marketing  and  advertising
           efforts.  All costs related to marketing and advertising are expensed
           in the period  incurred.  Marketing  costs  amounted to $368,289  and
           $397,555   for  the  years   ended   December   31,  1997  and  1996,
           respectively, and are included in franchise operations expense in the
           accompanying consolidated statements of income.

      (m)  FAIR VALUE OF FINANCIAL INSTRUMENTS
           -----------------------------------

           Management  believes  that  the  carrying  amounts  of cash  and cash
           equivalents,  accounts  receivable,  other current  assets,  accounts
           payable and accrued  expenses,  current  portions of notes receivable
           and payable are reasonable approximations of their fair value because
           of the short-term nature of these instruments.


                                                                     (Continued)



<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


           The  fair  value  of  noncurrent  portions  of  notes  receivable  is
           determined  as the  present  value  of  expected  future  cash  flows
           discounted  at the interest  rate  currently  offered by the Company,
           which   approximates   rates  currently   offered  by  local  lending
           institutions  for loans of similar terms to companies with comparable
           credit risk. Based on this valuation methodology, management believes
           that  the  carrying  amount  of  the  noncurrent  portions  of  notes
           receivable is a reasonable approximation of its fair value.

           The  fair  values  of   investment   securities   (both  trading  and
           available-for-sale)   are  based  on  quoted  market  prices  at  the
           reporting date for those or similar  investments.  The fair values of
           the Company's investment securities are disclosed in note 4.

           The fair value of the Company's  noncurrent portions of notes payable
           is estimated by discounting  the future cash flows of each instrument
           at  rates   currently   offered  to  the  Company  for  similar  debt
           instruments of comparable maturities by the Company's bankers.  Based
           on this valuation methodology,  management believes that the carrying
           amount of the  noncurrent  portions of notes  payable is a reasonable
           estimation of its fair value.

      (n)  RECLASSIFICATIONS
           -----------------

           Certain  reclassifications  have  been made to the 1996  balances  to
           conform with classifications adopted in 1997.

      (o)  USE OF ESTIMATES
           ----------------

           Management  of  the  Company  has  made a  number  of  estimates  and
           assumptions  relating to the reporting of assets and  liabilities and
           the disclosure of contingent assets and liabilities as of the balance
           sheet date and revenues and expenses  during the reporting  period to
           prepare  these  financial  statements in  conformity  with  generally
           accepted  accounting  principles.  Actual  results  could differ from
           those estimates.

      (p)  STOCK OPTIONS
           -------------

           Prior to January 1, 1996, the Company  accounted for its stock option
           plan in accordance with the provisions of Accounting Principles Board
           ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
           related  interpretations.  As  such,  compensation  expense  would be
           recorded on the date of grant only if the current market price of the
           underlying stock exceeded the exercise price. On January 1, 1996, the
           Company adopted Statement of Financial  Accounting Standards ("SFAS")
           No. 123,  Accounting for Stock-Based  Compensation,  which encourages
           entities to  recognize  as expense  over the vesting  period the fair
           value of all stock-based awards on the date of grant.  Alternatively,
           SFAS No. 123 allows  entities to continue to apply the  provisions of
           APB  Opinion  No. 25 and  provide  pro forma net income and pro forma
           earnings per share disclosures for employee stock option grants as if
           the fair-value-based method defined in SFAS No. 123 had been applied.
           The Company has  elected to continue to apply the  provisions  of APB
           Opinion No. 25 and provide the pro forma provisions of SFAS No. 123.

                                                                     (Continued)



<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


      (q)  EARNINGS PER SHARE
           ------------------

           In February 1997, the Financial  Accounting  Standards Board ("FASB")
           issued SFAS No. 128,  Earnings Per Share. SFAS No. 128 supersedes APB
           Opinion No. 15,  Earnings Per Share,  and specifies the  computation,
           presentation,  and  disclosure  requirements  for  earnings per share
           ("EPS").  SFAS No. 128 replaces the  presentation  of primary EPS and
           fully diluted EPS with a  presentation  of basic EPS and diluted EPS,
           respectively.  SFAS No. 128 also requires dual  presentation of basic
           and diluted EPS on the face of the income  statement for all entities
           with complex capital  structures.  All prior period EPS data has been
           restated to conform with SFAS No. 128.

      (r)  IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
           --------------------------------------------------------------------
           OF
           --

           The Company  adopted the  provisions of SFAS No. 121,  Accounting for
           the Impairment of Long-Lived  Assets and for Long-Lived  Assets to Be
           Disposed  Of, on  January  1,  1996.  This  statement  requires  that
           long-lived  assets and certain  identifiable  intangibles be reviewed
           for impairment  whenever events or changes in circumstances  indicate
           that  the  carrying  amount  of an  asset  may  not  be  recoverable.
           Recoverability  of  assets  to be  held  and  used is  measured  by a
           comparison  of the  carrying  amount of an asset to  future  net cash
           flows  expected  to be  generated  by the asset.  If such  assets are
           considered  to  be  impaired,  the  impairment  to be  recognized  is
           measured  by the  amount by which the  carrying  amount of the assets
           exceed the fair value of the  assets.  Assets to be  disposed  of are
           reported at the lower of the carrying amount or fair value less costs
           to sell. Adoption of this statement did not have a material impact on
           the  Company's   financial  position,   results  of  operations,   or
           liquidity.

      (s)  RECENT ACCOUNTING PRONOUNCEMENTS
           --------------------------------

           In June 1997, the FASB issued SFAS No. 130,  Reporting  Comprehensive
           Income.  This  statement  establishes  standards  for  reporting  and
           displaying  comprehensive  income and its components in a full set of
           general purpose financial statements. SFAS No. 130 requires all items
           that are  required to be  recognized  under  accounting  standards as
           components  of  comprehensive  income  be  reported  in  a  financial
           statement  that is  displayed  in equal  prominence  with  the  other
           financial statements.  The term "comprehensive income" is used in the
           statement to describe the total of all  components  of  comprehensive
           income including net income.  "Other comprehensive  income" refers to
           revenues,   expenses,   gains,   and  losses  that  are  included  in
           comprehensive   income  but  excluded  from  earnings  under  current
           accounting  standards.  SFAS  No.  130  is  effective  for  financial
           statements for years  beginning  after December 15, 1997. The Company
           will adopt SFAS No. 130 effective January 1, 1998.


                                                                     (Continued)



<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(3)    CASH AND CASH EQUIVALENTS
       -------------------------

       Cash and cash  equivalents  at December  31, 1997 and 1996  included  the
       following:

                                                             1997         1996
                                                             ----         ----

           Unrestricted cash:
             Demand deposits, money market funds,
               and overnight investments                 $ 2,264,632  $1,244,396
             Hotel demand deposits, savings accounts,
               and cash on hand                              606,745     218,392
                                                           ---------   ---------
                                                           2,871,377   1,462,788
                                                           ---------   ---------
           Restricted cash:
             Unsettled claim reserves (a)                     27,282      18,308
             Mortgage-related escrows (b)                    330,625     320,574
             Insurance deposits (c)                           52,490           -
                                                           ---------   ---------
                                                             410,397     338,882
                                                           ---------   ---------

                                                         $ 3,281,774  $1,801,670
                                                           =========   =========

           (a)   The Company acts as a trustee and  administers  certain aspects
                 of claims  asserted in the  bankruptcy  of the entity  formerly
                 known as Days Inns of America, Inc. (the Days Bankruptcy).  The
                 residual  amounts,  if any, in certain of the  related  reserve
                 accounts  inure  to the  benefit  of  the  Company  (note  11).
                 Accordingly,   these   accounts,   along   with   the   related
                 liabilities,  are  reflected in the  accompanying  consolidated
                 balance sheets.  Such  liabilities,  which equal the restricted
                 cash  balances,  are  included in accounts  payable and accrued
                 expenses.

           (b)   Mortgage-related  escrows are standard reserve accounts held by
                 or on behalf of the  holders of  mortgages  on certain  Company
                 properties (note 8). Such amounts are restricted to the payment
                 of insurance,  property  taxes,  and/or  property and equipment
                 replacements  and   enhancements   relating  to  the  mortgaged
                 properties.

           (c)   The  Company  is   self-insured   for   workers'   compensation
                 liabilities relating to certain employees in certain locations.
                 Some  states   require   deposits  be  made  by   self-insuring
                 companies.  Such  deposits  are  restricted  to the  payment of
                 workers' compensation claims which are otherwise not settled.


