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                        SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C. 20549

                                     FORM 10-K

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

   For the Fiscal Year ended December 31, 1997  Commission file number 001-11975

                              BOYKIN LODGING COMPANY
              (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S>                                                <C>
                    Ohio                                            34-1824586
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      (State or Other Jurisdiction of                  (I.R.S. Employer Identification No.)
       Incorporation or Organization)

      Guildhall Building, Suite 1500,
           45 W. Prospect Avenue                                      44115
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  (Address of Principal Executive Office)                           (Zip Code)

                                        (216) 430-1200
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                     (Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:

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<CAPTION>
         TITLE OF CLASS           NAME OF EXCHANGE ON WHICH REGISTERED
         --------------           ------------------------------------
<S>                               <C>
Common Shares, Without Par Value  New York Stock Exchange
</TABLE>

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

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

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

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing market price on March 19, 1998, was
approximately $344 million.

     As of March 19, 1998, the registrant had 14,042,251 Common Shares issued
and outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May
14, 1998, into Part III, Items 10, 11, 12, and 13.
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                           FORWARD LOOKING STATEMENTS

     This Form 10-K contains statements that constitute forward-looking
statements. Those statements appear in a number of places in this Form 10-K and
the documents incorporated by reference herein and include statements regarding
the intent, belief or current expectations of Boykin Lodging Company, its
directors or its officers with respect to (i) the leasing, management or
performance of its hotels and other hotels to be acquired; (ii) the adequacy of
reserves for renovation and refurbishment; (iii) potential acquisitions by
Boykin Lodging Company, including the proposed merger with Red Lion Inns Limited
Partnership; (iv) Boykin Lodging Company's financing plans; (v) Boykin Lodging
Company's policies regarding investments, dispositions, financings, conflicts of
interest and other matters and (vi) trends affecting Boykin Lodging Company's or
any hotel's financial condition or results of operations.

     Prospective investors are cautioned that any such forward-looking statement
is not a guarantee of future performance and involves risks and uncertainties,
and that actual results may differ materially from those in the forward-looking
statement as a result of various factors. The information contained in this Form
10-K and in the documents incorporated by reference herein identifies important
factors that could cause such differences. With respect to any such
forward-looking statement that includes a statement of its underlying
assumptions or bases, Boykin Lodging Company cautions that, while it believes
such assumptions or bases to be reasonable and has formed them in good faith,
assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material
depending on the circumstances. When, in any forward-looking statement, Boykin
Lodging Company or its management expresses an expectation or belief as to
future results, that expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
stated expectation or belief will result or be achieved or accomplished.

                                     PART I

ITEM 1. BUSINESS

(A) GENERAL DEVELOPMENT OF BUSINESS

  THE COMPANY

     Boykin Lodging Company, an Ohio corporation (the "Company"), is a
self-administered equity real estate investment trust ("REIT") that owns hotels
throughout the United States and leases its properties to established hotel
operators. The Company's primary business strategies are:

          - acquiring full service commercial and resort hotels on an accretive
            basis and at a discount to replacement cost;

          - developing strategic alliances and relationships with both a network
            of high quality lessees and franchisors of the hotel industry's
            premier upscale brands, and;

          - achieving revenue growth in its hotels through selective renovation
            and its lessees' strong management performance.

     The Company was formed to continue and expand the hotel ownership,
acquisition, redevelopment and repositioning activities of its predecessors,
Boykin Management Company and its affiliates (the "Boykin Group"). The Company
completed its initial public offering (the "Initial Offering") in November 1996.
In conjunction with the Initial Offering, the Company contributed approximately
$133.9 million to Boykin Hotel Properties, L.P., an Ohio limited partnership
(the "Partnership"), in exchange for an approximate 84.5% equity interest as the
sole general partner of the Partnership and loaned $40 million to the
Partnership in exchange for an Intercompany Convertible Note. The Partnership
then acquired nine hotel properties (the "Initial Hotels") in which the Boykin
Group held significant ownership interests.

     Since its founding in 1959, the Boykin Group has developed 14 full-service
hotels containing a total of 3,214 rooms and has owned or managed 40 properties
containing a total of 7,928 rooms. During 1997, consistent with its strategies,
the Company acquired eight hotels containing 2,160 guest rooms. As of December
31, 1997, the Company, through the Partnership, owned 17 hotels (the "Hotels")
with a total of 4,568 guest rooms.

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     The Company's management has substantial hotel operating, development,
acquisition and transactional experience. The Company's officers have over 100
years combined of experience in the hotel industry, and during the past 10
years, have directly overseen the acquisition, disposition, recapitalization,
development and repositioning of over $2 billion of hotel assets throughout the
United States.

  RECENT EVENTS

     On December 30, 1997 the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Red Lion Inns Limited Partnership ("Red
Lion"), under which the Company agreed to acquire the portfolio of 10
Doubletree-licensed hotels owned by Red Lion (the "Doubletree Hotels"). The
Doubletree Hotels contain 3,062 guest rooms and are located in California,
Oregon, Washington, Colorado, Idaho and Nebraska. If the proposed merger (the
"Proposed Merger") is consummated, the Doubletree Hotels will continue to be
managed by Doubletree and to be leased to a subsidiary of Boykin Management
Company Limited Liability Company ("BMC"). Under the Merger Agreement, the
Company will issue 3,110,048 Common Shares and pay approximately $35.3 million
in cash to the Red Lion limited partners and general partner. In connection with
the Proposed Merger, the Partnership will become responsible for Red Lion's
liabilities, which the Company estimates will be approximately $156 million at
the time of closing. At the time of the announcement of the Merger Agreement,
the consideration value was expected to total approximately $271 million. The
Company expects to complete the Proposed Merger early in the second quarter of
1998. Consummation of the Proposed Merger is subject to various conditions,
including approval by the Red Lion limited partners of the Proposed Merger and
approval by the Company's shareholders of the issuance of Common Shares in
connection with the Proposed Merger. There is no assurance that the Proposed
Merger will be completed.

     On February 24, 1998, the Company completed a follow-on public equity
offering of 4,500,000 Common Shares (the "Offering"). The proceeds were $112.5
million and net proceeds (less the underwriters' discount and offering expenses)
were approximately $106.3 million. The Company contributed all of the net
proceeds to the Partnership, increasing its ownership percentage therein to
90.3%. The proceeds were used by the Partnership to pay existing indebtedness
under the Company's credit facility, purchase limited partnership units from two
unaffiliated limited partners, fund the acquisitions of the 1998 Hotels and for
general corporate purposes.

     On March 12, 1998, the Company acquired two full-service hotels (the "1998
Hotels") containing a total of 568 guest rooms at an aggregate cost of $37.0
million. These hotels are located in Knoxville, Tennessee and High Point, North
Carolina and compete in the upscale price segment of the hospitality market. The
acquisitions were funded with cash proceeds from the Offering and borrowings
under the Company's credit facility.

     In the first quarter of 1998, the Company also executed an agreement to
acquire another hotel containing 207 guest rooms at a cost of $19.3 million. The
Company's purchase of this hotel is subject to various uncertainties and
conditions. There is no assurance that the Company will consummate this
potential acquisition.

(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

     All of the Company's operations are in a single industry segment.

(C) NARRATIVE DESCRIPTION OF BUSINESS

     The Company's primary business objectives are to maximize current returns
to shareholders through increases in cash flow available for distribution and to
increase long-term total returns to shareholders through appreciation in value
of the Common Shares. The Company seeks to achieve these objectives through
participation in increased revenues from its hotels pursuant to lease agreements
with tenants that provide the Company with the greater of a base rental income
or a percentage of revenues from hotel operations (the "Percentage Leases"). The
Company also seeks to achieve these objectives by selective acquisition,
ownership, redevelopment, repositioning and expansion of additional hotel
properties. The Company will seek to continue to invest in properties at which
the Company's established industry and marketing expertise will enable it to
improve the acquired hotels' performance.

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  HOTEL PORTFOLIO

     The Hotels and the 1998 Hotels are operated under franchise license
agreements with premiere nationally recognized hotel chains, including
Doubletree(R), Marriott(R), Radisson(R), Hilton(R), Holiday Inn(R), Quality
Suites(R) and Hampton Inns(R). One hotel operates as an independent hotel.
Serving both business and leisure travelers, the Hotels are located in Berkeley
and San Diego, California; Buffalo, New York; Cleveland and Columbus, Ohio;
Charlotte and Raleigh, North Carolina; Ft. Myers, Daytona Beach and Melbourne,
Florida; French Lick, Indiana; Minneapolis, Minnesota; Baltimore, Maryland; and
Kansas City, Missouri. The Hotels include 15 full-service hotels and two
limited-service hotels, all of which compete in the upscale to moderate price
segment of the hospitality market. For the 12 months ended December 31, 1997,
the Hotels (excluding the Daytona Beach Radisson Resort and the Doubletree Hotel
Kansas City, as these properties were not operational during the entire 12-month
period) had an average occupancy rate of 69.3%, an Average Daily Rate ("ADR") of
$88.14 and a Revenue Per Available Room ("REVPAR") of $61.12. The Boykin Group
developed and has owned and managed seven of the Initial Hotels since their
opening.

  BUSINESS STRATEGIES

     The Company's strategies to meet its objectives include (i) acquiring and
leasing full-service commercial and resort hotels on an accretive basis and at a
discount to replacement cost in the upscale and moderate markets, (ii)
developing strategic alliances and relationships with multiple lessees and
franchisors of premier upscale brands, (iii) achieving revenue growth in its
hotels, (iv) strategically renovating, upgrading and repositioning hotel
properties, and (v) expanding and developing additional hotel properties.

  Acquisitions

     The Company has acquired ten hotel properties, including the 1998 Hotels,
since the Initial Offering for an aggregate consideration of $145 million, and
believes that the upscale and moderate market segments of the hospitality
industry continue to present attractive acquisition opportunities. The Company's
acquisition strategy focuses on the following categories:

          - Product Type -- Full-service commercial hotels, airport hotels,
            major tourist hotels and destination resorts in major markets and
            business centers.

          - Market Repositioning Opportunities -- Undervalued hotels whose
            occupancy, daily rates and overall revenues can be significantly
            enhanced through new brand affiliations, implementation of new
            marketing strategies and effective yield management.

          - Redevelopment and Renovation Opportunities -- Hotels with sound
            operational fundamentals that, because of a lack of capital, require
            physical renovation to achieve their full performance potential, and
            other properties which can benefit from total redevelopment and
            market repositioning.

          - Portfolio Acquisitions -- Portfolios of hotels which result in
            geographic economies of scale or which may be leased back to proven
            hotel operators as additional lessees, and that may benefit from the
            Company's repositioning and redevelopment experience and access to
            capital.

  Strategic Alliances and Relationships

     - Multiple Lessee Strategy:  The Company continues to pursue lease
relationships with highly qualified operators who can provide the Company with
additional hotel acquisition opportunities. The Company's acquisitions of
Marriott's Hunt Valley Inn, the Holiday Inn Minneapolis West, the Doubletree
Hotel Kansas City and the Hampton Inn San Diego Airport/Sea World involve new
tenant relationships established by the Company in 1997.

     - Brand Strategy:  The Company focuses on owning hotel properties that are,
or can be, associated with brands that will lead the hospitality industry in
REVPAR, such as Doubletree(R), Marriott(R), Radisson(R), Hilton(R), Hyatt(R),
Renaissance(R), Omni(R), Holiday Inn(R) and Embassy Suites(R). The Company
believes that it can maximize its market share and revenue by taking advantage
of its orientation toward sales and marketing to identify the most effective
branding and to leverage its brands with effective direct sales strategies. The
Company expects to

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continue to affiliate with a number of different franchisors in order to
maximize the performance of its hotels by providing greater access to a broad
base of national marketing and reservation systems and to mitigate the risks of
franchise loss and franchise overlap. The Company believes that its
relationships with certain franchisors facilitate sourcing and completing
acquisitions on attractive terms. The Company intends to maintain a
geographically diversified hotel portfolio and may also cluster hotels within
certain primary markets in order to take advantage of operational and managerial
economies of scale.

  Internal Growth

     The Company believes that, based on historical operating results and the
strength of the Company's and its lessees' management teams, and the Company's
hotel portfolio and markets, the Hotels and the 1998 Hotels should provide the
Company with the opportunity for cash flow growth through the Percentage Leases.
REVPAR and aggregate total revenues of the Hotels (excluding the Doubletree
Hotel Kansas City and the Daytona Beach Radisson Resort, which had been in
operation for less than nine months in 1997) increased from $52.53 and $121.5
million, respectively, in 1995 to $56.93 and $129.2 million, respectively, in
1996 and to $61.12 and $137.0 million, respectively, in 1997.

     The Company believes that the revenue and cash flow of its hotels will be
maximized by intensive management and marketing. The Company intends to derive
increased cash flow through the application of its lessees' operating
strategies, which include active yield management. The Company believes that its
lessees' commitment to customer service and the experience of their management
teams position the Company to capitalize on the expected continuing demand in
the Company's markets.

  Capital Expenditure and Renovation Strategy

     The Company believes that its regular program of capital improvements at
its hotels, including replacement and refurbishment of FF&E, helps maintain and
enhance their competitiveness and maximizes revenue growth under the Percentage
Leases. During the year ended December 31, 1997, the Company spent approximately
$4.9 million from the Company's capital expenditure reserve on renovations and
additional capital improvements at the Hotels, in addition to the $8.6 million
that it spent in renovating acquired hotels in accordance with its acquisition
plans. This spending, excluding acquisitions-oriented expenditures represents an
average of approximately $1,476 per weighted average room. The Percentage Leases
require the Company to add to a capital expenditures reserve, annually,
aggregate minimum reserves of specified percentages of total revenue of its
hotels. For the 12-month period ended December 31, 1997, on a pro forma basis
this reserve would have represented an average of $1,417 per room for the
Hotels. The Company generally uses the capital expenditures reserve for the
replacement and refurbishment of FF&E and other capital expenditures to maintain
and enhance the competitive position of its hotels, although it may make other
uses of amounts reserved that it considers appropriate from time to time. The
Company believes that the reserve will be adequate to meet its continuing
capital expenditure and FF&E needs for its hotels in light of their age and
condition. The lessees' experience in developing and renovating their respective
properties will assist the Company in maintaining its properties' competitive
edge in their respective markets.

     Over the next 12 months, the Company's major capital expenditure plans
include: (i) a $6 million upgrade of the Berkeley Marina hotel in connection
with its recent conversion to a Radisson, including a complete upgrade and
modernization of the exterior, front entrance, lobby and half of the guest
rooms; (ii) a $1.5 million renovation of the Holiday Inn Minneapolis West,
including a new upscale concierge floor to cater to business travelers and
renovation of the guest rooms and public areas; (iii) the continuation of the
Company's $3.6 million renovation of the Holiday Inn Crabtree's exterior,
windows, guest rooms, common areas, lobby and pool; (iv) a $2 million
expenditure at the French Lick Springs Resort for general upgrades and
improvements; and (v) a $6 million renovation of the Cleveland Airport
Marriott's exterior, guest rooms, and lobby and public areas.

  Development Strategy

     The Company may develop additional full-service or upscale limited-service
hotels on land that the Company acquires in its current geographic markets or on
land contiguous to its hotels. The Company believes

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that selective development of hotels in its existing geographic markets would
enable it to take advantage of operating efficiencies to generate attractive
returns on investment.

  LESSEES

     The Company leases its properties to established hotel operators pursuant
to the Percentages Leases, which provide the Company with the greater of a base
rental income or a percentage of revenues from operations.

     The Company believes that having multiple tenants facilitates meeting its
growth objectives. In selecting lessees, the Company seeks hotel operators with
demonstrated full-service hotel expertise, a stable operating and financial
performance history, an excellent reputation in the hospitality industry, and an
ability to introduce additional acquisition opportunities to, and to lease
additional hotels from, the Company. The Company leases two hotels to CapStar
Hotel Company ("CapStar"), one hotel to Davidson Hotel Company ("Davidson") and
one hotel to Outrigger Lodging Services ("Outrigger"). The Company leases the
remaining 13 Hotels and the 1998 Hotels to BMC. The Doubletree Hotels are leased
to a wholly owned subsidiary of BMC. The Company expects to pursue lease
relationships with additional hotel operators that have excellent operating
histories and demonstrated management expertise.

     The Company's hotel joint ventures (more fully described below) are
structured to align its hotel lessees' economic interests with the Company's
economic interests. In each joint venture, the lessee's ability to receive cash
flow and equity capital distributions is subordinated to the Company's receipt
of specified minimum distributions. In addition, each lessee must maintain a
specified net worth to support its lease payment obligations and pledge its
joint venture interest as security for the lease payment obligations. The
Company is permitted to subject any joint venture's hotel to a mortgage or to
sell the hotel or the Company's interest in the joint venture without the
affected joint venture partner's consent.

     CapStar.  CapStar is a publicly traded hotel investment and management
company that acquires, owns, renovates, repositions and manages hotels
throughout the United States. CapStar's portfolio of full-service hotels under
management includes both independent brands and a number of well-known franchise
brands, including Hilton(R), Sheraton(R), Marriott(R), Embassy Suites(R),
Westin(R) and Doubletree(R).

     In July 1997, the Company and CapStar formed a joint venture called BoyStar
Ventures ("BoyStar") for the purpose of acquiring full-service, commercial and
resort hotel properties that CapStar will lease and manage. BoyStar, in which
the Company owns a 91% general partnership interest and CapStar owns a 9%
limited partnership interest, acquired the 196-room Holiday Inn Minneapolis West
in July 1997. In November 1997, the Company, through a joint venture with a
CapStar Affiliate (80% owned by the Company and 20% owned by the CapStar
Affiliate), acquired the 388-room Doubletree Hotel Kansas City and leased it to
CapStar. The hotel is managed by CapStar Management Company, L.P. The CapStar
Affiliate has the right, commencing in January 2000 and subject to certain
performance criteria, to sell half of its interest in the Kansas City joint
venture to the Company for its fair market value, payable in cash or Common
Shares at the option of the Company.

     Davidson.  Davidson is a privately held national hotel management company
located in Memphis, Tennessee. Davidson provides management, development,
consulting and accounting expertise for the hospitality industry. Davidson
operates hotels under franchise agreements with such franchisors as Marriott(R),
Embassy Suites(R), Hilton(R), Crowne Plaza(R), Omni(R) and Holiday Inn(R).

     In July 1997, the Company acquired a 91% general partnership interest in
Shawan Road Hotel Limited Partnership, in which a Davidson Affiliate owns a 9%
limited partnership interest. The partnership owns the 392-room Marriott's Hunt
Valley Inn, located in suburban Baltimore, Maryland. Davidson leases the hotel
from the partnership and manages the hotel. The Davidson Affiliate has the
right, commencing in July 1999 and subject to certain performance criteria, to
sell half of its interest in the limited partnership to the Company for its fair
market value, payable in cash or Common Shares at the option of the Company.

     Outrigger.  Outrigger is a privately held hotel management company based in
California. Outrigger currently operates or has operated a full range of hotel
products, including Marriott(R), Sheraton(R), Hilton(R),

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Residence Inn(R), Holiday Inn(R), and Radisson(R) and many limited service
products. In addition to branded hotels, Outrigger operates upscale, boutique
hotels.

     The Company and an Outrigger Affiliate formed a joint venture to acquire
the 199-room Hampton Inn San Diego Airport/Sea World in San Diego, California.
The joint venture, in which the Company owns a 91% interest and the Outrigger
Affiliate owns a 9% interest, acquired the hotel in November 1997. The joint
venture has leased the hotel to an affiliate of Outrigger, and the hotel is
managed by Outrigger and operates under a franchise agreement with Promus Hotel
Corporation (the licensor of Hampton Inn hotels).

     BMC.  Robert W. Boykin (the Company's President and Chief Executive
Officer) and his brother, John E. Boykin, indirectly own BMC, which was formed
at the time of the Initial Offering. BMC has continued the 39-year hotel
operation and management business of the Boykin Group. The Boykin Group has
capabilities in all phases of development and management of hotel properties.
BMC operates or manages 35 properties containing 8,410 rooms located throughout
the United States, including 13 of the Hotels, the 1998 Hotels and the
Doubletree Hotels.

     BMC's subsidiaries conduct management activities for owners other than the
Company, an award-winning hotel interior design business and a hotel and
restaurant food, beverage, supply and equipment purchasing business. These
operations are conducted in part with a view to introducing the Company to
acquisition opportunities.

     In anticipation of the Proposed Merger and to avoid certain adverse tax
consequences that it would otherwise have incurred, Red Lion leased to Westboy,
LLC ("Westboy"), pursuant to a Percentage Lease Agreement ("the Doubletree
Percentage Lease") effective January 1, 1998, the 10 Doubletree Hotels that the
Company expects to acquire in the Proposed Merger. Westboy contemporaneously
executed a management agreement (the "Doubletree Management Agreement") with Red
Lion Hotels, Inc. (the "Doubletree Manager"), a wholly owned subsidiary of
Doubletree Corporation, under which the Doubletree Manager will operate the
Doubletree Hotels. The Doubletree Percentage Lease and Doubletree Management
Agreement will remain in effect following consummation of the Proposed Merger.

     BMC and its owners, who have a substantial interest in the Company, have
interests that conflict with the Company's interests in connection with the
structuring and enforcement of the Percentage Leases and other leases and
agreements between the Company and BMC and in connection with activities that
may maximize profits for BMC without necessarily benefitting the Company. The
Company and BMC have undertaken several measures, including those listed below,
to align the interests of BMC and its owners with the interests of the Company
and its shareholders and to address these conflicts of interest:

          - BMC's owners have agreed to retain their equity interests in the
            Company (in the form of limited partnership units in the Partnership
            ("Units") exchangeable for Common Shares (if the Company consents
            thereto)) until November 1999;

          - Robert W. Boykin will not hold office in BMC (other than a
            directorship), and neither John E. Boykin nor any other officer of
            BMC will hold office in the Company;

          - Distributions from BMC and net proceeds of any sale of BMC (with
            certain limited exceptions) will be used to purchase Units or Common
            Shares, and half of BMC's consolidated earnings will be retained in
            BMC and its subsidiaries to maintain their consolidated net worth at
            not less than 25% of the aggregate annual rent payments under BMC's
            Percentage Leases;

          - Determinations made on behalf of the Company in connection with any
            conflict of interest involving any Boykin Group Affiliate are made
            by the Company's Independent Directors;

          - Each Boykin Group Affiliate will conduct all hotel acquisition,
            development and ownership activities only through the Company; and

          - Any change in control of BMC without the Company's consent will
            constitute a default under BMC's Percentage Leases.

     BMC also has developed a deferred compensation plan for its corporate-level
senior executives, under which each award's value is based on the value of the
Company's Common Shares.

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  ACCESS TO CAPITAL

     The Company's $150 million credit facility (the "Credit Facility") enables
the Company to acquire hotels without financing contingencies and is available
for certain other purposes, including capital expenditures and working capital,
as necessary. As a public company, the Company generally has access to a wide
variety of financing sources to fund acquisitions, such as the ability to issue
public and private debt, equity and hybrid securities, and the ability to
utilize Units as consideration when cash is not appropriate for tax or other
reasons. While its organizational documents contain no limitation on the amount
of debt it may incur, the Company, subject to the discretion of the Board of
Directors, intends to maintain a debt-to-total-market capitalization ratio
(measured at the time debt is incurred) of not more than 45%. The Company may
from time to time re-evaluate its debt capitalization policy in light of
economic conditions, relative costs of debt and equity capital, market values of
its properties, acquisition, development and expansion opportunities and other
factors.

     The Company has obtained a commitment for a $130 million, 10-year term
loan, to be funded on the closing of the Proposed Merger, with a rate of
interest to be fixed at a spread over the 10-year United States Treasury bond
rate upon closing of the loan. The loan will be secured by the Doubletree
Hotels, with amortization based on a 25-year schedule commencing on the second
anniversary of the loan. The Company also has obtained a commitment for a $250
million unsecured revolving credit facility (which would replace the Company's
existing secured Credit Facility), with a rate of interest at the same spread
over LIBOR as the existing Credit Facility. The Company expects to borrow $91
million under the new credit facility to fund the remainder of its cash
obligations in connection with the Proposed Merger. The $159 million balance of
the new revolving credit facility would be available for other acquisitions and
general corporate purposes. Each of these commitments is subject to customary
conditions, including the lenders' satisfactory completion of due diligence
inquiries and the preparation, execution and delivery of mutually acceptable
financing documentation.

     On February 24, 1998, the Company completed a follow-on public equity
offering of 4,500,000 common shares. The proceeds were $112.5 million and net
proceeds (less the underwriters' discount and offering expenses) were
approximately $106.3 million. The Company contributed all of the net proceeds to
the Partnership, increasing its ownership percentage therein to 90.3%. The
proceeds were used by the Partnership to pay down existing indebtedness under
the credit facility, purchase limited partnership units from two unaffiliated
limited partners, fund the acquisitions of the 1998 Hotels and for general
corporate purposes.

  EMPLOYEES

     The Company currently has eleven employees. These employees perform,
directly or through the Partnership, various acquisition, development,
redevelopment and corporate management functions.

  INVENTORY

     All working capital assets required in the operation of the Hotels and the
1998 Hotels are provided by the lessees at their expense.

  ENVIRONMENTAL MATTERS

     Under various federal, state and local laws, ordinances, and regulations,
an owner or operator of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances or petroleum on, under or
in the property. This liability may be imposed without regard to whether the
owner or operator knew of, or was responsible for, the presence of the
substances. Other federal, state and local laws, ordinances and regulations and
the common law impose on owners and operators certain requirements regarding
conditions and activities that may affect human health or the environment.
Failure to comply with applicable requirements could result in difficulty in the
lease or sale of any affected property or the imposition of monetary penalties,
in addition to the costs required to achieve compliance and potential liability
to third parties. The Company, the Partnership or the lessees, as the case may
be, may be potentially liable for such costs or claims in connection with the
ownership and operation of the Hotels, the 1998 Hotels and hotels acquired by
the Company in the future.

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     Neither the Company nor, to the knowledge of the Company, any other entity
with an interest in any of the Hotels or the 1998 Hotels, has been notified by
any governmental authority, or is otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
to other environmental matters in connection with any of its hotels.
Nonetheless, it is possible that material environmental contamination or
conditions exist, or could arise in the future, in the hotels or on the land
upon which they are located which could create a material environmental
liability. Further, there can be no assurance that the hotels that the Company
may acquire, including the 10 Doubletree Hotels, will not give rise to any
material environmental liability.

  COMPETITION

     Each of the Company's hotels is located in a developed area that includes
other hotel properties. The occupancy, ADR and REVPAR of any hotel or any hotel
property acquired in the future could be materially and adversely affected by
the number of competitive hotel properties in its market area. The Company also
may be competing for investment opportunities with entities that have
substantially greater financial resources than the Company. These entities may
generally be able to accept more risk than the Company can prudently manage,
including risks with respect to the creditworthiness of entities in which
investments may be made or risks attendant to a geographic concentration of
investments. Competition may generally reduce the number of suitable investment
opportunities offered to the Company and increase the bargaining power of
property owners seeking to sell.

  SEASONALITY

     The Company's hotels' operations historically have been seasonal. Thirteen
of the Hotels and the 1998 Hotels maintain higher occupancy rates during the
second and third quarters. The four Florida Hotels experience their highest
occupancy in the first quarter. This seasonality pattern can be expected to
cause fluctuations in the Company's quarterly lease revenue under the Percentage
Leases.

  THE INTERCOMPANY CONVERTIBLE NOTE

     The Company loaned $40 million of the net proceeds of the Initial Offering
to the Partnership. The loan is evidenced by an Intercompany Convertible Note,
which will mature on November 4, 2001. Interest accrues at a rate equal to 9.5%
per annum, increasing to 9.75% per annum on November 4, 1999, and is payable
quarterly. The Intercompany Convertible Note may be prepaid in full, but not in
part, at any time. The Company has the right to convert the Intercompany
Convertible Note after November 4, 1998, and prior to maturity and in advance of
any proposed prepayment by the Partnership, into additional equity interests in
the Partnership at face value based on the initial offering price of the Common
Shares in the Initial Offering of $20 per share (and assuming that the value of
one Partnership Unit equals the value of one Common Share). On conversion of the
Intercompany Convertible Note, the Company would receive an additional equity
interest in the Partnership of 1.3%, which will reduce the equity interest in
the Partnership of the other holders of Units to 8.4%, after giving effect to
the Offering and the use of the net proceeds therefrom, assuming no other Common
Shares or Units are issued prior to that conversion. If the Proposed Merger is
consummated, the Company would receive an additional equity interest in the
Partnership of 0.9% on conversion of the Intercompany Convertible Note, which
will reduce the equity interest in the Partnership of the other holders of Units
to 7.0%, assuming no other Common Shares or Units are issued prior to that
conversion. The Intercompany Convertible Note is secured by a mortgage on two of
the Hotels and is subordinated in right of payment to all other indebtedness of
the Partnership.

(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

     All of the Company's operations are conducted in the United States.