                                                                     (Continued)


<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(4)    INVESTMENT SECURITIES
       ---------------------

       The amortized cost,  gross  unrealized  holding gains,  gross  unrealized
       holding  losses,  and  fair  value  for  trading  and  available-for-sale
       securities  by  investment  type and class of  investment at December 31,
       1997 and 1996, were as follows:

                                                   1997
                                     ___________________________________________
                                                   Gross       Gross
                                                 unrealized  unrealized
                                      Amortized    holding    holding    Fair
                                         cost        gains     losses    value
                                      ---------  ----------  ----------  -------
           Trading securities:
             U.S. government and
              agency obligations   $ 2,962,739       -         -      $2,962,739
             Equity securities          10,763     216,779  (2,166)      225,376
                                    ----------     -------  -------    ---------

                    Total          $ 2,973,502     216,779  (2,166)   $3,188,115
                                     =========     =======   ======    =========


                                                    1996
                                   _____________________________________________
                                                    Gross      Gross
                                                 unrealized  unrealized
                                    Amortized      holding     holding    Fair
                                      cost          gains      losses     value
                                    _________    __________   __________  ______
           Trading securities:
               U.S. government and
                 agency obligations $ 1,184,742       -        -      $1,184,742
               Equity securities         10,763     268,703  (2,335)     277,131
                                     ----------     -------  -------   ---------
                                      1,195,505     268,703  (2,335)   1,461,873

           Available-for-sale securities:
               IRBs ($1,565,000 par
                 value)               1,109,872     455,128     -      1,565,000
                                      ---------     -------   ------   ---------

                    Total            $2,305,377     723,831   (2,335) $3,026,873
                                      =========     =======    ======  =========

       At  December  31,  1997 and  1996,  all  investments  are  classified  as
       short-term.

       The IRBs were secured by a Days Inn hotel located in Birmingham,  Alabama
       and were  called at par on February  1, 1997.  Investment  income in 1997
       includes a realized gain of $455,128 resulting from the call of the IRBs.


                                                                     (Continued)



<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       Equity  securities  are primarily  concentrated  in  hospitality  related
       companies.

       Proceeds  from  the  sale  of  trading  securities  were  $2,600,000  and
       $3,887,000 in 1997 and 1996, respectively.  Net realized gains calculated
       on a specific  identification  basis and included in investment income in
       1997 was $146,527 and in 1996 was $24,748.

       The  Company  owned the equity  certificates  representing  the  residual
       interest in the Days Inns Mortgage Trust ("DIMT"),  a special-purpose CMO
       Trust.  The Company  initially  recorded the investment at zero which was
       the estimated net realizable value of the certificates.  During 1996, the
       Company  sold an option to  purchase  the equity  certificates  to a DIMT
       bondholder.  As  a  result  of  the  sale  of  the  option,  the  Company
       reclassified  its  investment in DIMT from available for sale to trading,
       and the option price of $275,000 is included in 1996  investment  income.
       In February  1997, the option was exercised and the Company sold the DIMT
       equity  certificates for $100,000.  Such amount is included in unrealized
       holding gains on trading securities at December 31, 1996.

(5)    NOTES RECEIVABLE
       ----------------

       Notes receivable at December 31, 1997 consist of the following:

                                                      Other
                                      Secured         notes          Total
                                      -------         -----          -----
         Principal balances        $    232,048       920,653    $ 1,152,701
         Less allowances                 40,856        17,018         57,874
                                      ---------    ----------     ----------
                                        191,192       903,635      1,094,827

         Less current portions          191,192       179,328        370,520
                                        -------       -------     ----------

         Noncurrent portions       $          -       724,307    $   724,307
                                      =========       =======     ==========

         Number of notes                4               9              13
                                        =               =              ==


       Notes receivable at December 31, 1996 consist of the following:

                                                      Other
                                      Secured         notes          Total
                                      -------         -----          -----
         Principal balances         $ 1,849,254       525,062     $ 2,374,316
         Less allowances              1,341,810       100,000       1,441,810
                                      ---------       -------       ---------
                                        507,444       425,062         932,506
         Less current portions          359,481       107,507         466,988
                                      ---------       -------       ---------

         Noncurrent portions         $  147,963       317,555      $  465,518
                                      =========       =======       =========

         Number of notes                 6              2               8
                                         =              =               =


                                                                     (Continued)


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       The secured  notes are  primarily  collateralized  by  mortgages on hotel
       properties.

       The recorded  investment in notes  receivable for which an impairment has
       been  recognized  as of  December  31,  1997 and  1996 was  approximately
       $17,018 and $1,290,954,  respectively, and the Company has fully reserved
       for these notes.  Cash received in payment of impaired  loans during 1997
       and 1996 amounted to $806,199 and $831,468, respectively, and is included
       in other income in the accompanying consolidated statements of income.

       The activity in the allowance for doubtful notes receivable for the years
       ended December 31, 1997 and 1996 was:
<TABLE>
                                                                       1997            1996
                                                                       ----            ----
       <S>                                                          <C>             <C>
       Allowance for doubtful notes at beginning of year            $ 1,441,810     $2,380,450
       Allowance allocated to impaired notes acquired in
           business combination                                          41,196              -
       Write-downs charged against the allowance                       (618,933)      (107,172)
       Collections on impaired notes                                   (806,199)      (831,468)
                                                                       ---------     ----------

       Allowance for doubtful notes at end of year                  $    57,874     $1,441,810
                                                                        ========     =========
</TABLE>
(6)    PROPERTY AND EQUIPMENT
       ----------------------

       Property  and  equipment  at December  31,  1997 and 1996  consist of the
       following:
<TABLE>
                                                                       1997            1996
                                                                       ----            ----
        <S>                                                         <C>              <C>
        Hotel properties:
         Country Hearth Inn in Atlanta, Georgia:
            Land and building                                       $ 3,910,363      $ 3,729,808
            Furniture, fixtures, and equipment                           61,240           92,623
                                                                     -----------      ----------
                                                                      3,971,603        3,822,431
               Accumulated depreciation                                (137,550)         (18,500)
                                                                     -----------      ----------
                                                                      3,834,053        3,803,931
                                                                     -----------      -----------
         Country Hearth Inn in Dalton, Georgia:
               Land and building                                      1,952,639        1,821,040
               Furniture, fixtures, and equipment                       300,660          100,000
                                                                     -----------      -----------
                                                                      2,253,299        1,921,040
               Accumulated depreciation                                 (72,686)              -
                                                                     -----------      ----------
                                                                      2,180,613        1,921,040
                                                                     -----------      ----------
         Country Hearth Inn in Orlando, Florida:
               Land and building                                      6,932,578        6,909,268
               Furniture, fixtures, and equipment                       933,259          546,419
                                                                     -----------      -----------
                                                                      7,865,837        7,455,687
               Accumulated depreciation                              (1,319,416)      (1,080,268)
                                                                     -----------      -----------
                                                                      6,546,421        6,375,419
                                                                     -----------      -----------
</TABLE>

                                                                     (Continued)



<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

<TABLE>
         <S>                                                       <C>               <C>
        Three Country Hearth Inns in southeastern
            Texas:
               Land and buildings                                  $  3,033,000      $ 3,033,000
               Furniture, fixtures, and equipment                       537,995          522,793
                                                                    -----------       ----------
                                                                      3,570,995        3,555,793
               Accumulated depreciation                                (318,500)        (162,500)
                                                                    -----------       ----------
                                                                      3,252,495        3,393,293
                                                                    -----------       ----------
         Eight Country Hearth Inns in Kentucky
            and Missouri:
               Land and buildings                                     9,744,326                -
               Furniture, fixtures, and equipment                     1,363,557                -
                                                                     11,107,883                -
               Accumulated depreciation                                (129,000)               -
                                                                     10,978,883                -

         Days Inn in Daytona, Florida:
            Land and building                                         3,029,895        3,025,591
            Furniture, fixtures, and equipment                          338,363          326,729
            Capital lease assets                                         49,110               _-
                                                                     ----------       ----------
                                                                      3,417,368        3,352,320
            Accumulated depreciation and amortization                  (455,052)        (359,391)
                                                                     ----------       ----------
                                                                      2,962,316        2,992,929

         Extended-stay facility in St. Louis, Missouri:
            Land and building                                         3,382,966                -
            Furniture, fixtures, and equipment                          111,785                -
                                                                      3,494,751                -
            Accumulated depreciation                                    (53,457)               -
                                                                      3,441,294                -
         Seventeen leased hotel properties in the Midwest:
            Leasehold improvements                                      383,837                -
            Furniture, fixtures, and equipment                          257,202                -
            Capital lease assets                                        156,268                -
                                                                     ----------       ----------
                                                                        797,307                -
            Accumulated depreciation and amortization                   (95,892)               -
                                                                        701,415                -

         Corporate offices:
            Leasehold improvements                                       60,985                -
            Furniture, fixtures, and equipment                          145,539           73,785
                                                                        206,524           73,785
            Accumulated depreciation                                    (79,239)         (45,000)
                                                                     ----------       ----------
                                                                        127,285           28,785
                                                                     ----------       ----------

         Land held for sale                                             250,889          215,500
                                                                     ----------       ----------

                    Total property and equipment                   $ 34,275,664     $ 18,730,897
                                                                     ==========       ==========
</TABLE>

                                                                     (Continued)

<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


          In March  1996,  the  Company  acquired  an 82-room  hotel in Atlanta,
          Georgia  formerly  known as the  Sandy  Springs  Inn.  The  $3,060,000
          purchase price was partially  funded by a  seller-provided  $2,330,000
          first  mortgage loan (note 8). The remainder was paid in cash.  During
          the latter half of 1996, the Company spent approximately  $700,000 for
          renovations  and  refurbishments  and converted the hotel to a Country
          Hearth  Inn.  The  operations  of the hotel are  included  in the 1996
          consolidated income statement from the date of acquisition.