                                        8
<PAGE>   10

ITEM 2.  PROPERTIES

(A) HOTEL PROPERTIES

  EXISTING PROPERTIES

     On December 31, 1997, the Company owned the following 17 hotel properties:

<TABLE>
<CAPTION>
                                              NUMBER
                                                OF
                  PROPERTY                    ROOMS       LESSEE           LOCATION
                  --------                    ------     ---------     -----------------
<S>                                           <C>        <C>           <C>
Cleveland Marriott East.....................    403      BMC           Cleveland, OH
Marriott's Hunt Valley Inn..................    392      Davidson      Baltimore, MD
Cleveland Airport Marriott..................    375      BMC           Cleveland, OH
Buffalo Marriott............................    356      BMC           Buffalo, NY
Columbus North Marriott.....................    300      BMC           Columbus, OH
Berkeley Marina Radisson....................    373      BMC           Berkeley, CA
Daytona Beach Radisson Resort(1)............    206      BMC           Daytona Beach, FL
Radisson Inn Sanibel Gateway................    157      BMC           Fort Myers, FL
Holiday Inn Minneapolis West................    196      CapStar       Minneapolis, MN
Holiday Inn Crabtree........................    176      BMC           Raleigh, NC
Lake Norman Holiday Inn.....................    119      BMC           Charlotte, NC
Hampton Inn San Diego Airport/Sea World.....    199      Outrigger     San Diego, CA
Lake Norman Hampton Inn.....................    117      BMC           Charlotte, NC
Doubletree Hotel Kansas City................    388      CapStar       Kansas City, MO
Melbourne Quality Suites....................    208      BMC           Melbourne, FL
Melborne Hilton Oceanfront..................    118      BMC           Melbourne, FL
French Lick Springs Resort..................    485      BMC           French Lick, IN
                                              -----
                                              4,568
                                              =====
</TABLE>

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

(1) Reopened in January 1998 after eight month closure for a major renovation.

     CLEVELAND MARRIOTT EAST.  Located in Beachwood, Ohio, a suburb of
Cleveland, just off Interstate 271, this hotel adjoins commercial office
development and is about 20 minutes from downtown Cleveland and 30 minutes from
the Cleveland Hopkins International Airport. The majority of the guests are
business travelers. Group travel accounts for about 20% of the hotel's business.
The hotel is also adjacent to the planned 650-acre Chagrin Highlands
research-office park development. The property was owned and managed by the
Boykin Group as a Marriott since its opening in 1977 and is leased to BMC.

     MARRIOTT'S HUNT VALLEY INN.  This hotel is located in Hunt Valley,
Maryland, 20 miles north of downtown Baltimore, in the southeast quadrant of the
I-83/Shawan Road interchange, adjacent to the Hunt Valley Business Park. The
majority of the Hotel's business is from business travelers. The hotel was
originally opened in 1971, and was expanded in the early 1980's. The hotel is
leased to Davidson and is owned by a joint venture owned 91% by the Company and
9% by Davidson.

     CLEVELAND AIRPORT MARRIOTT.  This hotel is located in Cleveland, Ohio, on
Interstate 71 approximately eight miles from downtown Cleveland and two miles
from Cleveland Hopkins International Airport. Approximately one half of the
guests are business travelers. The property was developed and managed by the
Boykin Group since its opening in 1970 and is leased to BMC. The hotel is
currently undergoing an extensive renovation in connection with an extension of
its franchise agreement with Marriott.

     BUFFALO MARRIOTT.  This hotel is the only full-service Marriott hotel in
the greater Buffalo Metropolitan area. Located just off Interstate 290 in
Amherst, the hotel is adjacent to the State University of New York at Buffalo
and is approximately 15 minutes from downtown Buffalo, 30 minutes from Niagara
Falls, and 10 minutes from the Greater Buffalo International Airport. The
majority of the guests are business travelers. The property was owned and
managed by the Boykin Group as a Marriott since opening in 1981 and is leased to
BMC.

                                        9
<PAGE>   11

     COLUMBUS NORTH MARRIOTT.  Located in Columbus, Ohio, just off Interstate 71
and near Interstate 270, this hotel is the only full-service Marriott Hotel in
Columbus, and is approximately 20 minutes from downtown Columbus, 20 minutes
from Ohio State University and 20 minutes from the Port Columbus International
Airport. About one half of the guests are business travelers. Group travel
accounts for 40% of the hotel's business. The property was owned and managed by
the Boykin Group as a Marriott since its opening in 1981 and is leased to BMC.

     BERKELEY MARINA RADISSON.  This waterfront hotel is on the east side of San
Francisco Bay in the Berkeley Marina Complex. The hotel is in a secluded area
approximately 20 minutes from downtown San Francisco and 30 minutes from San
Francisco International Airport. The hotel is located near the Golden Gate
Bridge, Fisherman's Wharf and the Napa/Sonoma wine country. The University of
California at Berkeley is three miles away. The majority of the guests are
business travelers. The property was owned and managed by the Boykin Group since
its opening in 1972 and is leased to BMC. The property was expanded to its
current size in 1985.

     The land underlying this hotel is leased under a ground lease that expires
in 2033 but can be extended by the tenant to 2051. The rent payable under the
lease includes annual minimum rent of $100,000 and percentage rent based on the
hotel's revenues. The tenant is responsible for all taxes, maintenance and
insurance on the leased property.

     DAYTONA BEACH RADISSON RESORT.  This hotel, located in Daytona Beach,
Florida, rests on approximately two acres of land directly on the Atlantic
ocean, and consists of an 11-story building with 206 guest rooms and food and
beverage facilities. The hotel was built in 1974 and contains an attached
two-story addition constructed in 1988 containing meeting facilities. The hotel
underwent a complete, $7 million renovation prior to its reopening in January of
1998. The property is leased to BMC.

     RADISSON INN SANIBEL GATEWAY.  This hotel, located in Fort Myers, Florida,
is 15 miles from I-75 and seven miles off U.S. Highway 41. The hotel is two and
one-half miles from Sanibel Island and four and one-half miles from Ft. Myers
Beach. It is 25 minutes from the New Southwest Florida Airport and 15 minutes
from the Boston Red Sox and Minnesota Twins spring training complexes. The
majority of the guests are tourists and vacationers. The property was owned and
managed by the Boykin Group since its opening in 1986 and is leased to BMC.

     HOLIDAY INN MINNEAPOLIS WEST.  This hotel was built in 1986 and is located
eight miles west of downtown Minneapolis on Shelard Parkway and Wayzata
Boulevard at the Betty Crocker exit of Interstate 394. Minneapolis International
Airport and the Mall of America are approximately 18 miles from the hotel.
Business travelers represent most of the hotel's business. The hotel is leased
to Capstar and is owned by a joint venture owned 91% by the Company and 9% by
Capstar.

     HOLIDAY INN CRABTREE.  This hotel is located in Raleigh, North Carolina and
is opposite the Crabtree Mall, the largest mall in the Carolinas. This property
enjoys a premier highway location in the active North Raleigh market. Business
travelers represent most of the hotel's business. The hotel was opened in 1974
and is currently undergoing an extensive renovation. The hotel is leased to BMC.

     LAKE NORMAN HOLIDAY INN.  This hotel, built in 1987, is located in Lake
Norman, North Carolina, at the northeast corner of the intersection of
Interstate 77 North, Exit 28 and North Carolina Highway 73. See "Lake Norman
Hampton Inn" for a description of this hotel's location. The hotel is leased to
BMC.

     HAMPTON INN SAN DIEGO AIRPORT/SEA WORLD.  This recently renovated hotel is
located two miles northwest of the San Diego International Airport, two miles
southeast of Sea World and two blocks east of the San Diego Sports Arena. The
hotel, built in 1989, is also situated within five miles of downtown, the San
Diego Convention Center, the Zoo, and beaches. Approximately one-half of the
guests are business travelers. The hotel is leased to Outrigger and is owned by
a joint venture in which the Company and Outrigger are 91% and 9% partners,
respectively.

     LAKE NORMAN HAMPTON INN.  This hotel, which was built in 1991, is located
in Lake Norman, North Carolina, at the southeast corner of the intersection of
Interstate 77 North, Exit 28 and North Carolina Highway

                                       10
<PAGE>   12

73. Charlotte, North Carolina is 19 miles to the south. Lake Norman is an
upscale community located approximately five miles south of downtown
Mooresville, North Carolina, and just southeast of Lake Norman, one of North
Carolina's most widely used recreational lakes, offering boating, swimming, and
nearby golf facilities. Most of the area's hotel market is represented by the
commercial segment. The hotel is leased to BMC.

     DOUBLETREE HOTEL KANSAS CITY.  This hotel is located directly across from
the recently expanded convention center in downtown Kansas City, Missouri. The
hotel was built in 1969 and closed in 1996 for a complete renovation prior to
being reopened in April 1997 as an Omni hotel. In November, 1997 the hotel was
reflagged to the Doubletree brand name. The property is leased to and managed by
Capstar , and the Company and a Capstar affiliate own an 80% and a 20% interest,
respectively, in a joint venture that owns the hotel. The majority of the
hotel's guests are business travelers.

     The hotel renovation was funded, in part, with $15.1 million of proceeds
from tax increment financing bonds issued by the Redevelopment Authority of
Kansas City, Missouri (the "Authority"). Debt service on the bonds is to be
funded entirely by sales taxes, payroll taxes, real estate taxes, hotel taxes
and other taxes generated by the hotel. Capstar is obligated to fund the debt
service, however, in the event the specified taxes generated by the hotel are
insufficient to satisfy the debt service requirements of the bonds, the joint
venture would be obligated to the fund such shortfall. In the opinion of the
Company's management, it is unlikely that the joint venture will be required to
fund the debt service.

     MELBOURNE QUALITY SUITES.  This oceanfront hotel is located in Indialantic,
Florida, on the beach off Florida's coastal highway A1A, around 20 miles south
of Kennedy Space Center and 65 miles southeast of Disney World. The hotel is
approximately 10 miles from Melbourne International Airport. Most of the guests
are tourist or vacation travelers attracted by popular destinations such as
Disney World, Universal Studios and Sea World. This property was owned and
managed by the Boykin Group as a Quality Suites hotel since its opening in 1986
and is leased to BMC.

     MELBOURNE HILTON OCEANFRONT.  This hotel is located directly on the beach
in Melbourne, Florida and is located approximately one mile from the Melbourne
Quality Suites. The acquisition of this hotel has allowed the Company to benefit
from cross-selling and labor efficiencies. The hotel was constructed in 1986 and
underwent an extensive $3.6 million renovation in 1996. See "Melbourne Quality
Suites" for a description of the hotel's location. The hotel is leased to BMC.

     FRENCH LICK SPRINGS RESORT.  The French Lick Springs Resort, in French
Lick, Indiana, is a full-service destination resort containing 485 guest rooms,
five restaurants and lounges, meeting rooms containing an aggregate of 60,000
square feet of meeting space, two golf courses, 18 tennis courts, an equestrian
center and riding stables, a health and beauty spa and a bowling alley. The
hotel was built in stages, starting in 1903. The majority of the hotel's
business consists of leisure travelers. The hotel is leased to BMC.

  SUBSEQUENT ACQUISITIONS

     On March 12, 1998, the Company acquired the following two hotel properties:

<TABLE>
<CAPTION>
       PROPERTY          NUMBER OF ROOMS      LOCATION
       --------          ---------------   --------------
<S>                      <C>               <C>
High Point Radisson....        317         High Point, NC
Knoxville Hilton.......        251         Knoxville, TN
</TABLE>

     THE HIGH POINT RADISSON.  This property is located in downtown High Point
along the city's main commercial corridor. High Point is located within the
Greensboro/Winston-Salem/High Point Metropolitan Statistical Area. This region
is also commonly referred to as the Piedmont Triad, the most populated area in
North Carolina. The majority of the hotel's business is from business travelers.
The hotel opened in 1983 and is leased to BMC.

     THE KNOXVILLE HILTON.  This hotel is located within the heart of the city's
business and shopping district and is adjacent to the Knoxville Convention
Center. The University of Tennessee is located two blocks to the southwest of
the Hilton. The World's Fair Park, which includes the Tennessee Amphitheater and
Knoxville

                                       11
<PAGE>   13

Museum of Art, is located one block to the west. The majority of the hotel's
guests are business travelers. The hotel opened in 1981 and is leased to BMC.

  PROPOSED MERGER

     The Company entered into the Merger Agreement on December 30, 1997 with Red
Lion and certain related parties, under which the Company agreed to acquire the
Doubletree Hotels. Under the Merger Agreement, the Company will issue 3,110,048
million Common Shares and pay approximately $35.3 million in cash to the Red
Lion limited partners and general partner, and two wholly owned subsidiaries of
the Company will become the sole partners in Red Lion and then contribute their
Red Lion interests to the Partnership. In connection with the Proposed Merger,
the Partnership will become responsible for Red Lion's liabilities, which the
Company estimates will be approximately $156 million at the time of closing. At
the time of the announcement of the Merger Agreement, the consideration value
was expected to total approximately $271 million. The Company plans to finance
its cash requirements in connection with the Proposed Merger as described under
"Item 1 (c) -- Access to Capital." The Proposed Merger will constitute a taxable
transaction for the Red Lion partners and will be accounted for as a purchase by
the Company.

     The Doubletree Hotels, which formerly operated as "Red Lion Hotels" or "Red
Lion Inns," were reflagged to operate as Doubletree Hotels in June 1997 and are
located in growing commercial markets primarily in the western and northwestern
United States. The Doubletree Hotels are situated on major traffic arteries that
are near airports, commercial centers and tourist sites. Each hotel offers
full-service accommodations, including meeting space, lounges and banquet
facilities, and most have at least two restaurants. The hotels typically offer
valet service, swimming pools, health and fitness centers, concierge services,
business centers and complimentary airport shuttle services.

     The following table sets forth certain additional information with respect
to the Doubletree Hotels.

<TABLE>
<CAPTION>
                  PROPERTY                           LOCATION         NUMBER OF ROOMS
                  --------                           --------         ---------------
<S>                                            <C>                    <C>
Doubletree Hotel Portland Lloyd Center.......  Portland, OR                  476
Doubletree Hotel Sacramento..................  Sacramento, CA                448
Doubletree Hotel Omaha Downtown..............  Omaha, NE                     413
Doubletree Hotel Boise Riverside.............  Boise, ID                     304
Doubletree Hotel Colorado Springs World
  Arena......................................  Colorado Springs, CO          299
Doubletree Hotel Spokane Valley..............  Spokane Valley, WA            237
Doubletree Hotel Portland Downtown...........  Portland, OR                  235
Doubletree Hotel Eugene/Springfield..........  Springfield, OR               234
Doubletree Hotel Bellevue Center.............  Bellevue, WA                  208
Doubletree Hotel Yakima Valley...............  Yakima Valley, WA             208
                                                                           -----
                                                                           3,062
                                                                           =====
</TABLE>

     In connection with the Proposed Merger and to avoid certain adverse tax
consequences that it would have otherwise incurred, Red Lion leased all of the
Doubletree Hotels to Westboy under the Doubletree Percentage Lease, effective as
of January 1, 1998. Also in connection with the Proposed Merger, Westboy hired
the Doubletree Manager to manage the Doubletree Hotels pursuant to the
Doubletree Management Agreement. If the Proposed Merger is consummated, the
Doubletree Hotels will continue to be leased to Westboy and managed by the
Doubletree Manager.

     The Doubletree Management Agreement provides for a base management fee of
3% of hotel revenues and an incentive management fee of 15% of the first $36
million of "profits" (as defined) and 25% of "profits" in excess of $36 million.
The Doubletree Manager has agreed not to charge its customary franchise fee in
addition to these base and incentive fees. In certain cases, the incentive fee
may be deferred or forgiven, depending on the Doubletree Hotels' cash flow. The
financial performance of the Doubletree Hotels will be significantly dependent
upon management by the Doubletree Manager for most or all of the useful life of
the Doubletree Hotels. Although the Doubletree Management Agreement contains no
measurable performance criteria which the

                                       12
<PAGE>   14

Doubletree Manager is required to meet, and the Doubletree Manager may extend
the agreement for an aggregate term of up to 64 years, the Company believes
Westboy's asset management skills and the financial incentives to the Doubletree
Manager support the addition of the Doubletree Hotels to the Company's hotel
portfolio.

     The Company and Red Lion expect to complete the Proposed Merger early in
the second quarter of 1998. Consummation of the Proposed Merger is subject to
various conditions, and there is no assurance that it will be completed.
Moreover, if the Proposed Merger is completed, there is no assurance that the
Company will be able successfully to assimilate the Doubletree Hotels or to
realize the anticipated benefits of the Proposed Merger.

  THE PERCENTAGE LEASES

     The Percentage Leases have the terms described below. The Company expects
that leases with respect to its future hotel property investments will have
substantially similar terms, although the Board of Directors may alter any of
these terms. The following summary of the material terms of the Percentage
Leases is qualified in its entirety by reference to the form of Percentage
Lease, which was filed as an exhibit to the Company's Registration Statement on
Form S-11 (Registration Statement No. 333-6341, filed on June 19, 1996, as
amended).

     Duration.  The Percentage Leases have noncancelable remaining terms ranging
from three to ten years, subject to earlier termination on the occurrence of
certain contingencies described in the Percentage Leases. Except for the
Percentage Leases with Davidson and CapStar and the Doubletree Percentage Lease,
the Percentage Leases do not contain renewal terms. The right to extend the term
of the respective Percentage Leases with Davidson, CapStar and Doubletree is
subject to agreement between the parties regarding market terms.

     Amounts Payable Under the Percentage Leases.  The lessees are obligated to
pay (i) the higher of Minimum Rent or Percentage Rent (except for the French
Lick Springs Resort, for which both Minimum Rent and Percentage Rent are
required to be paid); and (ii) certain other amounts, including interest accrued
on any late payment or charge (the "Additional Charges"). Minimum Rent is a
fixed amount determined by negotiation between the Company and the applicable
lessee (except in certain cases, as defined in the applicable Percentage Lease
agreements). Percentage Rent is calculated by multiplying fixed percentages by
gross room and other revenue and gross food and beverage revenue, over specified
threshold amounts. Minimum Rent is payable monthly in advance, and Percentage
Rent is payable for each quarter within 30 days after the end of the quarter.
Both the threshold gross room and other revenue amounts used in computing
Percentage Rent and Minimum Rent are adjusted annually for changes in the
Consumer Price Index.

     Each Percentage Lease requires the lessee to pay rent, all costs and
expenses, and all utility and other charges incurred in the operation of the
hotel. All capital expenditures (as defined in the lease) are the responsibility
of the Company. Each Percentage Lease also provides for rent reductions and
abatements in the event of damage or destruction or a partial taking of the
hotel. The lessee is required to carry insurance to cover rental interruption
for a period at least one year.

     Maintenance and Modifications.  The lessee is required to maintain the
hotel in good order and repair and to make the nonstructural repairs necessary
therefor. The Company funds capital expenditures and the repair, replacement and
refurbishment of FF&E in the hotel, when and as considered necessary by the
Company and as required by the franchises, and maintains a capital expenditures
reserve to help provide funds to cover such expenses. The Company reserves
annually an amount equal to specified percentages of the gross revenues
generated from its hotels. See "Item 1. (c) -- Business Strategies -- Capital
Expenditure and Renovation Strategy."

     For as long as BMC maintains its interior design and purchase operations,
it will perform interior design and purchasing services for the hotels leased to
BMC at a discount from its normal rates.

     Insurance and Property Taxes.  The Company pays, or causes the lessee to
pay, real estate and personal property taxes and maintains, or causes the lessee
to maintain, property insurance, including casualty insurance, on its hotels.
The lessee maintains comprehensive general public liability, workers'
compensation, 12-month rental interruption and any other insurance customary for
properties similar to the hotel or required by any

                                       13
<PAGE>   15

relevant franchisor and must have the Company named as an additional insured.
The Company believes that the insurance coverage carried by each hotel is
adequate in scope and amount.

     Indemnification.  Under each Percentage Lease, the lessee indemnifies the
Company against all liabilities, costs and expenses (including reasonable
attorneys' fees and disbursements) incurred by, imposed on or asserted against
the Partnership, on account of, among other things, (i) any accident or injury
to person or property on or about the hotel; (ii) any negligence by the lessee
or any of its agents as to the leased property; (iii) in the case of the Initial
Hotels, any environmental liability resulting from conditions existing at the
time of completion of the Offering or caused or resulting thereafter from any
action, inaction or negligence of BMC; (iv) taxes and assessments in respect of
the hotel (other than real estate taxes and income taxes of the Company on
income attributable to the hotel); (v) the sale or consumption of alcoholic
beverages on or in the real property or improvements thereon; or (vi) any breach
of the lease by the lessee. The lessee is not required, however, to indemnify
the Company against the Company's negligence or willful misconduct.

     Assignment and Subleasing.  The lessee is not permitted to sublet all or
any part of the hotel or to assign its interest under the lease without the
prior written consent of the Company. The lessee may, however, enter into a
management agreement with a third party for the management and operation of the
hotel, with the consent of the Company, which the Company may withhold in its
sole and absolute discretion. The lease may not be directly or indirectly sold
by selling direct (or, in most cases, indirect) ownership or control of the
lessee without causing a default under the lease.

     Events of Default.  Events of default under each Percentage Lease include,
among others, the failure by the lessee to pay Minimum Rent when due and the
continuation of that failure for a period of 10 days, the failure by the lessee
to pay the Percentage Rent for any quarter within 10 days after the end of that
quarter, the failure by the lessee to observe or perform any other term of the
lease and the continuation of that failure beyond any applicable cure period, an
event of default under any other Percentage Lease to which the lessee is a
party, termination of the franchise agreement covering any hotel leased to the
lessee, and with respect to BMC, any failure to comply with BMC's covenants
regarding distributions and maintenance of its net worth, as described under
"Item 1. (c) -- Lessees -- BMC," and any failure by Robert and John Boykin and
their heirs to own, collectively, at least 51% of BMC or otherwise control BMC.

     If an event of default under any lease with BMC occurs and continues beyond
any curative period, the Company may terminate the lease and any or all of the
other Percentage Leases with BMC, and BMC will be required to surrender
possession of the affected hotels. If an event of default under any lease with
any other Company lessee occurs and continues beyond any curative period, the
Company may terminate the lease and the lessee will be required to surrender
possession of the affected hotel.

     Franchise Agreements.  The lessee, or in certain cases a third party
management company, will be the franchisee under the franchise agreements for
the hotels leased to the lessee.

     Doubletree Percentage Lease.  Westboy has entered into a Percentage Lease
for the Doubletree Hotels. If the Proposed Merger does not occur, Red Lion has
the right to cause Westboy to assign the lease and Westboy has the right, if the
Red Lion Partnership does not exercise that right, to terminate the lease. The
assignment or the termination, as applicable, would be effective on December 31,
1998. A copy of the Doubletree Percentage Lease was filed as an exhibit to the
Company's Form 8-K filed on January 9, 1998. The terms of the Doubletree
Percentage Lease are substantially the same as the other Percentage Leases
described above, except that (i) its duration is subject to different terms,
(ii) it requires that 3% of gross revenues be spent on capital improvements at
the direction of the lessee or of any manager engaged by the lessee, that 1% of
gross revenues be spent on capital improvements at the discretion of the lessor
(subject to certain limited exceptions), and that the Company spend an
additional $10 million on capital improvements at the Doubletree Hotels by June
30, 2000, and (iii) it limits the amount of mortgage debt that may be placed on
the Doubletree Hotels.

                                       14
<PAGE>   16

  FRANCHISE AGREEMENTS

     The Company's lessees are the franchisees under the respective franchise
agreements for the Hotels. Five of the 17 Hotels are licensed by Marriott
International, Inc. Of the 12 remaining Hotels, one is licensed by Doubletree
Corporation, two by Promus Hotels, Inc. (licensor of Hampton Inn hotels), one by
Choice Hotels International, Inc. (licensor of Quality Suites hotels), three by
Radisson Hotels International, Inc. (Radisson), three by Holiday Inns
Franchising, Inc. and one by Hilton Inns, Inc. (Hilton). The French Lick Springs
Resort has no franchise affiliation. The 1998 Hotels are licensed by Radisson
and Hilton.

     The Company anticipates that most of the additional hotel properties in
which it invests will be operated under franchise agreements. The Company
believes that the public's perception of quality associated with a franchisor
can be an important feature in the operation of a hotel. Franchisors provide a
variety of benefits for franchisees, including national advertising, publicity,
and other marketing programs designed to increase brand awareness, training of
personnel, continuous review of quality standards, and centralized reservation
systems. The franchise agreements generally impose certain management,
operational, recordkeeping, accounting, reporting and marketing standards and
procedures with which the franchised operator must comply.

     - Termination.  Each franchise agreement gives the operator the right to
operate the franchised hotel under a franchise for a period of years specified
in that agreement. The operator is responsible for making all payments to the
franchisor under the franchise agreements. The expiration dates for the Hotels'
and the 1998 Hotels' franchise agreements range from October 7, 2001 to December
31, 2018. The franchise agreements provide for early termination at the
franchisor's option on the occurrence of certain events of default.

     - Sale of Hotel.  The franchise agreements with Marriott and Hilton contain
a provision requiring the franchisee, on receiving a bona fide offer to buy or
lease the franchised hotel, to give the franchisor the option to buy or lease
(as applicable) that hotel on the same terms as are contained in that offer. The
Choice Hotel franchise agreement provides that the agreement automatically
terminates on transfer of the franchised hotel unless the franchisor expressly
consents to that transfer. The Hampton Inn license agreements provide that a
transferee of the licensee must apply for a new franchise and that transfers not
specifically authorized under the license agreement are void and are also a
breach of the license agreement. The Holiday Inn license agreements provide that
a transferee of the hotel must apply for a new license unless the franchisor has
given its prior written consent to the transfer of the hotel.

     - Noncompetition.  The franchise agreements for the Company's five Marriott
hotels prohibit the franchisee from being connected or associated in any manner
with any hotel, motel or inn business within a five-mile radius around the
franchised hotel. These restrictions can be waived by Marriott, whose waiver may
not be unreasonably withheld. If a franchise agreement is terminated because of
a default by the lessee, the lessee may not, for 24 months after termination,
operate any motel, hotel or inn business (other than those in which it is then
engaged) that is in the five-mile radius trade area.

     - Fees.  Under the franchise agreements, the lessees pay franchise fees
ranging from 3% to 6% of gross room sales and advertising or marketing and
reservation fees ranging from 0.8% to 4% of gross room sales.

(B) OFFICE SPACE

     Pursuant to a Shared Services and Office Space Agreement, the Company paid
BMC $2,000 per month in 1997 for the right to use certain office space and
receive certain related services.

ITEM 3. LEGAL PROCEEDINGS

     The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, the amount of
any ultimate liability with respect to these actions will not materially affect
the financial statements of the Company.

                                       15
<PAGE>   17

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

     There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.

                               EXECUTIVE OFFICERS

     Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the following
information is reported below.

     Executive officers of the Company are elected and serve at the discretion
of the Board of Directors until their successors are duly chosen and qualified.

     (a) The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
       NAME          AGE                       POSITION
       ----          ---                       --------
<S>                  <C>   <C>
Robert W. Boykin     48    Director, Chairman of the Board, President
                           and Chief Executive Officer
Raymond P. Heitland  62    Director, Chief Financial Officer and
                           Secretary
Mark L. Bishop       38    Senior Vice President--Acquisitions
Michael D. Murphy    41    Senior Vice President--Acquisitions
Paul A. O'Neil       40    Treasurer
Andrew C. Alexander  34    Vice President -- Corporate Counsel
</TABLE>

     The following is a biographical summary of the business experience of the
executive officers of the Company.

     Robert W. Boykin has served as the President and Chief Executive Officer of
the Company since its formation. He served as the President and Chief Executive
officer of Boykin Management Company from 1985 until November 1996. He served as
Boykin Management Company's Executive Vice President from 1981 until 1985.

     Raymond P. Heitland has served as the Chief Financial Officer of the
Company since its formation. He served as the Chief Financial Officer of Boykin
Management Company from 1970 until November 1996.

     Mark L. Bishop is Senior Vice President-Acquisitions of the Company. He
served as Senior Vice President-Acquisitions of Boykin Management Company from
April 1994 until November 1996. From December 1986 until April 1994, Mr. Bishop
was employed by Grubb & Ellis, serving as Vice President/Senior Marketing
Consultant beginning in February 1991. From February 1990 until December 1995,
Mr. Bishop also owned and served as President of four separate companies that
owned and operated restaurants.

     Michael D. Murphy became Senior Vice President-Acquisitions of the Company
in January 1998. From April 1996 until November 1997, Mr. Murphy served as
Senior Vice President of Acquisitions with Patriot American Hospitality, Inc., a
hotel REIT. From October 1994 until April 1996, Mr. Murphy served as the Chief
Executive Officer of The Stonebridge Group, Inc., a real estate consulting
company founded by Mr. Murphy. From October 1989 until October 1994, Mr. Murphy
was employed by Affirmative Equities Company, L.P., a real estate investment and
consulting firm, serving as a Principal.

     Paul A. O'Neil is the Treasurer of the Company. He served as Chief
Financial Officer and Treasurer of BMC from November 1996 until May 1997 and as
Senior Vice President of Boykin Management Company from 1994 until November
1996. From 1990 to 1994, Mr. O'Neil managed the Real Estate Services Group in
Arthur Andersen LLP's Cleveland, Ohio office.

     Andrew C. Alexander became Vice President-Corporate Counsel of the Company
in July 1997. From July 1995 until July 1997, Mr. Alexander served as Vice
President-Corporate Counsel of Renaissance Hotel Group, N.V., a publicly traded
hotel company. From September 1989 until July 1995, Mr. Alexander was an
attorney at the law firm of Calfee, Halter & Griswold, LLP.

                                       16
<PAGE>   18

     There are no arrangements or understandings known to the Company between
any executive officer and any other person pursuant to which any executive
officer was elected to office. There is no family relationship between any
director or executive officer and any other director or executive officer of the
Company.