          In August  1996,  the  Company  acquired  a 96-room  hotel in  Dalton,
          Georgia  formerly  known as the Sunset Inn.  The  $1,400,000  purchase
          price was partially  funded by a $1,050,000 first mortgage loan from a
          local bank and a seller-provided $70,000 purchase money note (note 8).
          The remainder was paid in cash. The Company completed  renovations and
          refurbishments  in February  1997 and converted the hotel to a Country
          Hearth Inn. Expenditures for such amounted to approximately  $850,000.
          The  operations  of the hotel are  included  in the 1996  consolidated
          income  statement  from the date of  acquisition.  A  $262,500  second
          mortgage was added in 1997 (note 8).

          In May 1995,  the Company  acquired  majority  ownership in a 150-room
          hotel  in  Orlando,  Florida  formerly  known  as  the  Heritage  Inn.
          Immediately upon acquisition,  the hotel was converted to operate as a
          Country Hearth Inn. The hotel secures a first mortgage loan (note 8).

          In December  1995,  the Company  purchased  three  Homeplace Inn hotel
          properties in southeastern  Texas from affiliates of American  Liberty
          Hospitality, Inc. (ALH). The three hotels secure a first mortgage loan
          (note 8). Immediately upon acquisition, the acquired hotels along with
          three other ALH owned  Homeplace  Inn  properties  were  converted  to
          operate  as Country  Hearth  Inns under  license  agreements  with the
          Company.  ALH  continues to manage the hotels under  agreements  which
          provide for management fees equal to 4% of gross revenues.

          The  180-room   hotel  in  Daytona,   Florida  was  acquired   through
          foreclosure in 1993. The Company's  foreclosure was completed  subject
          to a first mortgage note payable (note 8).

          In May 1997,  the Company  acquired  The Lodge Keeper  Group,  Inc. of
          Prospect,   Ohio  ("Lodge   Keeper").   The  purchase   price  totaled
          approximately $6.3 million  consisting  primarily of cash of $825,000,
          106,320  shares of common stock of the Company,  and the assumption of
          approximately  $4.8 million of debt (note 8). Lodge Keeper operated 18
          hotels  under  long-term  leases,  held  management  contracts on  six
          Country  Hearth Inn hotels,  and owned one  independent  hotel,  among
          other  assets.  The  acquisition  has been  accounted  for  using  the
          purchase method and Lodge Keeper's  results of operations are included
          in the Company's financial statements from the acquisition date.

          In  September   1997,   the  Company   acquired   Hatfield  Inns,  LLC
          ("Hatfield").  The purchase  price totaled  approximately  $11 million
          consisting  primarily of cash and payables of $1.5 million, $3 million
          of preferred stock issued by the Company (note 10), and the assumption
          or placement of approximately  $6.5 million of debt (note 8). Hatfield
          owned eight 40-unit hotel properties located in Kentucky and Missouri.
          The Company has converted  all eight  properties  into Country  Hearth
          Inns and  intends to use the plans and design  rights  which were also
          acquired  to  develop  and  construct   additional   properties.   The
          acquisition  has been  accounted  for using the  purchase  method  and
          Hatfield's  results  of  operations  are  included  in  the  Company's
          financial statements from the acquisition date.


                                                                     (Continued)

<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


          All of the  above  described  business  and  hotel  acquisitions  were
          accounted for using the purchase method. The following table presents,
          on  an  unaudited  pro  forma  basis,  the  Company's  1997  and  1996
          consolidated revenues, net income, and net income per share that would
          have been  reported if all of these  transactions  had occurred at the
          beginning of the periods  presented.  The  unaudited pro forma results
          are not necessarily  indicative of the results which will occur in the
          future.

                                                       For the year ended
                                                          December 31,
                                                       ------------------
                                                    1997               1996
                                                    ----               ----
             Revenues                            $ 23,312,916      $27,818,502
             Net income                             3,501,861        2,368,268
             Basic net income per share               1.73              1.17
             Diluted net income per share             1.48              1.07


          In 1997, the Company  recognized a gain of $289,300 as a result of the
          taking  of a parcel  of land by the  Commonwealth  of  Virginia  under
          eminent  domain  statutes.   Compensation  proceeds  of  $348,000  are
          included  in  accounts  receivable  in the  accompanying  consolidated
          balance sheet at December 31, 1997.

          A 150-room hotel in Miami, Florida was sold in December 1996 resulting
          in a gain of $445,761.

          In 1996, the Company  acquired and sold a hotel in Lake Park,  Georgia
          resulting in gain of $141,103.

(7)       DEFERRED COSTS, LEASEHOLD INTERESTS, AND OTHER ASSETS
          -----------------------------------------------------

          Deferred costs at December 31, 1997 and 1996 consist of the following:


                                                        1997           1996
                                                        ----           ----

           Country Hearth Inn franchise system:
               Trademark rights                      $  584,300   $   584,300
               Franchise licenses                       939,778       931,117
               Other deferred costs                     162,338       142,243
                                                      ---------    ----------
                                                      1,686,416     1,657,660
           Accumulated amortization                    (350,334)     (230,333)
                                                      ---------    ----------
                                                      1,336,082     1,427,327
           Unamortized debt issue costs                 597,071       223,231
                                                      ---------    ----------

                                                     $1,933,153    $1,650,558
                                                      =========     ==========

                                                                     (Continued)


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       Leasehold  interests  represent  the  cost of  leasehold  rights  in real
       property acquired by the Company and consist of the following at December
       31, 1997 and 1996:
<TABLE>


                                                                                 1997          1996
                                                                                 ----          ----
           <S>                                                           <C>               <C>
           Leasehold interests                                           $     2,927,409   $     -
           Accumulated amortization                                              (87,922)        -
                                                                            ------------       ---

                                                                         $     2,839,487         -

       Other assets at December 31, 1997 and 1996 consist of the following:

                                                                                  1997          1996
                                                                                  ----          ----

           Contract deposits                                              $       68,677   $   35,000
           Investments in joint ventures                                       1,135,269      291,727
           Other                                                                  23,841            -
                                                                               ---------      -------

                                                                          $    1,227,787   $  326,727
                                                                               =========      =======

(8)    NOTES PAYABLE
       -------------

       Notes payable at December 31, 1997 and 1996 consist of the following:

                                                                              1997               1996
                                                                              ----               ----
           First mortgage note payable (Daytona)                          $  2,088,599      $  2,108,868
           First mortgage note payable (Texas)                               2,305,258         2,355,362
           First mortgage note payable (Orlando)                             4,518,726         4,593,580
           First mortgage note payable (Atlanta)                             2,131,037         2,170,713
           First mortgage note payable (Dalton)                              1,027,845         1,046,148
           Second mortgage note payable (Dalton)                               262,079                 -
           First mortgage notes payable (Kentucky)                           2,387,964                 -
           First and second mortgage notes payable
              (Kentucky/ Missouri)                                           4,461,975                 -
           First mortgage note payable (St. Louis)                           1,786,268                 -
           Unsecured subordinated debt                                       2,232,258                 -
           Convertible debentures, net of unamortized
              discount                                                       4,900,555                 -
           Construction loan (Kentucky)                                         23,391                 -
           Capital lease obligations (note 9)                                  142,083                 -
           Other notes payable                                                 314,070           144,288
                                                                            ----------        ----------
                                                                            28,582,108        12,418,959
           Less current portions                                               933,183           337,567
                                                                            ----------        ----------

           Noncurrent portions of notes payable                           $ 27,648,925       $12,081,392
                                                                            ==========        ==========
</TABLE>


          The  Daytona  first  mortgage  note  payable is secured by the Daytona
          hotel  property.  The note bears  interest at 8% and requires  monthly
          payments of $15,850 until April 1999 at which time the then  remaining
          balance is due and payable.


                                                                     (Continued)

<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       The Texas  first  mortgage  note  payable is  secured by the Texas  hotel
       properties.  The note  bears  interest  at 9.056%  and  requires  monthly
       payments of $21,680 until  December 2002 at which time the then remaining
       balance is due and payable.

       The Orlando  first  mortgage note payable is secured by the Orlando hotel
       property.  The note bears interest at 9.55% and requires monthly payments
       of $43,028 until December 2016.

       The Atlanta  first  mortgage note payable is secured by the Atlanta hotel
       property.  The note bears interest at 9.5% and requires  monthly payments
       of $20,350 until August 2016.

       The Dalton  first and second  mortgage  notes  payable are secured by the
       Dalton hotel property.  The first mortgage note payable bears interest at
       9.15% and requires  monthly  payments of $9,549 until  September  2001 at
       which  time the then  remaining  balance is due and  payable.  The second
       mortgage  note  payable  bears  interest  at 8.74% and  requires  monthly
       payments of $2,313 until  September 2001 at which time the then remaining
       balance is due and payable.

       The Kentucky first mortgage notes payable  consist of three notes secured
       by three hotels in Kentucky with an aggregate  book value at December 31,
       1997 of approximately $4.1 million.  The notes are  cross-collateralized,
       bear interest at 9.18%, and require aggregate monthly payments of $21,826
       until October 2007 at which time the then remaining  balances are due and
       payable.

       The Kentucky/Missouri  first and second mortgage notes payable consist of
       six notes secured by five hotels in Kentucky (2) and Missouri (3) with an
       aggregate book value at December 31, 1997 of approximately  $6.7 million.
       The notes bear  interest  at prime plus 1% (9.5% at December  31,  1997),
       require  aggregate  monthly  payments of  $47,188,  and mature at various
       dates (1999-2015).