     Employment Arrangements.  Robert W. Boykin, Raymond P. Heitland and Mark L.
Bishop entered into employment contracts with the Company in connection with the
Initial Offering. Mr. Boykin's agreement provides for an initial three-year term
that is automatically extended for an additional year at the end of each year of
the agreement, subject to the right of either party to terminate the agreement
by giving two years prior written notice. The agreements of Messrs. Heitland and
Bishop both provide for one-year terms that are automatically extended for an
additional year at the end of each year of the agreement, subject to the right
of either party to terminate the agreement by giving six months prior written
notice. Mr. Heitland's and Mr. Bishop's employment agreements are currently in
effect until December 31, 1998. Each of Messrs. Boykin, Heitland and Bishop is
prohibited from competing with the Company during the term of his employment
agreement and, in the case of Messrs. Boykin and Heitland, for a term of two
years thereafter, and in the case of Mr. Bishop, for a term of six months
thereafter.

     On May 20, 1997, the Company entered into an employment arrangement with
Paul A. O'Neil. The arrangement provides for an initial one year term that will
be extended for an additional year at the end of each year of the arrangement,
subject to the right of either party to terminate the employment relationship by
giving six months prior written notice.

                                    PART II

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

(A) MARKET INFORMATION

     The Company's Common Shares are traded on the New York Stock Exchange under
the symbol "BOY." The following table sets forth for the indicated periods the
high and low sales prices for the Common Shares and the cash distributions
declared per share:


<TABLE>
<CAPTION>
                                                                                   CASH
                                                             PRICE RANGE       DISTRIBUTIONS
                                                           --------------        DECLARED
                                                           HIGH       LOW        PER SHARE
                                                           ----       ---      -------------
<S>                                                        <C>        <C>          <C>
Year Ended December 31, 1996:
  Fourth Quarter (beginning October 30, 1996)............  $24        $20          $0.28

Year Ended December 31, 1997:
  First Quarter..........................................  $24-1/2    $21-5/8      $0.45
  Second Quarter.........................................  $23-15/16  $20          $0.45
  Third Quarter..........................................  $27        $22-1/2      $0.45
  Fourth Quarter.........................................  $27-3/4    $24-3/4      $0.45

Year Ending December 31, 1998:
  First Quarter (through March 19, 1998).................  $28-1/2    $23-9/16     $0.47
</TABLE>


(B)  SHAREHOLDER INFORMATION

     As of March 19, 1998, there were 199 record holders of the Company's Common
Shares, including shares held in "street name" by nominees who are record
holders, and approximately 9,000 beneficial owners.

     In order to comply with certain requirements related to qualification of
the Company as a REIT, the Company's charter limits the number of Common Shares
that may be owned by any single person or affiliated group to 9% of the
outstanding Common Shares.

                                       17
<PAGE>   19

(C) DISTRIBUTION INFORMATION

     The Company's current annualized distribution rate is $1.88 per share,
payable quarterly in an amount equal to $0.47 per share, which represents an
$.08 annual per share increase over the 1997 distribution rate of $1.80. The
Company's 1997 distributions were fully taxable as dividends.

     The Company currently anticipates that it will maintain at least the
current distribution rate in the near term, unless actual results of operations,
economic conditions or other factors differ from its current expectations. The
declaration and payment of distributions by the Company is at the discretion of
the Company's Board of Directors and depends on, among other things, the
Company's receipt of cash distributions from the Partnership, the Company's
level of indebtedness, any contractual restrictions and other factors considered
relevant by the Board. The level of the Partnership's cash distributions is
determined by the Partnership in light of its cash needs, including its
requirements for investing and financing activities and other anticipated cash
needs. The Partnership's principal source of revenue consists of payments of
rent by the lessees under the Percentage Leases.

(D) SALES OF UNREGISTERED SECURITIES

     In September 1997, the Company sold 20,000 Common Shares to BMC for cash
consideration of $490,625, or $24.53 per share. This sale was not registered
under the Securities Act of 1933 (the "Securities Act") in reliance upon the
exemption from the registration requirements thereof provided by Section 4(2) of
the Securities Act.

(E) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES

     On February 24, 1998, the Company completed a follow-on public equity
offering of 4,500,000 Common Shares. The proceeds were $112.5 million and net
proceeds (less the underwriters' discount and offering expenses) were
approximately $106.3 million. The Company contributed all of the net proceeds to
the Partnership, increasing its ownership percentage therein to 90.3%. The
proceeds were used by the Partnership to pay down existing indebtedness under
the Company's credit facility, purchase limited partnership units from two
unaffiliated limited partners, fund the acquisitions of the 1998 Hotels and for
general corporate purposes.

ITEM 6.  SELECTED FINANCIAL DATA

     The following tables set forth selected historical and pro forma operating
and financial data for the Company and BMC and selected combined historical
financial data for the Initial Hotels. The selected historical financial data
for the Company and BMC for the year ended December 31, 1997, for the period
November 4, 1996 (inception of operations) to December 31, 1996, and the
selected combined historical financial data for the Initial Hotels for the
period January 1, 1996 through November 3, 1996, and for the years ended
December 31, 1993 through 1995 have been derived from the historical financial
statements of the Company, BMC and the Initial Hotels, respectively, audited by
Arthur Andersen LLP, independent public accountants, whose reports with respect
thereto are included herein (See Index to Financial Statements at Page F-1).

     The pro forma information of the Company is presented as if the initial
public offering and related formation transactions, and the Company's
acquisitions of the Melborne Hilton Oceanfront, Holiday Inn Crabtree, French
Lick Springs Resort, Holiday Inn Minneapolis West, Marriott's Hunt Valley Inn
and Hampton Inn San Diego Airport/Sea World, had been consummated as of January
1, 1996. The pro forma information excludes the results of the Daytona Beach
Radisson Resort and the Doubletree Hotel Kansas City, as these hotels were not
operating during the entire twelve month pro forma periods.

     In the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS 128") for calculating earnings per
share. The Company has included the basic and diluted earnings per share amounts
under the methods prescribed by SFAS 128, and has restated previously reported
earnings per share data to conform with the requirements of SFAS 128.

     The pro forma information of BMC is presented as if the Company's initial
public offering and related formation transactions, and the Company's
acquisitions (and the related BMC leases) of the Melborne Hilton Oceanfront,
Holiday Inn Crabtree and French Lick Springs Resort had been consummated as of
January 1, 1996.
                                       18
<PAGE>   20

The pro forma information excludes the results of the Daytona Beach Radisson
Resort, as this hotel was not open during the entire pro forma periods.

     The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and all of the financial statements and notes thereto included
elsewhere in this Form 10-K.

                                       19
<PAGE>   21

                             BOYKIN LODGING COMPANY

                SELECTED HISTORICAL OPERATING AND FINANCIAL DATA

               (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                    PERIOD FROM
                                                                                 NOVEMBER 4, 1996
                                                               YEAR ENDED    (INCEPTION OF OPERATIONS)
                                                              DECEMBER 31,        TO DECEMBER 31,
                                                                  1997                 1996
                                                              ------------   -------------------------
<S>                                                           <C>            <C>
OPERATING DATA:
  Lease revenue.............................................   $  37,884             $  3,258
  Interest income...........................................         382                  120
                                                               ---------             --------
     Total revenues.........................................      38,266                3,378
                                                               ---------             --------
  Real estate related depreciation and amortization.........      10,148                1,344
  Real estate and personal property taxes, insurance and
     ground rent............................................       5,173                  620
  General and administrative................................       2,404                  450
  Interest expense..........................................       2,653                   54
  Amortization of deferred financing costs..................         454                   69
                                                               ---------             --------
     Total expenses.........................................      20,832                2,537
                                                               ---------             --------
  Income before minority interest and extraordinary item....      17,434                  841
  Minority interest.........................................      (2,210)                 (40)
                                                               ---------             --------
  Income before extraordinary item..........................      15,224                  801
  Extraordinary item -- loss on early extinguishment of
     debt, net of $172 and $970 of minority interest
     in 1997 and 1996, respectively.........................        (882)              (4,908)
                                                               ---------             --------
  Net income (loss) applicable to common shares.............   $  14,342             $ (4,107)
                                                               ---------             --------
EARNINGS PER SHARE:
  Basic:
     Income before extraordinary item.......................   $    1.60             $    .09
     Extraordinary item, net................................        (.09)                (.55)
                                                               ---------             --------
     Net income (loss) per common share.....................   $    1.51             $   (.46)
                                                               ---------             --------
  Diluted:
     Income before extraordinary item.......................   $    1.59             $    .09
     Extraordinary item, net................................        (.10)                (.54)
                                                               ---------             --------
     Net income (loss) per common share.....................   $    1.49             $   (.45)
                                                               ---------             --------
     Weighted average number of common shares outstanding:
     Basic..................................................       9,523                8,981
     Diluted................................................       9,595                9,036
OTHER DATA:
     Funds from operations(1)...............................   $  27,381             $  2,185
     Net cash provided by operating activities..............   $  29,503             $    329
     Net cash used for investing activities.................   $(110,554)            $ (1,824)
     Net cash provided by financing activities..............   $  61,544             $ 22,857
     Dividends declared.....................................   $  17,150             $  2,700
     Weighted average number of common shares and units
       outstanding..........................................      10,883               10,359
BALANCE SHEET DATA:
     Investment in hotel properties, net....................   $ 231,651             $113,322
     Total assets...........................................     238,855              137,271
     Total debt.............................................      91,750                   --
     Minority interest in Partnership.......................      13,054               14,045
     Shareholders' equity...................................     114,815              117,021
</TABLE>

                                       20
<PAGE>   22

                             BOYKIN LODGING COMPANY

                SELECTED PRO FORMA OPERATING AND FINANCIAL DATA
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

               (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------   --------
<S>                                                           <C>        <C>
OPERATING DATA:
  Lease revenue.............................................  $ 42,789   $ 39,730
  Interest income...........................................        --         --
                                                              --------   --------
     Total revenues.........................................    42,789     39,730
                                                              --------   --------
  Real estate related depreciation and amortization.........    11,704     10,976
  Real estate and personal property taxes, insurance and
     ground rent............................................     5,744      5,468
  General and administrative................................     2,404      1,450
  Interest expense..........................................     5,235      5,165
  Amortization of deferred financing costs..................       454        436
                                                              --------   --------
     Total expenses.........................................    25,541     23,495
                                                              --------   --------
  Income before minority interest and extraordinary item....    17,248     16,235
  Minority interest.........................................    (2,091)    (1,951)
                                                              --------   --------
  Income before extraordinary item applicable to common
     shares.................................................  $ 15,157   $ 14,284
                                                              ========   ========
EARNINGS PER SHARE:
  Income before extraordinary item:
     Basic..................................................  $   1.59   $   1.50
     Diluted................................................      1.58       1.49
  Weighted average number of common shares outstanding
     Basic..................................................     9,523      9,516
     Diluted................................................     9,595      9,571
OTHER DATA:
  Funds from operations(1)..................................  $ 28,895   $ 27,171
  Net cash provided by operating activities(2)..............  $ 29,349   $ 27,607
  Net cash used for investing activities(3).................  $ (5,463)  $ (5,168)
  Net cash used for financing activities(4).................  $(19,589)  $(19,609)
  Weighted average number of common shares and units
     outstanding............................................    10,883     10,894
</TABLE>

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

(1) The White Paper on Funds From Operations approved by the Board of Governors
    of the National Association of Real Estate Investment Trusts ("NAREIT") in
    March 1995 defines Funds From Operations as net income (loss) (computed in
    accordance with GAAP), excluding gains (or losses) from debt restructuring
    and sales of properties, plus real estate related depreciation and
    amortization and after comparable adjustments for the Company's portion of
    these items related to unconsolidated entities and joint ventures. The
    Company believes that Funds From Operations ("FFO") is helpful to investors
    as a measure of the performance of an equity REIT because, along with cash
    flow from operating activities, financing activities and investing
    activities, it provides investors with an indication of the ability of the
    Company to incur and service debt, to make capital expenditures and to fund
    other cash needs. The Company computes FFO in accordance with standards
    established by NAREIT which may not be comparable to FFO reported by other
    REITs that do not define the term in accordance with the current NAREIT
    definition or that interpret the current NAREIT definition differently than
    the Company. FFO does not represent cash generated from operating activities
    determined by GAAP and should not be considered as an alternative to net
    income (determined in accordance with GAAP) as an indication of the
    Company's financial performance or to cash flow from operating activities
    (determined in accordance with GAAP) as a measure of the Company's
    liquidity, nor is it indicative of funds available to fund the Company's
    cash needs, including its ability to make cash distributions. FFO may
    include funds that may not be available for management's discretionary use
    due to functional

                                       21
<PAGE>   23

    requirements to conserve funds for capital expenditures and property
    acquisitions, and other commitments and uncertainties. The following is a
    reconciliation between net income and FFO (in thousands):

<TABLE>
<CAPTION>
                                                                         PRO FORMA FOR YEARS
                                                   HISTORICAL            ENDED DECEMBER 31,
                                           ---------------------------   -------------------
                                                             PERIOD
                                            YEAR ENDED       ENDED
                                           DECEMBER 31,   DECEMBER 31,
                                               1997           1996         1997       1996
                                           ------------   ------------   --------   --------
<S>                                        <C>            <C>            <C>        <C>
Net income (loss)........................    $14,342        $(4,107)     $15,157    $14,284
Real estate related depreciation and
  amortization...........................     10,148          1,344       11,704     10,976
Minority interest........................      2,210             40        2,091      1,951
Extraordinary item.......................        882          4,908           --         --
FFO applicable to joint venture minority
  interest...............................       (201)            --          (57)       (40)
                                             -------        -------      -------    -------
Funds from operations....................    $27,381        $ 2,185      $28,895    $27,171
                                             =======        =======      =======    =======
</TABLE>

(2) For pro forma purposes, net cash provided by operating activities represents
    net income before depreciation of real estate assets, amortization of
    deferred financing costs and minority interest including adjustments for the
    joint venture minority interest therein. For pro forma purposes, no effect
    has been given to changes in working capital assets and liabilities.

(3) For pro forma purposes, net cash used for investing activities represents 4%
    of hotel revenues for the applicable period. For those hotels which are
    owned through a joint venture, only the Company's percentage interest in
    such hotel revenues is considered in the calculation.

(4) For pro forma purposes, net cash used for financing activities represents
    estimated dividends and distributions based upon the Company's historical
    annual dividend rate of $1.80 per Common Share and the pro forma weighted
    average number of Common Shares and Units outstanding during the applicable
    period.

                                       22
<PAGE>   24

              BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY

         SELECTED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                             PRO FORMA
                                                              HISTORICAL PERIOD             YEAR ENDED
                                        HISTORICAL          FROM NOVEMBER 4, 1996          DECEMBER 31,
                                        YEAR ENDED       (INCEPTION OF OPERATIONS) TO   -------------------
                                     DECEMBER 31, 1997        DECEMBER 31, 1996           1997       1996
                                     -----------------   ----------------------------   --------   --------
<S>                                  <C>                 <C>                            <C>        <C>
OPERATING DATA:
  Room revenue.....................      $ 72,751                  $ 7,684              $ 74,682   $ 69,717
  Food and beverage revenue........        30,229                    3,976                31,136     30,297
  Other hotel revenue..............         7,568                      620                 7,938      7,625
                                         --------                  -------              --------   --------
     Total hotel revenues..........       110,548                   12,280               113,756    107,639
  Other revenue....................         2,477                      382                 2,477      2,777
                                         --------                  -------              --------   --------
     Total revenues................       113,025                   12,662               116,233    110,416
                                         --------                  -------              --------   --------
  Operating expenses...............        75,891                    9,748                78,346     74,292
  Cost of goods sold of nonhotel
     operations....................           619                      102                   619      1,686
  Percentage lease expense.........        34,834                    3,258                35,924     33,268
                                         --------                  -------              --------   --------
  Total expenses...................       111,344                   13,108               114,889    109,246
                                         --------                  -------              --------   --------
  Net income (loss)................      $  1,681                  $  (446)             $  1,344   $  1,170
                                         ========                  =======              ========   ========
</TABLE>

                                 INITIAL HOTELS
                  SELECTED COMBINED HISTORICAL FINANCIAL DATA

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                     JANUARY 1,
                                                        YEAR ENDED DECEMBER 31,        1996 TO
                                                      ----------------------------   NOVEMBER 3,
                                                       1993      1994       1995       1996(A)
                                                      -------   -------   --------   -----------
<S>                                                   <C>       <C>       <C>        <C>
OPERATING DATA:
  Room revenue......................................  $45,753   $48,652   $ 50,730    $ 51,627
  Food and beverage revenue.........................   22,357    22,811     22,984      20,062
  Other revenue.....................................    3,977     4,092      4,490       4,148
                                                      -------   -------   --------    --------
     Total revenues.................................   72,087    75,555     78,204      75,837
                                                      -------   -------   --------    --------
  Departmental and other expenses...................   53,242    53,967     54,629      52,367
  Real estate and personal property taxes, insurance
     and ground rent................................    3,112     3,329      3,579       3,228
  Depreciation and amortization.....................    5,822     5,690      6,545       6,308
  Interest expense..................................   12,375    12,397     14,169      13,430
  Gain on property insurance recovery...............       --        --       (670)        (32)
                                                      -------   -------   --------    --------
  Income (loss) before extraordinary item...........   (2,464)      172        (48)        536
  Extraordinary item-- gain (loss) on early
     extinguishment of debt.........................       --        --        556      (1,315)
                                                      -------   -------   --------    --------
  Net income (loss).................................  $(2,464)  $   172   $    508    $   (779)
                                                      =======   =======   ========    ========
</TABLE>

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

(A) On February 8, 1996, the Lake Norman Holiday Inn and Lake Norman Hampton Inn
    were acquired by an affiliate of The Boykin Group. The acquisition was
    accounted for as a purchase and, accordingly, the operating results of the
    Holiday Inn and Hampton Inn have been included in the above operating data
    commencing February 8, 1996.

                                       23
<PAGE>   25

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

BACKGROUND

     On November 4, 1996, the Company completed the Initial Offering of
8,275,000 shares. An additional 1,241,250 common shares were issued by the
Company on November 29, 1996 upon an exercise in full of the underwriters'
over-allotment option. The net proceeds to the Company from these transactions
were $173.9 million. The Company contributed all of the net proceeds to the
Partnership in exchange for (i) an 84.5% general partnership interest in the
Partnership, and (ii) a $40 million intercompany convertible note (the "Note").
The Note matures on the fifth anniversary of the Initial Offering. On conversion
of the Note, the Company will receive an additional general partnership interest
in the Partnership of 1.3%. The Company is the sole general partner of the
Partnership.

     The Partnership used a substantial portion of the proceeds from the Company
and issued limited partnership interests representing approximately 15.5% of the
Partnership to acquire the nine Initial Hotels. The Partnership leases the
Initial Hotels to BMC pursuant to the Percentage Leases.

     On February 24, 1998, the Company completed the Offering. The proceeds were
$112.5 million and net proceeds (less the underwriters' discount and offering
expenses) were approximately $106.3 million. The Company contributed all of the
net proceeds to the Partnership, increasing its ownership percentage therein to
90.3%. The proceeds were used by the Partnership to pay down existing
indebtedness under the credit facility, purchase limited partnership units from
two unaffiliated limited partners, to fund the acquisitions of the 1998 Hotels
and for general corporate purposes.

     The Company's principal source of revenue is lease payments from lessees
pursuant to the Percentage Leases. Percentage Lease revenue is based upon the
room, food and beverage and other revenues of the Company's hotels. The lessees'
ability to make payments to the Company pursuant to the Percentage Leases is
dependent primarily upon the operations of the hotels. Since BMC contributes a
significant portion of the Company's lease revenues, management believes that a
discussion of the historical and pro forma operations of BMC and the historical
operations of the Initial Hotels is important to understand the business of the
Company.

     The following discusses (i) the Company's actual results of operations for
the year ended December 31, 1997 and the period from November 4, 1996 (inception
of operations) through December 31, 1996, and pro forma results of operations
for the years ended December 31, 1997 and 1996, (ii) BMC's actual results of
operations for the year ended December 31, 1997 and the period from November 4,
1996 (inception of operations) through December 31, 1996, and pro forma results
of operations for the years ended December 31, 1997 and 1996, and (iii) the
historical results of operations for the Initial Hotels for the period January
1, 1996 to November 3, 1996 and the year ended December 31, 1995.

     The pro forma information of the Company is presented as if the Initial
Offering and related formation transactions, and the Company's acquisitions of
the Melborne Hilton Oceanfront, Holiday Inn Crabtree, French Lick Springs
Resort, Holiday Inn Minneapolis West, Marriott's Hunt Valley Inn and Hampton Inn
San Diego Airport/Sea World, had been consummated as of January 1, 1996. The pro
forma information excludes the results of the Daytona Beach Radisson Resort and
the Doubletree Hotel Kansas City, as these hotels were not operating during the
entire twelve month pro forma periods.

     The pro forma information of BMC is presented as if the Company's initial
public offering and related formation transactions, and the Company's
acquisitions (and the related BMC leases) of the Melborne Hilton Oceanfront,
Holiday Inn Crabtree and French Lick Springs Resort had been consummated as of
January 1, 1996. The pro forma information excludes the results of the Daytona
Beach Radisson Resort, as this hotel was not open during the entire pro forma
periods.

                                       24
<PAGE>   26

                             RESULTS OF OPERATIONS

THE COMPANY

  Actual Results of Operations for the Year Ended December 31, 1997 Compared to
the Period From November 4, 1996 (inception of operations) to December 31, 1996

     Percentage Lease revenue increased to $37.9 million in 1997 from $3.3
million in 1996, primarily because of the partial year of operations in 1996 and
the increase in the number of hotels owned by the Company from nine to 17 at
December 31, 1996 and 1997, respectively. Percentage Lease revenue payable by
BMC represented $34.8 million, or 91.8% of total Percentage Lease revenue in
1997, compared to 100% in 1996.

     Income before minority interest and extraordinary item increased to $17.4
million in 1997 compared to $841,000 in 1996. As a percent of total revenue,
income before minority interest and extraordinary item increased to 45.6% in
1997 from 24.9% in 1996, primarily resulting from (i) a decline in real estate
related depreciation and amortization, as a percent of total revenue, from 39.8%
in 1996 to 26.5% in 1997, (ii) a decrease in real estate and personal property
taxes, insurance and ground rent, as a percentage of total revenues, from 18.4%
in 1996 to 13.5% in 1997, and (iii) a decrease in general and administrative
expenses, as a percent of total revenues, from 13.3% in 1996 to 6.3% in 1997.
These expenses, as a percent of total revenues, decreased because of a greater
increase in Percentage Lease revenues during the Company's full year of
operations in 1997 relative to the increase in expenses during the same period.
Interest expense increased to $2.7 million in 1997 compared to $54,000 in 1996
because of borrowings under the Credit Facility used to fund acquisitions in
1997.

     Net income was $14.3 million in 1997 compared to a net loss in 1996 of $4.1
million. Minority interest applicable to the operating partnership and joint
venture partnerships in the income before extraordinary item of the Partnership
was $2.2 million in 1997, or 5.8% of total revenues, compared to $40,000, or
1.2%, in 1996. Extraordinary charges (net of minority interest of $970,000 and
$172,000 in 1996 and 1997, respectively) decreased from $4.9 million in 1996 to
$882,000 in 1997. The extraordinary charge in 1997 represented the write-off of
deferred financing costs incurred in connection with increasing the Credit
Facility in October 1997 and the retirement of mortgage indebtedness of one of
the joint ventures. The extraordinary charge in 1996 represented the write-off
of deferred financing costs and the payment of prepayment penalties and fees
incurred in connection with the retirement of all mortgage indebtedness assumed
by the Partnership upon formation of the Company.

     The Company's funds from operations ("FFO") in 1997 was $27.4 million
compared to $2.2 million in 1996. The White Paper on FFO approved by the Board
of Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 defines FFO as net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring and
sales of properties, plus real estate related depreciation and amortization and
after comparable adjustments for the Company's portion of these items related to
unconsolidated entities and joint ventures. The Company believes that FFO is
helpful to investors as a measure of the performance of an equity REIT because,
along with cash flow from operating activities, financing activities and
investing activities, it provides investors with an indication of the ability of
the Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes FFO in accordance with standards
established by NAREIT which may not be comparable to FFO reported by other REITs
that do not define the term in accordance with the current NAREIT definition or
that interpret the current NAREIT definition differently than the Company. FFO
does not represent cash generated from operating activities determined by GAAP
and should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
FFO may include funds that may not be available for management's discretionary
use due to functional requirements to conserve funds that may not be available
for management's discretionary use due to functional requirements to conserve
funds for capital expenditures and property acquisitions, and other commitments
and uncertainties. The following is a reconciliation between net income and FFO
(in thousands):

                                       25
<PAGE>   27

<TABLE>
<CAPTION>
                                                                                 PRO FORMA FOR YEARS
                                                           HISTORICAL            ENDED DECEMBER 31,
                                                   ---------------------------   -------------------
                                                                     PERIOD
                                                    YEAR ENDED       ENDED
                                                   DECEMBER 31,   DECEMBER 31,
                                                       1997           1996         1997       1996
                                                   ------------   ------------   --------   --------
<S>                                                <C>            <C>            <C>        <C>
Net income (loss)................................    $14,342        $(4,107)     $15,157    $14,284
Real estate related depreciation and
  amortization...................................     10,148          1,344       11,704     10,976
Minority interest................................      2,210             40        2,091      1,951
Extraordinary item...............................        882          4,908           --         --
FFO applicable to joint venture minority
  interest.......................................       (201)            --          (57)       (40)
                                                     -------        -------      -------    -------
Funds from operations............................    $27,381        $ 2,185      $28,895    $27,171
                                                     =======        =======      =======    =======
</TABLE>

  Pro Forma Results of Operations for the Year Ended 1997 Compared to 1996

     For the year ended December 31, 1997, the Company's pro forma revenue from
Percentage Leases would have been $42.8 million, representing a $3.1 million, or
7.8%, increase over pro forma Percentage Lease revenue for the year ended
December 31, 1996 of $39.7 million. The increase for 1997 over 1996 is primarily
the result of increases in the average daily rates (ADR) and improvements in
occupancy rates experienced at the Hotels.

     Pro forma expenses before minority interest, consisting principally of
depreciation and amortization, property taxes, insurance, ground rent, general
administrative expenses and interest expense would have been $25.5 million,
representing a $2.0 million, or 8.5%, increase over 1996 expenses of $23.5
million. As a percentage of revenues, the Company's expenses before minority
interest would have increased from 59.2% in 1996 to 59.6% in 1997. The principal
factors for this increase are attributable to general and administrative
expenses, depreciation and amortization, and taxes, insurance and ground rent
expense.

     General and administrative expenses would have increased $954,000 in 1997
compared to 1996, or 65.8%, primarily attributable to incremental costs
associated with hiring management personnel to support the Company's strategic
growth objectives. Pro forma depreciation and amortization would have increased
from $11.0 million in 1996 to $11.7 million in 1997, an increase of $.7 million,
or 6.4%, related to additional depreciation associated with 1997 capital
expenditures. Real estate and personal property taxes, insurance and ground rent
expense would have increased from $5.5 million in 1996 to $5.7 million in 1997,
or 3.6%, primarily because of inflation and the reassessment of certain hotels
acquired in 1997. Pro forma interest expense would have increased slightly
between years, because of higher average borrowing levels in 1997 compared to
1996 associated with funding capital expenditures, offset somewhat by lower
interest rates in 1997.

     Pro forma FFO for the year ended December 31, 1997 increased 6.3% to $28.9
million compared to $27.2 million in 1996. The increase in FFO in 1997 is
attributable to the increase in Percentage Lease revenues.

     The pro forma results of operations do not include the pro forma revenues
and expenses associated with the Daytona Beach Radisson Resort or the Doubletree
Hotel Kansas City, as the hotel revenue and expense information for the pro
forma periods is not available. The Daytona Beach Radisson Resort was closed for
renovation during most of 1997 prior to its reopening in January 1998. The
Doubletree Hotel Kansas City was also closed for renovation during most of 1996
and the first quarter of 1997 before its reopening in April 1997. The Company
expects that the performance of these hotels will contribute significantly to
the Company's profitability in 1998.

     During 1997, the pro forma ADR at the Hotels increased to $88.13 compared
to $82.84 in 1996, representing a 6.4% increase. The weighted average occupancy
also increased to 69.3% compared to 68.7% in 1996. These increases resulted in
an increase in REVPAR of 7.3%, to $61.06 in 1997 compared to $56.93 in 1996. The
following table sets forth the pro forma operating data of the hotels owned by
the Company as of December 31, 1997, without regard to when the Company acquired
the hotels.