       The St.  Louis first  mortgage  note  payable is secured by the St. Louis
       extended-stay  facility.  The note bears  interest  at 8.5% and  requires
       monthly  payments of $13,178  until  February 2004 at which time the then
       remaining balance is due and payable.

       The unsecured subordinated debt consists of five notes assumed as part of
       the Lodge  Keeper  acquisition.  The notes are due in varying  amounts of
       monthly  and  quarterly  payments  and  mature at various  dates  through
       December 2002. The stated balances represent the present value of amounts
       to be paid at a discount rate of 9%.

       The convertible debentures, which were issued to investment funds managed
       by  a  related  party  (note  14),  consist  of  four  notes  aggregating
       $5,000,000  net of unamortized  original  issue discount of $99,445.  The
       notes bear interest at 8%, are unsecured, require quarterly interest only
       payments, and are due December 2002. Under the debenture agreements,  the
       holders also have certain rights of conversion (note 10).


                                                                     (Continued)


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       In  connection  with  the   construction  of  a  Country  Health  Inn  in
       Nicholasville,  Kentucky,  the Company  entered into a construction  loan
       secured by the hotel property under  construction with a total commitment
       of $1,000,000.  Borrowings  under the loan bear interest at prime plus 1%
       (9.5% at December 31, 1997) with required  monthly interest only payments
       until maturity in October 2001.

       The combined  aggregate  amount of  maturities  for all notes payable for
       each of the next five years and thereafter is as follows:

                                                     Minimum
           Year ending December 31,                  amount
           ------------------------                  -------

                    1998                          $   933,183
                    1999                            3,559,618
                    2000                            2,662,949
                    2001                            2,243,558
                    2002                            8,031,311
                    Thereafter                     11,151,489
                                                   ----------
                                                  $28,582,108

(9)       LEASES
          ------

          The  Company  leases  certain  equipment  under  agreements  that  are
          classified as capital leases. The leases have terms ranging from three
          to seven years and have  purchase  options at the end of the  original
          lease terms.

          Capital  lease assets  included in property and  equipment at December
          31, 1997 and 1996, are as follows:

                                                   1997             1996
                                                   ----             ----

           Equipment                           $  205,378        $    -
           Accumulated amortization               (20,836)            -
                                                 ---------           ---

                                               $  184,542             -
                                                  =======         $  ===

          The Company  operates  several of its locations in leased  facilities.
          Lease terms range from 10 to 30 years with options to renew at varying
          terms.  Certain of the leases  provide for  contingent  payments based
          upon a percent  of sales.  Some  leased  vehicles  and  equipment  are
          classified as operating leases.

                                                                     (Continued)


<PAGE>


                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


          Future  minimum  payments,  by  year  and  in  the  aggregate,   under
          noncancelable  capital  leases and  operating  leases with  initial or
          remaining  terms  of one  year or more  consist  of the  following  at
          December 31, 1997:

                            Year ending                  Capital       Operating
                           December 31,                  leases          lease
                           ____________                  _______       _________

           1998                                         $  107,257  $  1,635,971
           1999                                             24,785     1,514,449
           2000                                             19,818     1,461,854
           2001                                             14,449     1,381,353
           2002                                              9,631     1,337,637
           Subsequent years                                      -     7,137,361
                                                           -------    ----------
                      Total minimum lease payments         175,940    14,468,625
                                                                      ==========
           Less estimated executory costs                    8,826
                                                           -------

           Net minimum lease payments                      167,114
           Amounts representing interest                   (25,031)
                                                           --------
           Present value of net minimum payments           142,083
           Current portions                                (89,551)
                                                           --------
           Long-term capitalized lease obligation       $   52,532
                                                         ==========

          The Company  remains  contingently  liable for future  minimum  rental
          payments  of  $581,174  on  subleased  and  assigned   properties  and
          equipment in the event of default by the sublessees and assignees.

          Rental expense,  including  contingent  rentals of $109,489 and net of
          sublease  rentals of $84,741,  for all operating leases was $1,356,003
          in  1997.  Rental  expense  for  all  operating  leases  in  1996  was
          immaterial.

          Leases  described in the preceding  paragraphs  include leases between
          the Company and  operating  companies  whose  shareholders  are common
          stockholders  of the Company.  Such amounts  totaled  $33,745 in 1997.
          Total future minimum  payments under these related party leases amount
          to $264,163.

(10)      CAPITAL STRUCTURE AND NET INCOME PER SHARE
          ------------------------------------------

          Series A Preferred Stock
          ------------------------

          In  connection  with the  Hatfield  acquisition  (note 6), the Company
          issued 30,000 shares of Series A (par value $100) preferred stock. The
          Series A preferred stock is nonvoting and accrues cumulative dividends
          at the rate of 10%,  payable  when and to the extent  declared  by the
          Company's Board of Directors.  All accrued but unpaid dividends of the
          Series A preferred stock must be paid in full before any cash dividend
          may be declared on the  Company's  common  stock.  As of December  31,
          1997, there were no cumulative preferred dividends in arrears.

                                                                     (Continued)

<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


          In the event of any voluntary or involuntary liquidation, dissolution,
          or  winding-up  of the Company,  the holders of the Series A preferred
          stock shall be entitled to  receive,  prior and in  preference  to any
          distribution  to the holders of the Company's  common stock, an amount
          equal to the par value of the  preferred  shares  held plus any unpaid
          cumulative dividends.

          At any  time  after  September  17,  2004,  each  holder  of  Series A
          preferred stock may convert any or all such stock, at par, into common
          shares of the Company.  The  conversion  price for such common  shares
          shall  be the  market  price  of  such  shares  immediately  prior  to
          conversion.

          At any time after  September 17, 2004,  the Company may convert all of
          the Series A preferred  stock,  at 110% of par,  into common shares of
          the Company.  The conversion price for such common shares shall be the
          market price of such shares  immediately  prior to conversion.  If the
          Company  converts the Series A preferred  stock into common  shares of
          the Company,  the holders of such converted shares have certain rights
          for a limited  time  period to put the shares  back to the Company for
          cash.

          Convertible Debentures
          ----------------------

          The convertible debentures (note 8) are convertible into common shares
          of the  Company  any time at the option of the holder at a price of $9
          per  share.  If all such  debentures  were  converted,  an  additional
          555,555 shares of common stock would be issued.


                                                                     (Continued)


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       Net Income Per Share
       --------------------

       The following table sets forth the  computations of basic and diluted net
       income per common share for the years ended December 31, 1997 and 1996:

<TABLE>


                                                                  1997                1996
                                                                  ----                ----
<S>                                                       <C>                      <C>

Numerator:
  Net income                                              $   3,173,612            $1,816,844
  Less Series A preferred stock dividends                       (92,333)                  -
                                                              ----------            --------
  Numerator for basic net income per common
     share                                                    3,081,279             1,816,844
  Add back Series A preferred stock dividends
     (assumed converted)                                         92,333                   -

  Numerator for diluted net income per common
     share                                                $   3,173,612            $1,816,844
                                                              =========             =========

Denominator:
  Denominator for basic net income per common share:
       Actual weighted-average shares outstanding             1,844,098             1,767,720
       Effect of dilutive securities:
         Series A preferred stock                               122,178               -
         Outstanding stock options                               63,470                46,790
                                                              ---------             ---------

       Denominator for diluted net income per
         common share                                         2,029,746             1,814,510
                                                              =========             =========

Net income per common share:
  Basic                                                         $  1.67                $ 1.03
                                                                   ====                  ====


  Diluted                                                       $  1.56                 $ 1.00
                                                                   ====                   ====
</TABLE>


       The assumed  conversion of the  convertible  debentures was excluded from
       the computation of diluted net income per common share because the effect
       would be antidilutive.

(11)   OTHER INCOME
       ------------

       Other income  includes  $806,199 in 1997 and $831,468 in 1996 relating to
       collections  on impaired  loans (note 5). Other  income in 1997  includes
       hotel  management  fees of  $254,954.  Other income in 1997 and 1996 also
       includes $330,540 and $721,117,  respectively, from favorable settlements
       of Days Bankruptcy  claims and changes in estimates of allowed amounts of
       remaining unsettled claims (note 3).

                                                                     (Continued)

<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(12)   INCOME TAXES
       ------------

       Total  income tax  expense  (benefit),  principally  Federal,  recognized
       differs from the amount computed by applying the U.S.  Federal income tax
       rate of 34% to pretax income as a result of the following:

<TABLE>

                                                                        1997              1996
                                                                        ----              ----
           <S>                                                       <C>               <C>

           Computed "expected" tax expense                           $    83,000       $ 618,000
           Increase (reduction) in income taxes resulting from:
               State taxes, net of Federal tax benefit                     7,000          39,000
               Income not subject to taxation                                  -        (282,000)
               Change in valuation allowance for deferred
                 tax assets                                           (3,020,000)       (375,000)
                                                                       ---------        --------

                                                                     $(2,930,000)      $       -
                                                                       =========        ========
</TABLE>

       At December 31, 1997,  the Company has net operating  loss  carryforwards
       for Federal income tax purposes of  approximately  $10.1 million which is
       available to offset future taxable income, if any, through 2012.

       The tax effects of temporary  differences  that give rise to  significant
       portions of deferred tax assets and  liabilities  as of December 31, 1997
       and 1996 are presented below:
<TABLE>


                                                                      1997              1996
                                                                      ----              ----
         <S>                                                        <C>              <C>

         Deferred tax assets:
             Notes receivable allowances                            $    10,000      $   500,000
             Net operating loss carryforwards                         3,450,000       14,550,000
             Effect of state income taxes                               400,000          400,000
                                                                      ----------      -----------
                  Total deferred tax assets                           3,860,000       15,450,000

             Less valuation allowance                                         -        3,950,000
                                                                      ----------      -----------
                  Net deferred tax assets                             3,860,000       11,500,000

         Deferred tax liabilities:
                  Partnership losses                                          -      (11,500,000)
                  Property and equipment basis differences             (930,000)               -
                                                                      ----------      -----------
                  Net deferred tax assets                           $ 2,930,000      $         -
                                                                      ==========      ===========

</TABLE>

                                                                    (Continued)

<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     The valuation allowance for deferred tax assets as of December 31, 1997 and
     1996 was $- 0- and  $3,950,000,  respectively.  The net change in the total
     valuation  allowance for the year ended December 31, 1997 was a decrease of
     $3,950,000 and for year ended December 31, 1996 was a decrease of $375,000.
     Approximately  $930,000  of  the  1997  decrease  was  attributable  to the
     Hatfield acquisition (note 6) - (see below).

     In assessing the realizability of deferred tax assets, management considers
     whether it is more likely than not that some portion or all of the deferred
     tax assets will not be realized.  The ultimate  realization of deferred tax
     assets is dependent  upon the  generation of future  taxable  income by the
     Company  during the periods in which  those  temporary  differences  become
     deductible.  Management  considers the projected  future taxable income and
     tax planning strategies in determining the valuation allowance.

     During 1997, the Company sold two wholly owned  subsidiaries which held the
     investment in DIMT (note 4). DIMT was treated as a  partnership  for income
     tax purposes and had produced  significant tax purpose net operating losses
     (NOLs) totaling  approximately $34 million through December 31, 1996. These
     NOLs had no  impact on the  Company's  book  provision  for  regular  taxes
     because  the  ultimate  dissolution  of the  partnership  would  result  in
     immediate  gain  recognition  for  a  comparable  amount.  Because  of  NOL
     limitations,  the Company was exposed,  however,  to significant  potential
     future  alternative  minimum  tax  liability.  All of these tax  attributes
     accompanied the DIMT interest with its sale, and the Company's tax position
     is no longer impacted by DIMT.

     Also during 1997, the Internal  Revenue Service  commenced and completed an
     examination of the Company's 1994 federal income tax return.  No changes to
     the Company's return, as filed, were made or proposed.

     The Hatfield  acquisition  (note 6) was  structured  as a tax-free  merger;
     thus, the Company's tax basis in the assets acquired were not stepped-up to
     fair  market  value.  The  resulting  deferred  tax  liability  was offset,
     however,  by a reduction  in the  Company's  deferred  tax asset  valuation
     allowance of $930,000.

     The Lodge Keeper  acquisition was similarly  structured;  thus,  there were
     deferred tax  liabilities  relating to differences in book and tax bases of
     the assets acquired.  Lodge Keeper,  however,  had NOLs available to offset
     such built-in gains; thus, no net deferred tax impact from the Lodge Keeper
     acquisition was recognized by the Company.

     In  evaluating  the impact of the above events in  conjunction  with recent
     trends in the Company's operations, specifically franchising activities and
     hotel  development,  management had determined  that it is more likely than
     not that the results of future operations will generate  sufficient taxable
     income to realize the deferred tax assets.  Such  determination was made in
     the fourth  quarter of 1997,  resulting in the  recognition of a $2,930,000
     deferred   income  tax  benefit.   Although  no  assurances  can  be  made,
     realization  of the  Company's  deferred  tax  assets  should  occur if the
     Company generates approximately $10 million of taxable income over the next
     15 years.


                                                                     (Continued)


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(13)   STOCK OPTION PLAN
       -----------------

       The  Company's  1995 Stock  Option  Plan (the 1995 Plan)  authorized  the
       issuance  of options  for up to 170,000  shares of the  Company's  common
       stock.  The Company's  1997 Stock Option Plan (the 1997 Plan)  authorized
       the issuance of options for up to 80,000 shares of the  Company's  common
       stock. Granted options vest one-third immediately, one-third on the first
       anniversary of the grant date, and one-third on the second anniversary of
       the grant date.  The exercise  price for all options  represents the fair
       value of the  common  stock at the  grant  date.  All 1995  Plan  options
       terminate five years after vesting,  or earlier under certain conditions.
       All 1997 Plan options terminate ten years after vesting, or earlier under
       certain conditions.

       The granted stock option activity is as follows:

                                                  Number        Weighted-average
                                                 of shares       exercise price
                                                 ---------      ----------------

             Balance at December 31, 1995         110,000         $   3.44
               Granted in 1996                     56,000             5.69
               Exercised in 1996                  (10,000)            3.44
                                                  -------             ----
             Balance December 31, 1996            156,000             4.25

               Granted in 1997                     77,000             6.88
               Exercised in 1997                  (25,333)            3.85
               Forfeited in 1997                   (1,667)            5.38
                                                 ---------            ----

             Balance December 31, 1997            206,000         $   5.27
                                                  =======             ====

       The  following  table  summarizes  information  concerning  stock options
       outstanding as of December 31, 1997:

<TABLE>
<CAPTION>


                                                    Outstanding                                Exercisable
                                        _____________________________________      __________________________________
<S>                 <C>                  <C>                    <C>                <C>                   <C>

                                           Weighted-            Weighted-                                 Weighted-
     Range of                               average              average                                   average
     exercise                              remaining            exercise                                  exercise
      prices         Shares                  life                 price               Shares                price
     ________        ______               __________            _________             ______               _________

    $  3.44          80,000               3.3 years              $ 3.44               80,000              $   3.44
 $5.38 - 6.25        49,000               4.5 years                5.74               32,667                  5.74
    $  6.88          77,000               10.5 years               6.88               25,667                  6.88
                    -------                                        ----              -------
                    206,000                                      $ 5.27              138,334
                    =======                                        ====              =======

</TABLE>

                                                                    (Continued)


<PAGE>

                          BUCKHEAD AMERICA CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       No  compensation  expense has been  recognized  for the  Company's  stock
       option plans. Had compensation  cost for the Company's stock option plans
       been determined  based upon the fair value  methodology  prescribed under
       SFAS No.  123,  the  Company's  net  income  would  have been  reduced by
       approximately  $73,000 or approximately $0.04 per common share (basic and
       diluted) in 1997 and reduced by approximately  $44,000,  or approximately
       $0.02 per common  share  (basic and  dilutive)  in 1996.  The  effects of
       either recognizing or disclosing compensation cost under SFAS No. 123 may
       not be  representative  of the effects on reported  net income for future
       years.  The fair value of the options granted during 1997 is estimated as
       $2.16 on the date of grant using the  Black-Sholes  option-pricing  model
       with the following  assumptions:  dividend  yield 0%,  volatility of 20%,
       risk-free  interest rate of 6.0%,  and an expected  life of 5 years.  The
       weighted-average  fair value of options  granted during 1996 is estimated
       as $0.84 on the date of grant using the Black-Sholes option-pricing model
       with the  following  assumptions:  dividend  yield  0%,  volatility  15%,
       risk-free interest rate of 6.0%, and an expected life of 2 years.

(14)   RELATED PARTY TRANSACTIONS
       --------------------------

       Following the Days Bankruptcy, a trust was created (the Creditors' Trust)
       to pursue  certain  claims for the benefit of  unsecured  creditors.  The
       Company  acts as  trustee  for the  Creditors'  Trust.  The  Company  was
       reimbursed $100,000 in 1997 and 1996 for expenses incurred related to the
       Creditors'  Trust.  Other  operating and  administrative  expenses in the
       accompanying  1997  and  1996  consolidated   statements  of  income  are
       presented net of such amounts, respectively.

       The Company performed  accounting and tax services for DIMT. Other income
       in 1997 and 1996  includes  $60,000 and  $31,025,  respectively,  for the
       performance of such services.

       Other notes  receivable  (note 5) at December 31, 1997 includes  $230,221
       due  from an  officer  and  shareholder  of the  Company.  Such  note was
       originated  in  connection  with  the  Lodge  Keeper  acquisition,  bears
       interest at 10%, and is due in monthly  installments of $5,312 until June
       2002.

       The  convertible  debentures  (notes 8 and 10) were issued to  investment
       funds managed by a subsidiary of Tower Investment  Group,  Inc.  (Tower).
       Tower owns or controls  approximately  15% of the  Company's  outstanding
       common stock. An executive  officer of Tower is on the Company's Board of
       Directors.




Item 8.   Changes In and  Disagreements  with  Accountants  on Accounting and
Financial Disclosure.

         None.




                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.