                                       26
<PAGE>   28

<TABLE>
<CAPTION>
                                         ADR                OCCUPANCY              REVPAR
                                  ------------------      --------------      ----------------
                                   1997       1996        1997     1996        1997     1996
                                  -------    -------      -----    -----      -------  -------
<S>                               <C>        <C>          <C>      <C>        <C>      <C>
Cleveland Marriott East.........  $104.10    $ 95.41       73.6%    73.7%     $ 76.64  $ 70.35
Marriott's Hunt Valley Inn......    85.42      79.98       66.6     63.3        56.87    50.65
Cleveland Airport Marriott......    96.67      91.09       71.3     72.8        68.92    66.31
Buffalo Marriott................    97.02      93.84       76.8     75.1        74.52    70.50
Columbus North Marriott.........    97.58      89.29       75.8     75.7        73.93    67.60
Berkeley Marina Radisson........   110.29     103.11       87.0     85.8        95.92    88.50
Daytona Beach Radisson Resort...      (1)        (1)        (1)      (1)          (1)      (1)
Radisson Inn Sanibel Gateway....    70.64      67.74       74.2     78.5        52.40    53.18
Holiday Inn Minneapolis West....    77.38      75.15       60.5     61.2        46.78    46.00
Holiday Inn Crabtree............    72.68      68.27       68.2     77.5        49.55    52.91
Lake Norman Holiday Inn.........    69.31      69.15       74.2     69.9        51.46    48.34
Hampton Inn San Diego
  Airport/Sea World.............    46.35      39.40       72.2     70.4        33.45    27.74
Lake Norman Hampton Inn.........    66.33      63.17       78.4     73.1        51.99    46.19
Doubletree Hotel Kansas City....      (1)        (1)        (1)      (1)          (1)      (1)
Melbourne Quality Suites........    82.61      79.90       75.5     74.1        62.40    59.17
Melbourne Hilton Oceanfront.....    78.64      75.81       81.2     74.2        63.89    56.28
French Lick Springs Resort......    78.40      73.61       34.6     33.7        27.10    24.79
                                  -------    -------      -----    -----      -------  -------

  Total Hotels..................  $ 88.13    $ 82.84       69.3%    68.7%     $ 61.06  $ 56.93
                                  =======    =======      =====    =====      =======  =======
</TABLE>

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

(1) The pro forma data excludes the operations of the Daytona Beach Radisson
    Resort and the Doubletree Hotel Kansas City as these hotels were closed
    during portions of the proforma periods prior to being reopened in January
    1998 and April 1997, respectively.

     No assurance can be given that the trends reflected in this data applicable
to the Hotels, or any trends associated with the 1998 Hotels, will continue or
that ADR, occupancy and REVPAR will not decrease as a result of changes in
national or local economic or hospitality industry conditions. Moreover, if the
Proposed Merger is completed, there is no assurance that the Company will be
able to assimilate the Doubletree Hotels successfully or to realize the
anticipated benefits of the Proposed Merger.

BMC

  Actual Results of Operations for the Year Ended December 31, 1997 Compared to
the Period From November 4, 1996 (inception of operations) to December 31, 1996

     For the year ended December 31, 1997 BMC had hotel revenues of $110.5
million compared to $12.3 million in 1996. The increase was because of the
partial year in 1996 and an increase in the number of hotels leased, from nine
at December 31, 1996 to 13 at December 31, 1997. BMC recorded net income of $1.7
million in 1997 compared to a net loss of $446,000 in 1996. The loss in 1996 was
partially the result of the application of the Percentage Lease rent terms
during an interim period (as opposed to a full calendar year). The terms of each
Percentage Lease allow for annualizing the rent payable to compensate for the
effects of seasonality when base rents may be required during periods of lower
occupancy which would otherwise be offset during peak seasons. Historically, the
fourth quarter has been a period of lower occupancy for the Initial Hotels on a
combined basis in comparison to the other three quarters of the year.

     The Percentage Lease expense during 1997 was $34.8 million, or 31.5% of
hotel revenues, compared to $3.3 million, or 26.8% of hotel revenues, in 1996.
Departmental and other hotel operating expenses, consisting primarily of rooms
expenses, food and beverage costs, franchise fees, utilities, repairs and
maintenance, and other general and administrative expenses of the hotels, were
$75.9 million in 1997 compared to $9.7 million in 1996. As a percent of hotel
revenues, the departmental and other hotel operating expenses decreased from
78.9% in 1996 to 68.7% in 1997 because of the lower fourth quarter revenues in
1996 (as opposed to a full calendar year).

                                       27
<PAGE>   29

  Pro Forma Results of Operations for the Year Ended 1997 Compared to 1996

     For the year ended December 31, 1997, BMC's pro forma hotel revenues would
have been $113.8 million, an increase of 5.8% over pro forma hotel revenues for
the year ended December 31, 1996 of $107.6 million. The increase in revenues for
1997 compared to 1996 is primarily the result of increases in the average daily
rates and slight improvements in occupancy rates experienced at the BMC hotels.

     Pro forma Percentage Lease expense would have increased from $33.3 million
in 1996 to $35.9 million in 1997, or 7.8%, because of increased pro forma hotel
revenues. Pro forma departmental expenses and other hotel operating expenses of
BMC would have been $78.3 million in 1997 compared to $74.3 million in 1996, an
increase of 5.4%. As a percentage of hotel revenues, these expenses would have
decreased slightly from 69.1% in 1996 to 68.8% in 1997.

     Pro forma net income of BMC would have been $1.3 million and $1.2 million
for 1997 and 1996, respectively. As a percent of total revenues, net income
would have been 1.1% in both 1997 and 1996.

THE INITIAL HOTELS -- ACTUAL RESULTS OF OPERATIONS

  Comparison of the Initial Hotels for the Period January 1, 1996 to November 3,
  1996 to the Year Ended December 31, 1995

     Total hotel revenues were $75.8 million in the short period 1996 compared
to $78.2 million in 1995. Despite being a short period, room revenue increased
by $897,000, or 1.8%, in 1996 over 1995, principally as a result of (i) the
acquisitions of the Lake Norman Holiday Inn and Lake Norman Hampton Inn (the
"Lake Norman Properties") in February 1996, (ii) the August 1995 hurricane
damage to the Melbourne Quality Suites which resulted in that property being
closed for an extended period of 1995, and (iii) an increase in ADR and
occupancy rates. The overall increases in ADR and occupancy rates resulted in an
increase in REVPAR from $65.87 in 1995 to $70.62 in 1996.

     As a percentage of total hotel revenues, departmental and other expenses
decreased from 69.9% in 1995 to 69.0% in the 1996 period because of the increase
in ADR and a change in hotel revenue mix to more profitable rooms revenue.
Partially offsetting factors were (i) management fee rate increases in May 1995
at four of the Initial Hotels, which resulted in management fee expense
increasing from 4.2% of total revenue in 1995 to 4.4% in 1996, (ii) franchise
royalty fee rate increases at two of the Initial Hotels in 1996, which resulted
in franchise royalties and other charges increasing from 4.9% of total revenue
in 1995 to 5.4% in 1996, and (iii) final settlement of a business interruption
insurance claim with respect to the Melbourne Quality Suites in 1996, which
resulted in a $118,000 charge against 1996 operations, or .2% of total revenue.

     Real estate and personal property taxes, insurance and ground rent and
interest expense as a percentage of revenues decreased from 22.7% in 1995 to
22.0% in 1996 because of the relatively fixed nature of these expenses.
Depreciation and amortization as a percentage of total revenue decreased
slightly from 8.4% in 1995 to 8.3% in 1996. Additional depreciation expense
related to the property writeup recorded in May 1995 at three of the Initial
Hotels in connection with the redemption of certain partnership interests, and
depreciation on new property additions resulted in depreciation and
amortization, as a percentage of total revenue, remaining constant between 1995
and 1996.

     The $670,000 gain on property insurance recovery in 1995 resulted from the
insurance recovery related to property damage at the Melbourne Quality Suites
caused by Hurricane Erin in August 1995. The gain on early extinguishment of
debt of $556,000 in 1995 related to the refinancing of four of the Initial
Hotels in May 1995. The $1.3 million loss on early extinguishment of debt in
1996 related to the refinancing of the mortgage debt of the Buffalo Marriott.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, is its share of the Partnership's cash
flow from the Percentage Leases. The lessees' obligations under the Percentage
Leases are unsecured and the lessees' ability to make rent payments to the
Partnership under

                                       28
<PAGE>   30

the Percentage Leases, and the Company's liquidity, including its ability to
make distributions to shareholders, are dependent on the lessees' ability to
generate sufficient cash flow from the operation of the Hotels and the 1998
Hotels.

     As of December 31, 1997, the Company had $1,855,000 of cash and cash
equivalents and had outstanding borrowings totaling $91,750,000 against the
Credit Facility.

     The Company obtained the Credit Facility to assist in funding its
acquisitions and development of additional hotels and for certain other
purposes, including capital expenditures and working capital, as necessary.
Borrowings under the Credit Facility are secured by first mortgages on thirteen
of the Hotels, including lease revenues generated from such properties. The
Credit Facility expires in November 1999, with an additional one year extension
at the Company's option. Borrowings against the Credit Facility bear interest at
a floating rate of 1.40% to 1.75% over various Eurodollar (LIBOR) rates (7.50%
at December 31, 1997). The Company is required to pay a .25% fee on the unused
portion of the Credit Facility. The Credit Facility requires, among other
things, the maintenance of a minimum net worth, and specified coverage ratios of
EBITDA to debt service and EBITDA to debt service and fixed charges.

     On October 15, 1997 the Credit Facility was amended to increase the maximum
amount of borrowings from $75 million to $150 million. All borrowings
outstanding under the Credit Facility at the time of the Offering were paid in
full with the net proceeds from the Offering. The Company has obtained a
commitment for a new unsecured credit facility of up to $250 million, to be
available on completion of the Proposed Merger. The Company also obtained a
commitment for a $130 million 10-year term loan (the "Fixed Rate Loan") secured
by the Doubletree Hotels, with a rate of interest at a spread over the 10-year
United States Treasury Bond upon closing of the loan. Interest only will be paid
for the first two years, with principal repayments commencing in the third loan
year based on a 25-year amortization schedule. The Company anticipates that the
Fixed Rate Loan and new credit facility will enable the Company to finance the
Proposed Merger and to meet its anticipated cash needs for the next year. The
Company may seek to negotiate additional credit facilities, or issue debt
instruments. Any debt incurred or issued by the Company may be secured or
unsecured, long-term, medium-term or short-term, bear interest at a fixed or
variable rate, and be subject to such other terms as the Board of Directors
considers prudent.

     The Company estimates that on a pro forma basis giving effect to the
Offering, the closing of the Proposed Merger, and the borrowings under the Fixed
Rate Loan and the new credit facility, the Company would have approximately $221
million in outstanding indebtedness and available borrowing capacity under the
credit facility of $159 million.

     The Company will acquire or develop additional hotel properties only as
suitable opportunities arise, and the Company will not undertake acquisition or
development of properties unless adequate sources of financing are available.
Funds for future acquisitions or development of hotels are expected to be
derived, in whole or in part, from borrowings under the Fixed Rate Loan, credit
facility or other borrowings or from the proceeds of additional issuances of
Common Shares or other securities. In November 1997, the Company filed a shelf
registration statement with the Securities and Exchange Commission for the
issuance of up to $300 million in securities over the next two years. Securities
issued under this registration statement may be preferred shares, depository
shares, common shares or any combination thereof and may be issued at different
times, depending on market conditions. Warrants to purchase these securities may
also be issued. The terms of issuance of any securities covered by this
registration statement would be determined at the time of their offering. The
$112.5 million of Common Shares sold in the Offering were sold under this
registration statement.

     On March 12, 1998, the Company acquired two hotel properties for an
aggregate consideration of $37.0 million, which was funded with cash proceeds
from the Offering and borrowings under the Credit Facility. These properties
were leased to BMC, which will operate the properties under long-term Percentage
Leases. Also, in February 1998 the Company entered into an agreement to purchase
a hotel located in Fort Myers Beach, Florida for aggregate consideration of
$19.3 million. This transaction, if completed, will be funded from borrowings
under the Credit Facility and the property will be leased to a subsidiary of
South Seas Properties Company, which will manage the resort under a long-term
Percentage Lease. Consummation of the transaction is

                                       29
<PAGE>   31

subject to various uncertainties and conditions, and there is no assurance that
the transaction will be consummated.

     The Percentage Leases require the Company to establish aggregate minimum
reserves for capital expenditures equal to specified percentages of total
revenues of the Hotels and the 1998 Hotels. In addition, the Company intends to
make capital expenditure funds available from the Credit Facility, as needed.
The Company intends to use the reserve for capital improvements to the hotels
and for refurbishment and replacement of furniture, fixtures and equipment, but
may make other uses of amounts reserved that it considers appropriate from time
to time. The Company anticipates making similar arrangements with respect to
future hotels that it may acquire or develop. During the year ended December 31,
1997, the Company made $13.5 million of capital expenditures. The Company
considers the majority of these improvements to be revenue-producing and
therefore these amounts have been capitalized and are being depreciated over
their estimated useful lives. Over the next 12 months, the Company's major
capital expenditure plans include: (i) a $6 million upgrade of the Berkeley
Marina hotel in connection with its conversion to a Radisson, including a
complete upgrade and modernization of the exterior, front entrance, lobby and
half of the guest rooms; (ii) a $1.5 million renovation of the Holiday Inn
Minneapolis West, including a new upscale concierge floor to cater to business
travelers and renovation of the guest rooms and public areas; (iii) the
continuation of the Company's $3.6 million renovation of the Holiday Inn
Crabtree's exterior, windows, guest rooms, common areas, lobby and pool; (iv) a
$2 million expenditure at the French Lick Springs Resort for general upgrades
and improvements; and (v) a $6 million renovation of the Cleveland Airport
Marriott's exterior, guest rooms, and lobby and public areas.

INFLATION

     The Company's revenues are based on Percentage Leases, which result in
changes in the Company's revenues based on changes in the revenues of its
hotels. Therefore, the Company relies entirely on the performance of the hotels
and the lessees' ability to increase revenues to keep pace with inflation.
Operators of hotels in general, and the Company's lessees, can change room rates
quickly, but competitive pressures may limit the lessees' ability to raise rates
to keep pace with inflation.

     The Company's general and administrative costs, as well as real estate and
personal property taxes, property and casualty insurance and ground rent, are
subject to inflation.

SEASONALITY

     The Company's hotels' operations historically have been seasonal. Thirteen
of the Hotels and the 1998 Hotels maintain higher occupancy rates during the
second and third quarters. The four Hotels located in Florida experience their
highest occupancy in the first quarter. This seasonality pattern can be expected
to cause fluctuations in the Company's quarterly lease revenue under the
Percentage Leases. The Company anticipates that its cash flow from the
Percentage Leases will be sufficient to enable the Company to continue to make
quarterly distributions at the current rate for the next twelve months. To the
extent that cash flow from operations is insufficient during any quarter because
of temporary or seasonal fluctuations in Percentage Lease revenue, the Company
expects to utilize cash on hand or borrowings to make those distributions. No
assurance can be given that the Company will make distributions in the future at
the current rate, or at all.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See Index to the Financial Statements on page F-1

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Not applicable.

                                       30
<PAGE>   32

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item 10 is incorporated by reference to
the information under the headings "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" contained in the Company's Proxy
Statement in connection with its Annual Meeting of Shareholders, and the
information under the heading "Executive Officers" in Part I of this Annual
Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this Item 11 is incorporated by reference to
the information under the heading "Executive Compensation" contained in the
Company's Proxy Statement in connection with its Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item 12 is incorporated by reference to
the information under the heading "Security Ownership of Certain Beneficial
Owners and Management" contained in the Company's Proxy Statement in connection
with its Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item 13 is incorporated by reference to
the information under the heading "Transactions with Management" contained in
the Company's Proxy Statement in connection with its Annual Meeting of
Shareholders.