DIRECTORS AND EXECUTIVE OFFICERS

         The directors and executive officers of the Company are as follows:

                                                                    YEAR JOINED
NAME              AGE          POSITION                             THE COMPANY

Robert M. Miller   46          Chairman of the Board of Directors        1992

Douglas C. Collins 45          Director                                  1992
                               President, Chief Executive
                               Officer and Treasurer

Robert B. Lee      43          Director                                  1992
                               Senior Vice President, Chief
                               Financial Officer and Secretary

William K. Stern   71          Director                                  1992

Steven A. Van Dyke 39          Director                                  1997

Ronald L. Devine   54          President - The Lodge Keeper Group        1997

Gregory C. Plank   52          President - BAC Franchising, Inc.         1996

     ROBERT M. MILLER. Mr. Miller, the chairman of the board of directors of the
Company, was a partner in the law firm of Berlack,  Israels & Liberman from 1984
to  1995.  Mr.  Miller's   practice   involved   corporate   restructuring   and
reorganization,  both in and out of bankruptcy.  Mr. Miller has been involved in
numerous  reorganizations  (including R.H. Macy & Co., Inc.,  Zale  Corporation,
Integrated Resources,  Inc., Insilco Corporation and First City Industries).  In
1995, Mr. Miller  affiliated  with the law firm of Rosenman & Colin. In November
1996, Mr. Miller  founded  Cakewalk LLC,  which owns various  independent  music
labels.

     DOUGLAS C.  COLLINS.  Mr.  Collins  became  President  and Chief  Executive
Officer of the  Company in December  1992.  Prior to joining  the  Company,  Mr.
Collins  served as President of Days Inns from February  1992 through  September
1992 and Director of Days Inns from  September  1992 through  November 1992. Mr.
Collins served as Senior Vice President and Chief Financial Officer of Days Inns
from August 1990 through  February 1992,  after serving as President of Imperial
Hotels Corporation,  a hotel chain owner and operator, from April 1988 until May
1990. Mr. Collins joined Imperial Hotels


<PAGE>



Corporation in August 1980, serving as Vice President of Finance and Development
from June 1984 to April 1988.

     ROBERT B. LEE. Mr. Lee became Secretary of the Company in December 1992 and
became Vice  President  and Chief  Financial  Officer in July 1993.  Mr. Lee was
named  Senior  Vice  President  of  Buckhead  in May 1996.  Prior to joining the
Company,  Mr. Lee served as the  Corporate  Controller of Days Inns from October
1990 until  December  1992. He  functioned  in numerous  capacities up to senior
manager in the  accounting and audit practice of KPMG Peat Marwick from December
1979 to October 1990.

     WILLIAM K. STERN.  Mr.  Stern,  a director of the  Company,  has over forty
years of experience in the hospitality  industry. He served as Vice President of
Loews  Hotels  and as  President  of Loews  Representation  International,  Inc.
("LRI"),  a separate  division of Loews Hotels.  In 1987, Mr. Stern  established
"The Grande  Collection  of Hotels," a deluxe  division of LRI.  Mr.  Stern also
served as the Chief Executive  Officer of the Grande  Collection  division.  Mr.
Stern has been the owner of Stern  Services  International,  a hotel  consulting
company, since 1992.

     STEVEN A. VAN DYKE.  Mr.  Van  Dyke,  a  director  of the  Company,  is the
President and Chief Executive Officer of Tower Investment Group, Inc.  ("Tower")
and has served in that  capacity for more than the last five years.  Tower is an
investment  advisor  and manages  multimillion  dollar  private  equity and debt
funds.

     RONALD L. DEVINE.  Mr. Devine was the President and Chief Executive Officer
of The Lodge Keeper Group, Inc. ("Lodge Keeper") prior to its acquisition by the
Company  and  served in that  capacity  for more than the last five  years.  Mr.
Devine  continues  to serve as  President  of Lodge  Keeper and is an  executive
officer of the Company.

     GREGORY C. PLANK. Mr. Plank became President of BAC Franchising,  Inc., the
Company's Country Hearth Inn franchising  subsidiary,  in May 1996. From 1991 to
1996,  Mr. Plank  served as  Executive  Vice  President  of Forte  Hotels,  Inc.
overseeing  Travelodge and  Thriftlodge  in North and South  America.  Mr. Plank
previously  served as Vice  President of Marketing  for Ramada and has held Vice
President  positions in development  and operations for Sheraton Inns,  Hawthorn
Suites, and independent developers.



     The members of the  Company's  Board of Directors  are elected  annually to
serve one year  terms.  The  holders  of Common  Stock will elect a new Board of
Directors  at the next annual  meeting,  which is scheduled to occur on or about
Thursday, May 28, 1998.


<PAGE>



INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

         None.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely on its review of copies of forms received by it pursuant to Section
16(a)  of  the  Securities   Exchange  Act  of  1934,  as  amended,  or  written
representations from certain reporting persons, the Company believes that during
1997 all Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial owners were complied with.


                                       14
533311.1

<PAGE>



ITEM 10.  EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

     The following table sets forth the compensation  paid by the Company to the
named executive officers for the years ended December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>

                                                                                   LONG TERM
                                                                                COMPENSATION
                                                                                      AWARDS
                                                        ANNUAL COMPENSATION       SECURITIES       ALL OTHER
NAME AND                                                SALARY         BONUS      UNDERLYING       COMPENSA-
PRINCIPAL POSITION                      YEAR         ($)             ($)         OPTIONS (#)       TION  ($)
----------------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>            <C>          <C>              <C>
Douglas C. Collins                      1997          $235,000       94,005       16,000 (c)       $1,500 (d)
Chief Executive Officer                 1996           235,000       72,000        7,000 (c)        4,750 (d)
                                        1995           210,000       82,500       30,000 (c)        4,620 (d)

Robert B. Lee                           1997           105,000       31,502        9,000 (c)        1,449 (d)
Chief Financial Officer                 1996            98,600       22,292        4,000 (c)        3,022 (d)
                                        1995            88,800       17,760       10,000 (c)        2,664 (d)

Gregory C. Plank                        1997           135,000       40,502        6,000 (c)         -
President - Franchising                 1996 (a)        81,000       24,111       15,000 (c)       35,312 (e)

Ronald L. Devine                        1997 (b)        70,240       21,005        9,000 (c)         -
President - Lodge Keeper
</TABLE>

  (a) Mr. Plank's employment with the Company began on May 20, 1996.

  (b) Mr. Devine's employment with the Company began on May 8, 1997.

  (c) See "OPTION GRANTS TABLE."

  (d) Employer's portion of 401(k) contribution.

  (e) Relocation allowance.


<PAGE>



OPTION GRANTS TABLE

         The  following  table sets  forth the number of shares of Common  Stock
underlying options granted to the named executive officers during the year ended
December 31, 1997.

<TABLE>
<CAPTION>

                                 NUMBER OF             PERCENT OF
                                 SHARES OF                  TOTAL
                                 COMMON STOCK             OPTIONS
                                 UNDERLYING            GRANTED TO        EXERCISE
                                 OPTIONS                EMPLOYEES           PRICE           EXPIRATION
NAME                             GRANTED (#)       IN FISCAL 1997       ($/SHARE)             DATE (G)
------------------------------------------------------------------------------------------------------
<S>                              <C>                     <C>           <C>               <C>
Douglas C. Collins               5,333                   9.7%          $ 6.88 (f)        June 26, 2007
                                 5,333                   9.7%          $ 6.88 (f)        June 26, 2008
                                 5,334                   9.7%          $ 6.88 (f)        June 26, 2009

Robert B. Lee                    3,000                   5.5%          $ 6.88 (f)        June 26, 2007
                                 3,000                   5.5%          $ 6.88 (f)        June 26, 2008
                                 3,000                   5.5%          $ 6.88 (f)        June 26, 2009

Gregory C. Plank                 2,000                   3.6%          $ 6.88 (f)        June 26, 2007
                                 2,000                   3.6%          $ 6.88 (f)        June 26, 2008
                                 2,000                   3.6%          $ 6.88 (f)        June 26, 2009

Ronald L. Devine                 3,000                   5.5%          $ 6.88 (f)        June 26, 2007
                                 3,000                   5.5%          $ 6.88 (f)        June 26, 2008
                                 3,000                   5.5%          $ 6.88 (f)        June 26, 2009

</TABLE>

(f) The exercise price was fixed as the market price at the date of grant.

(g) The options expire ten years after the date they become vested.


<PAGE>



AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE

          The following table sets forth the number and fiscal year-end value of
unexercised  options granted to the named executive  officers as of December 31,
1997.

                                    NUMBER OF
                                    SHARES OF
                                 COMMON STOCK                    VALUE OF
                                   UNDERLYING                 UNEXERCISED
                                  UNEXERCISED                IN-THE-MONEY
                                   OPTIONS AT                  OPTIONS AT
                                     FY-END(#)                   FY-END($)

                                  EXERCISABLE/                EXERCISABLE/
          NAME                   UNEXERCISABLE               UNEXERCISABLE

          Douglas C. Collins   40,000 / 13,000            $120,000 / 6,685

          Robert B. Lee         15,667 / 7,333              42,239 / 3,796

          Gregory C. Plank      12,000 / 9,000               9,240 / 5,355

          Ronald L. Devine       3,000 / 6,000                 735 / 1,470

          No options were exercised by the named executive officers during 1997.



COMPENSATION OF DIRECTORS

         Mr.  Miller,  the  chairman of the board of  directors  of the Company,
receives  annual fees of $87,000 and $750 per  attendance  at board of directors
meetings.

         Each of the Company's  other outside  directors,  Mr. Stern and Mr. Van
Dyke,  receive  an annual  fee of $12,000  and $750 per  attendance  at board of
directors meetings.

         Stern Services  International,  a company owned by Mr. Stern,  received
$4,000 in 1997 for consulting services performed for the Company.



<PAGE>



EMPLOYMENT  CONTRACTS  AND  TERMINATION  OF  EMPLOYMENT  AND CHANGE-  IN-CONTROL
ARRANGEMENTS

          DOUGLAS  C.  COLLINS.  The  Company  has  entered  into an  employment
contract with Mr. Collins for a term which expires in July 1999. If the contract
is  terminated  by the Company (1) prior to the end of its term,  (2) other than
for  cause,  and  (3)  within  twelve  months   following  a   change-in-control
(generally,  acquisition  of control of over 50% of the Common Stock or a change
in a majority of the board of  directors),  Mr. Collins shall be entitled to the
greater of (x) his annual base salary payable  through the end of his employment
term and (y)  one-half of his base salary for the rest of the year in which such
termination  occurs.  If such event  occurred as of January 1, 1998, Mr. Collins
would be entitled to a payment of $375,000.

          If Mr.  Collins  terminates  his  contract (1) between 90 and 120 days
following a  change-in-control  or (2) within 30 days  following  any  demotion,
diminution of responsibility or pay or forced relocation occurring within twelve
months of a  change-in-control,  he shall be  entitled  to the lesser of (x) his
annual base salary through the end of his  employment  term, and (y) one-half of
his base  salary for the year in which such  termination  occurs.  If such event
occurred as of January 1, 1998, Mr.
Collins would be entitled to a payment of $125,000.

          If Mr.  Collins'  employment  is otherwise  terminated  without  cause
before the expiration of his employment term, the Company must pay him an amount
equal to his annual base salary for the year in which such  termination  occurs.
If such event occurred as of January 1, 1998, Mr. Collins would be entitled to a
payment of $250,000.

          ROBERT B. LEE.  The Company has entered  into an  employment  contract
with  Mr.  Lee  for a term  which  expires  in July  1999.  If the  contract  is
terminated  by the Company (1) prior to the end of its term,  (2) other than for
cause,  and (3) within twelve months following a  change-in-control  (generally,
acquisition of control of over 50% of the Common Stock or a change in a majority
of the board of directors),  Mr. Lee shall be entitled to the greater of (x) his
annual  base  salary  payable  through  the end of his  employment  term and (y)
one-half of his base  salary for the rest of the year in which such  termination
occurs.  If such event occurred as of January 1, 1998, Mr. Lee would be entitled
to a payment of $173,250.

          If Mr.  Lee  terminates  his  contract  (1)  between  90 and 120  days
following a  change-in-control  or (2) within 30 days  following  any  demotion,
diminution of responsibility or pay or forced relocation occurring within twelve
months of a  change-in-control,  he shall be  entitled  to the lesser of (x) his
annual base salary through the end of his  employment  term, and (y) one-half of
his base  salary for the year in which such  termination  occurs.  If such event
occurred  as of  January  1, 1998,  Mr.  Lee would be  entitled  to a payment of
$57,750.

          If Mr. Lee's employment is otherwise  terminated  without cause before
the expiration of his employment  term, the Company must pay him an amount equal
to his annual base salary for the year in which such termination occurs. If such
event  occurred as of January 1, 1998, Mr. Lee would be entitled to a payment of
$115,500.

         GREGORY C. PLANK.  The Company has entered into an employment  contract
with Mr.  Plank for a term  which  expires in April  1999.  If the  contract  is
terminated by the Company (1) prior to the end



<PAGE>



of its term, (2) other than for cause,  and (3) within twelve months following a
change-in-control  (generally,  acquisition of control of over 50% of the Common
Stock or a change in a majority of the board of  directors),  Mr. Plank shall be
entitled to the greater of (x) his annual base salary payable through the end of
his employment term and (y) one-half of his base salary for the rest of the year
in which such termination  occurs. If such event occurred as of January 1, 1998,
Mr. Plank would be entitled to a payment of $200,000.

          If Mr.  Plank  terminates  his  contract  (1)  between 90 and 120 days
following a  change-in-control  or (2) within 30 days  following  any  demotion,
diminution of responsibility or pay or forced relocation occurring within twelve
months of a  change-in-control,  he shall be  entitled  to the lesser of (x) his
annual base salary through the end of his  employment  term, and (y) one-half of
his base  salary for the year in which such  termination  occurs.  If such event
occurred  as of January 1, 1998,  Mr.  Plank  would be  entitled to a payment of
$75,000.

          If Mr. Plank's employment is otherwise terminated without cause before
the expiration of his employment  term, the Company must pay him an amount equal
to his annual base salary for the year in which such termination occurs. If such
event  occurred as of January 1, 1998,  Mr. Plank would be entitled to a payment
of $150,000.




<PAGE>



ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

          The  following  table sets forth  information  as of February 28, 1998
with respect to the  beneficial  ownership of shares of the Common Stock held by
beneficial owners of more than 5% of the Common Stock. The information set forth
below is based upon the Company's stock records and information  obtained by the
Company from the persons named below.  Unless otherwise  indicated,  each person
has sole voting and investment power with respect to such shares.


   NAME AND ADDRESS                    AMOUNT AND NATURE OF            PERCENT
OF BENEFICIAL OWNERSHIP                BENEFICIAL OWNERSHIP           OF CLASS

NY Motel Enterprises                        112,821 - Direct            5.94%
440 West 57th Street
New York, NY   10019

Leon M. & Marsha C. Wagner                  116,025 - (a)               6.11%
1325 Avenue of the Americas
22nd Floor
New York, NY 10019

Hotel-Motel Management Corporation          149,000 - Direct            7.85%
3485 N. Desert Drive - Suite 106
Building 2
East Point, GA  30344

Heartland Advisors, Inc.                    251,200 - Investment       13.24%
790 North Milwaukee Street                            Advisor
Milwaukee, WI 53202

Tower Investment Group, Inc.                817,555 - Investment       33.32%
Suite 270                                             Advisor (b)
777 South Harbour Island Boulevard
Tampa, FL 33602


(a)  Mr. Wagner holds 36,632 shares directly and Ms. Wagner,  his spouse,  holds
     12,082 shares directly. They share investment and voting power with respect
     to 67,311 shares.

(b)  Includes  262,000  shares owned by  investment  funds  managed by Tower and
     555,555  contingently  issuable  shares from the  conversion  of debentures
     owned by investment funds managed by Tower.


<PAGE>



SECURITY OWNERSHIP OF MANAGEMENT

   The  following  table sets forth,  as of February  28, 1998,  all  beneficial
holdings of  outstanding  Common Stock by the directors and the named  executive
officers of the Company and all directors and executive officers as a group. The
information  set forth  below is based  upon the  Company's  stock  records  and
information  obtained  by the  Company  from the  persons  named  below.  Unless
otherwise  indicated,  each  person has sole  voting and  investment  power with
respect to such shares. The address of each director and executive officer is in
care of the Company,  Suite 200,  4243  Dunwoody  Club Drive,  Atlanta,  Georgia
30350.



              NAME OF                AMOUNT AND NATURE OF         PERCENT
         BENEFICIAL HOLDER           BENEFICIAL OWNERSHIP         OF CLASS

         Douglas C. Collins                    60,941 - (a)        3.14 %
         Ronald L. Devine                      68,452 - (b)        3.60 %
         Robert B. Lee             30,808 - (c)                    1.61 %
         Robert M. Miller                      49,922 - (d)        2.59 %
         Gregory C. Plank                      14,000 - (e)        0.73 %
         William K. Stern                      37,333 - (f)        1.94 %
         Steven A. Van Dyke                  822,419 - (g)        33.49 %
         Directors and Officers            1,077,367 - (a-g)      41.66 %
         as a group (7 persons)

         (a) Mr.  Collins  holds 12,100  shares  directly and holds 6,508 shares
indirectly  through DC Hospitality,  Inc., which is 85% owned by Mr. Collins and
15% owned by Mr. Lee. Mr.  Collins  also has the right to acquire an  additional
42,333 shares within the next 60 days pursuant to option agreements.

         (b) Mr.  Devine  holds  65,452  shares  directly  and has the  right to
acquire an additional 3,000 shares within the next 60 days pursuant to an option
agreement.

         (c) Mr.  Lee  holds  7,300  shares  directly  and  holds  6,508  shares
indirectly  through DC Hospitality,  Inc., which is 15% owned by Mr. Lee and 85%
owned by Mr. Collins. Mr. Lee also has the right to acquire an additional 17,000
shares within the next 60 days pursuant to option agreements.

         (d) Mr.  Miller  holds  21,255  shares  directly  and has the  right to
acquire  28,667  additional  shares  within the next 60 days  pursuant to option
agreements.

         (e) Mr. Plank holds 2,000 shares  directly and has the right to acquire
12,000 additional shares within the next 60 days pursuant to option agreements.

         (f) Mr. Stern holds 10,000 shares directly and has the right to acquire
27,333 additional shares within the next 60 days pursuant to option agreements.

         (g) Mr.  Van Dyke  holds  2,531  shares  directly  and has the right to
acquire an additional 2,333 shares within the next 60 days pursuant to an option
agreement..  Mr. Van Dyke is the President and Chief Executive  Officer of Tower
Investment Group,  Inc. Tower manages  investment funds which own 262,000 shares
and  have  the  right  to  acquire  555,555  within  the  next 60 days  from the
conversion of debentures.

CHANGES IN CONTROL

         To the best of the Company's knowledge, there are no arrangements which
may result in a change of control.


<PAGE>


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On December 22, 1997,  the Company  issued  $5,000,000  of  Convertible
Debentures to investment  funds managed by Tower  Investment  Group,  Inc. Tower
manages  investment funds which already owned 262,000 (13.8%) of the outstanding
common  shares of the  Company.  Mr. Van Dyke,  a director of the Company is the
Chief Executive Officer of Tower.

         The related  debenture notes bear interest at 8%, payable  quarterly in
arrears,  and are due December 22, 2002.  The debentures  are  convertible  into
common  shares  of the  Company  at any time at  $9.00  per  share.  If all such
debentures were converted, an additional 555,555 shares of Common Stock would be
issued.

         In connection with the Lodge Keeper acquisition,  the Company assumed a
lease for  office  space in  Prospect,  Ohio.  The lease  requires  annual  rent
payments of approximately  $50,000 through 2001. Members of the immediate family
of Mr. Devine, an executive officer of the Company, own 50% of the lessor.

         Also in  connection  with the  Lodge  Keeper  acquisition,  Mr.  Devine
executed a $250,000  note  payable to the  Company  for  certain  inventory  and
equipment  which did not relate to Lodge  Keeper's  primary  business.  The note
bears  interest at 10% and is due in monthly  installments  of $5,312 until June
2002.


<PAGE>



ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)   INDEX TO EXHIBITS
      -----------------

   Exhibit     Description
   -------     -----------

   2.1         Closing  Agreement  dated  May  15,  1995  between  Heritage  Inn
               Associates,  Ltd. and BLM EB, Inc.  (Incorporated by reference to
               Exhibit (2) to the Registrant's Current Report on Form 8-K filed
               May 25, 1995.)

   2.2         Agreement for Purchase and Sale of Hotel between Buckhead and ALH
               Properties  No. One, Inc.  (Incorporated  by reference to Exhibit
               (2)(a) to the  Registrant's Current  Report  on  Form  8-K  filed
               December 20, 1995.)

   2.3         Agreement for Purchase and Sale of Hotel between Buckhead and ALH
               Properties  No. Two, Inc.  (Incorporated  by reference to Exhibit
               (2)(b) to the  Registrant's  Current Report  on  Form  8-K  filed
               December 20, 1995.)

   2.4         Stock  Purchase  Agreement  dated as of March 7,  1997  among the
               Registrant, The Lodge Keeper Group, Inc. ("Lodge Keeper") and the
               Stockholders of  Lodge Keeper.   (Incorporated  by  reference  to
               Exhibit 2.1 to the  Registrant's  Quarterly Report on Form 10-QSB
               for the quarter ended March 31, 1997.)

   2.5         Agreement  of  Merger  dated  as of  March  11,  1997  among  the
               Registrant,  BLM-RH,  Inc.,  Hatfield  Inns,  LLC,  Guy  Hatfield
               Dorothy Hatfield, and Hatfield Inns Advisors,  LLC. (Incorporated
               by reference to Appendix B to the  Registrant's  Definitive Proxy
               Statement filed with the Securities and Exchange Commission on
               June 9, 1997.)

   2.6         Second  Amendment to  Agreement of Merger,  dated as of September
               17, 1997 among the Company, BLM-RH, Inc., Hatfield Inns, LLC, Guy
               Hatfield,  Dorothy  Hatfield,  and  Hatfield Inn  Advisors,  LLC.
               (Incorporated  by reference to Exhibit 2.1.1 to the  Registrant's
               Current Report on Form 8-K filed October 8, 1997.)

   3.1         Articles of Incorporation.  (Incorporated by reference to Exhibit
               2.1 to the Registrant's Registration Statement on Form 10-SB (No.
               0-22132) which became effective on November 22, 1993.)

   3.2         Certificate  of  Amendment  of   Certificate  of   Incorporation.


<PAGE>



               (Incorporated by reference to Exhibit 3(i)(a) to the Registrant's
               Annual  Report on Form 10-KSB for the fiscal year ended  December
               31, 1994.)

   3.4         Certificate  of  Amendment  of   Certificate   of   Incorporation
               (Incorporated  by reference  to Appendix "A" to the  Registrant's
               Definitive Proxy Statement filed with the Securities and Exchange
               Commission on June 9, 1997.)

   3.5         Certificate  of  Designation,  Preference  and Rights of Series A
               Preferred Stock of the Registrant.  (Incorporated by reference to
               Exhibit  3.1(c)  to the  Registrant's  Quarterly  Report  on Form
               10-QSB for the quarter ended September 30, 1997.)

   3.6         By-Laws - Amended and Restated as of June 27, 1994. (Incorporated
               by reference to Exhibit 3(ii) to the  Registrant's  Annual Report
               on Form 10-KSB for the fiscal year ended December 31, 1994.)

   4.1         Mortgage  Note  Payable  dated as of  November  7.  1996  made by
               Heritage Inn Associates,  LP as maker,  to Bloomfield  Acceptance
               Company, LLC.  (Incorporated by reference to Exhibit 4(ii) to the
               Registrant's  Annual  Report on Form  10-KSB for the fiscal  year
               ended December 31, 1996.)

   4.2         Certificate  of  Designation,  Preference  and Rights of Series A
               Preferred Stock of the Registrant.  (Incorporated by reference to
               Exhibit  3(i)(c)  to the  Registrant's  Quarterly  Report on Form
               10-QSB for the quarter ended September 30, 1997.)

  10.1         Employment  Agreement  dated  as of June  30,  1993  between  the
               Company and Douglas C.  Collins.  (Incorporated  by  reference to
               Exhibit 6.2 to the  Registrant's  Registration  Statement on Form
               10-SB (No.022132) which became effective on November 22, 1993.)

  10.2         Amendment   to   Douglas   C.   Collins   Employment   Agreement.
               (Incorporated by reference to Exhibit (ii)(b) to the Registrant's
               Annual  Report on Form 10-KSB for the fiscal year ended  December
               31, 1995.)

  10.3         Employment  Agreement  dated  as of June  30,  1993  between  the
               Company and Robert B. Lee.  (Incorporated by reference to Exhibit
               10(ii)(c) to the  Registrant's  Annual  Report on Form 10-KSB for
               the fiscal year ended December 31, 1995.)

  10.4         Amendment to Robert B. Lee Employment Agreement. (Incorporated by
               reference to Exhibit 10(ii)(d) to the Registrant's  Annual Report



<PAGE>



               on Form 10-KSB for the fiscal year ended December 31, 1995.)

  10.5         Employment  Agreement  dated as of April  29,  1996  between  the
               Company and  Gregory C.  Plank.  (Incorporated  by  reference  to
               Exhibit  10(ii)(e)  to the  Registrant's  Annual  Report  on Form
               10-KSB for the fiscal year ended December 31, 1996.)

  10.6         1995 Stock Option Plan.  (Incorporated by reference to Appendix A
               to the  Registrant's  Definitive  Proxy Statement dated April 25,
               1995.)

  10.7         1997  Employee  Stock Option Plan  (Incorporated  by reference to
               Annex 1 to the Registrant's Definitive Proxy Statement filed with
               the Securities and Exchange Commission on June 9, 1997.)

  10.8         Form of Amended and Restated Debenture (Incorporated by reference
               to  Exhibit  II to the  Schedule  13D of Bay  Harbour,  Tower and
               Steven Van Dyke filed December 31, 1997 (File No. 005-47807)).

  10.9         Debentures  Purchase  Agreement  dated  as of  December  2,  1997
               between the  Company  and Bay  Harbour for its managed  accounts.
               (Incorporated  by reference  to Exhibit 10.2 to the  Registrant's
               Current Report on Form 8-K filed January 9, 1998.)

   21          Subsidiaries of the Company

   23          Accountants' Consent

   27          Financial Data Schedule (Electronic filing only)




<PAGE>



(b)  REPORTS ON FORM 8-K.


     The Company  has not filed any reports on Form 8-K during the last  quarter
of the period covered by this report.

     The  Company  filed a report on Form 8-K on January 9, 1998 which  reported
the December 22, 1997 sale of debentures  to  investment  funds managed by Tower
Investment Group, Inc.




<PAGE>



                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

(Registrant) BUCKHEAD AMERICA CORPORATION

By: (Signature and Title):

            /s/ DOUGLAS C. COLLINS                /s/ ROBERT B. LEE
           Douglas C. Collins                     Robert B. Lee
           President &                            Senior Vice President & Chief
           Chief Executive Officer                Financial & Accounting Officer

Date:      March 31 , 1998                  Date:     March 31 , 1998



In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.

By: (Signature and Title)                                   DATE


 /s/ DOUGLAS C. COLLINS                                     March 31, 1998
Douglas C. Collins
Director


 /s/ ROBERT B. LEE                                          March 31, 1998
Robert B. Lee
Director


 /s/ ROBERT M. MILLER                                       March 31, 1998
Robert M. Miller
Director

 /s/ WILLIAM K. STERN                                       March 31, 1998
William K. Stern
Director

                                                            March 31, 1998
Steven A. Van Dyke
Director