                                       31
<PAGE>   33

                             BOYKIN LODGING COMPANY

                        AS OF DECEMBER 31, 1997 AND 1996

                                     INDEX

<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
BOYKIN LODGING COMPANY:
  Report of Independent Public Accountants..................      F-2
  Consolidated Balance Sheets as of December 31, 1997 and
     1996...................................................      F-3
  Consolidated Statements of Operations for the year ended
     December 31, 1997 and the Period February 8, 1996
     (Inception) through December 31, 1996..................      F-4
  Consolidated Statements of Shareholders' Equity for the
     year ended December 31, 1997 and the Period February 8,
     1996 (Inception), through December 31, 1996............      F-5
  Consolidated Statements of Cash Flows for the year ended
     December 31, 1997 and the Period February 8, 1996
     (Inception), through December 31, 1996.................      F-6
  Notes to Consolidated Financial Statements................      F-7
  Schedule III -- Real Estate and Accumulated Depreciation
     as of December 31, 1997................................     F-18

INITIAL HOTELS (PREDECESSORS TO BOYKIN LODGING COMPANY):
  Report of Independent Public Accountants..................     F-20
  Combined Balance Sheet as of November 3, 1996.............     F-21
  Combined Statements of Operations for the Period January
     1, 1996, through November 3, 1996, and the year ended
     December 31, 1995......................................     F-22
  Combined Statements of Partners' Deficit for the Period
     January 1, 1996, through November 3, 1996 and the year
     ended December 31, 1995................................     F-23
  Combined Statements of Cash Flows for the Period January
     1, 1996, through November 3, 1996 and the year ended
     December 31, 1995......................................     F-24
  Notes to Combined Financial Statements....................     F-25

BOYKIN MANAGEMENT COMPANY LIMITED LIABILITY COMPANY AND
  SUBSIDIARIES (BMC):
  Report of Independent Public Accountants..................     F-31
  Consolidated Balance Sheets as of December 31, 1997 and
     1996...................................................     F-32
  Consolidated Statements of Operations for the year ended
     December 31, 1997 and the Period November 4, 1996
     (Inception of Operations), through December 31, 1996...     F-33
  Consolidated Statements of Cash Flows for the year ended
     December 31, 1997 and the Period November 4, 1996
     (Inception of Operations), through December 31, 1996...     F-34
  Consolidated Statements of Members' Capital for the year
     ended December 31, 1997 and the Period November 4, 1996
     (Inception of Operations), through December 31, 1996...     F-35
  Notes to Consolidated Financial Statements................     F-36

BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC. AND
  BOPA DESIGN COMPANY (PREDECESSORS TO BMC):
  Report of Independent Public Accountants..................     F-42
  Combined Statement of Net Assets as of November 3, 1996...     F-43
  Combined Statements of Revenues and Expenses for the
     Period January 1, 1996, through November 3, 1996 and
     the Year Ended March 31, 1996..........................     F-44
  Notes to Combined Financial Statements....................     F-45
</TABLE>

                                       F-1
<PAGE>   34

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of
Boykin Lodging Company:

     We have audited the accompanying consolidated balance sheets of Boykin
Lodging Company (an Ohio corporation) and subsidiary as of December 31, 1997 and
1996 and the related consolidated statements of operations, shareholders' equity
and cash flows for the year ended December 31, 1997 and the period February 8,
1996 (inception) through December 31, 1996. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule 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 financial statements referred to above present fairly,
in all material respects, the financial position of Boykin Lodging Company and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for the year ended December 31, 1997 and the period
February 8, 1996 (inception) through December 31, 1996, in conformity with
generally accepted accounting principles.

     Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

                                          ARTHUR ANDERSEN LLP

Cleveland, Ohio,
  January 26, 1998
  (except with respect to the matters discussed
  in Note 15 as to which the date is
  February 24, 1998).

                                       F-2
<PAGE>   35

                             BOYKIN LODGING COMPANY

          CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996

                         (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------   --------
<S>                                                           <C>        <C>
                           ASSETS
Investment in hotel properties, net.........................  $231,651   $113,322
Cash and cash equivalents...................................     1,855     21,362
Rent receivable from lessees --
  Related party lessee......................................       897        306
  Third party lessees.......................................       360         --
Deferred expenses, net......................................     2,055      1,509
Other assets................................................     2,037        772
                                                              --------   --------
     Total assets...........................................  $238,855   $137,271
                                                              ========   ========

            LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings under credit facility............................  $ 91,750   $     --
Accounts payable and accrued expenses.......................     4,688      2,433
Dividends/distributions payable.............................     4,893      3,091
Due to lessees --
  Related party lessee......................................     1,069        681
  Third party lessees.......................................     1,268         --
Minority interest in joint ventures.........................     7,318         --
Minority interest in operating partnership..................    13,054     14,045
SHAREHOLDERS' EQUITY:
     Preferred shares, without par value; 10,000,000 shares
      authorized; no shares issued and outstanding..........        --         --
     Common shares, without par value; 40,000,000 shares
      authorized; 9,542,251 and 9,516,251 shares issued and
      outstanding December 31, 1997 and December 31, 1996,
      respectively, stated at...............................        --         --
     Additional paid-in capital.............................   124,430    123,828
     Retained deficit.......................................    (9,615)    (6,807)
                                                              --------   --------
     Total shareholders' equity.............................   114,815    117,021
                                                              --------   --------
                                                              $238,855   $137,271
                                                              ========   ========
</TABLE>

        The accompanying notes to consolidated financial statements are
                   an integral part of these balance sheets.
                                       F-3
<PAGE>   36

                             BOYKIN LODGING COMPANY

                     CONSOLIDATED STATEMENTS OF OPERATIONS

      FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FEBRUARY 8, 1996
                     (INCEPTION) THROUGH DECEMBER 31, 1996

                (AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                PERIOD
                                                                             FEBRUARY 8,
                                                               YEAR ENDED    1996 THROUGH
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
Revenues:
  Lease revenue from related party..........................    $34,834        $ 3,258
  Other lease revenue.......................................      3,050             --
  Interest income...........................................        382            120
                                                                -------        -------
                                                                 38,266          3,378
                                                                -------        -------
Expenses:
  Real estate related depreciation and amortization.........     10,148          1,344
  Real estate and personal property taxes, insurance and
     ground rent............................................      5,173            620
  General and administrative................................      2,404            450
  Interest expense..........................................      2,653             54
  Amortization of deferred financing costs..................        454             69
                                                                -------        -------
                                                                 20,832          2,537
                                                                -------        -------
Income before minority interests and extraordinary item.....     17,434            841
Minority interest in joint ventures.........................       (144)            --
Minority interest in operating partnership..................     (2,066)           (40)
                                                                -------        -------
Income before extraordinary item............................     15,224            801
Extraordinary item -- loss on early extinguishment of debt,
  net of minority interest of $172 and $970 in 1997 and
  1996, respectively........................................       (882)        (4,908)
                                                                -------        -------
Net income (loss) applicable to common shares...............    $14,342        $(4,107)
                                                                =======        =======
Earnings per share:
  Basic.....................................................    $  1.51        $  (.46)
  Diluted...................................................    $  1.49        $  (.45)
     Weighted average number of common shares outstanding...      9,523          8,981
                                                                =======        =======
</TABLE>

        The accompanying notes to consolidated financial statements are
                     an integral part of these statements.

                                       F-4
<PAGE>   37

                             BOYKIN LODGING COMPANY

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
      FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FEBRUARY 8, 1996
                     (INCEPTION) THROUGH DECEMBER 31, 1996

                         (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 ADDITIONAL
                                                      COMMON      PAID-IN     RETAINED
                                                      SHARES      CAPITAL     DEFICIT     TOTAL
                                                     ---------   ----------   --------   --------
<S>                                                  <C>         <C>          <C>        <C>
Issuance of common shares, net of offering expenses
  of $16,427.......................................  9,516,251    $173,898    $     --   $173,898
Purchase accounting adjustment necessary to reflect
  assets at predecessor cost.......................         --     (50,070)         --    (50,070)
Net loss...........................................         --          --      (4,107)    (4,107)
Dividends declared -- $.2837 per common share......         --          --      (2,700)    (2,700)
                                                     ---------    --------    --------   --------
Balance, December 31, 1996.........................  9,516,251     123,828      (6,807)   117,021
Net income.........................................         --          --      14,342     14,342
Dividends declared -- $1.80 per common share.......         --          --     (17,150)   (17,150)
Shares issued......................................     26,000         616          --        616
Additional offering costs..........................         --         (14)         --        (14)
                                                     ---------    --------    --------   --------
Balance, December 31, 1997.........................  9,542,251    $124,430    $ (9,615)  $114,815
                                                     =========    ========    ========   ========
</TABLE>

        The accompanying notes to consolidated financial statements are
                     an integral part of these statements.

                                       F-5
<PAGE>   38

                             BOYKIN LODGING COMPANY

                      CONSOLIDATED STATEMENT OF CASH FLOWS
      FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FEBRUARY 8, 1996
                     (INCEPTION) THROUGH DECEMBER 31, 1996

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                PERIOD
                                                                             FEBRUARY 8,
                                                               YEAR ENDED    1996 THROUGH
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
Cash flows from operating activities:
  Net income (loss).........................................    $ 14,342      $  (4,107)
  Adjustments to reconcile net income (loss) to net cash
     flow provided by operating activities
     Extraordinary item -- noncash loss on early
      extinguishment of debt................................       1,054             57
     Depreciation and amortization..........................      10,602          1,413
     Stock compensation.....................................          26             --
     Minority interests.....................................       2,038            930
     Changes in assets and liabilities
     Rent receivable........................................        (951)          (306)
     Other assets...........................................      (1,200)          (772)
     Accounts payable and accrued expenses..................       1,936          2,433
     Due to lessees.........................................       1,656            681
                                                                --------      ---------
       Net cash flow provided by operating activities.......      29,503            329
                                                                --------      ---------
Cash flows from investing activities:
  Acquisitions of hotel properties..........................     (97,043)            --
  Improvements and additions to hotel properties............     (13,511)          (622)
  Title, insurance, transfer taxes and filing fees paid to
     acquire Initial Hotel properties.......................          --         (1,202)
                                                                --------      ---------
       Net cash flow used for investing activities..........    (110,554)        (1,824)
                                                                --------      ---------
Cash flows from financing activities:
  Payments of dividends and distributions...................     (17,781)            --
  Borrowings against credit facility........................      91,750          2,000
  Repayment of borrowing against bank credit facility.......          --         (2,000)
  Retirement of mortgage debt assumed.......................     (10,338)      (140,623)
  Payment of deferred financing costs.......................      (1,589)            --
  Proceeds from issuance of common shares...................         590        173,898
  Additional offering costs.................................         (14)        (1,307)
  Cash payments for redemption of certain limited
     partnership interests..................................      (1,074)            --
  Payments to non-continuing equity investors of
     predecessor............................................          --         (9,111)
                                                                --------      ---------
       Net cash flow provided by financing activities.......      61,544         22,857
                                                                --------      ---------
Net change in cash and cash equivalents.....................     (19,507)        21,362
Cash and cash equivalents, beginning of period..............      21,362             --
                                                                --------      ---------
Cash and cash equivalents, end of period....................    $  1,855      $  21,362
                                                                ========      =========
</TABLE>

        The accompanying notes to consolidated financial statements are
                     an integral part of these statements.

                                       F-6
<PAGE>   39

                             BOYKIN LODGING COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

              (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

1.  ORGANIZATION AND INITIAL PUBLIC OFFERING:

     Boykin Lodging Company (the Company) is a self-administered equity real
estate investment trust (REIT) that was incorporated February 8, 1996 to acquire
equity interests in hotel properties. The Company had no operations prior to
November 4, 1996. On November 4, 1996, the Company completed an initial public
offering of 8,275,000 common shares. An additional 1,241,250 common shares were
issued by the Company on November 29, 1996 upon an exercise in-full of the
underwriters' over-allotment option (together with the initial public offering,
the Initial Offering). The offering price of all shares sold was $20 per share,
resulting in gross proceeds of approximately $190,325 and net proceeds (less the
underwriters' discount and offering expenses) of approximately $173,898. The
Company contributed all of the net proceeds of the Initial Offering to Boykin
Hotel Properties, L.P., a limited partnership (the Partnership) in exchange for
(i) an 84.5% general partnership interest in the Partnership, and (ii) a $40,000
Intercompany Convertible Note (the Note). The Note matures on the fifth
anniversary of the closing of the Initial Offering. Interest on the Note accrues
at a rate equal to 9.5% per annum, increasing to 9.75% per annum on the third
anniversary of the completion of the Initial Offering, and is payable quarterly.
The Note may be prepaid in full, but not in part, at any time. The Company will
have the right to convert the Note after the second anniversary of the
completion of the Initial Offering, and prior to maturity and in advance of any
proposed prepayment by the Partnership, into additional equity interests in the
Partnership at face value based on the initial offering price of the Company's
common shares. The Company is the sole general partner of the Partnership. The
Note is secured by mortgages on certain hotel properties.

     The Partnership used a substantial portion of the proceeds from the Company
and issued limited partnership interests representing approximately 15.5% of the
Partnership to acquire nine hotel properties (the Initial Hotels) from various
entities, to finance certain capital improvements, and for general working
capital purposes. The Partnership leases the Initial Hotels to Boykin Management
Company Limited Liability Company (BMC) pursuant to leases which contain
provisions for rent based on the revenues of the hotels (the Percentage Leases).
Each Percentage Lease obligates BMC to pay rent equal to the greater of the
minimum rent or a percentage rent based on the gross revenues of each hotel. BMC
holds the franchise agreement for each hotel. BMC is owned by Robert W. Boykin,
Chairman, President and Chief Executive Officer of the Company (53.8%) and his
brother, John E. Boykin (46.2%).

     Pursuant to the Partnership Agreement, the limited partners of the
Partnership received exchange rights, which enable them to cause the Partnership
to pay cash for their interests in the Partnership, or at the Company's
election, to exchange common shares for such interests. The exchange rights may
be exercised in whole or in part. The number of common shares initially issuable
to the limited partners upon exercise of the exchange rights was 1,378,000. The
number of shares issuable upon exercise of the exchange rights will be adjusted
upon the occurrence of stock splits, mergers, consolidations or similar pro rata
share transactions, which otherwise would have the effect of diluting the
ownership interests of the limited partners or the shareholders of the Company.

  Basis of Presentation

     The Company exercises unilateral control over the Partnership. Therefore,
the financial statements of the Company, the Partnership and the joint ventures
discussed in Note 3 are consolidated. All significant intercompany transactions
and balances have been eliminated.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Investment in Hotel Properties

     Hotel properties are stated at cost and are depreciated using the
straight-line method over estimated useful lives ranging from 20 to 40 years for
buildings and improvements and 3 to 20 years for furniture and equipment.

                                       F-7
<PAGE>   40
                             BOYKIN LODGING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     In accounting for the acquisitions of the Initial Hotels discussed in Note
1, purchase accounting was applied to those hotel properties in which (i)
non-affiliated persons exchanged their interests for units of the Partnership or
cash, or (ii) affiliated persons exchanged their interests for cash
consideration. The exchange of ownership interests by affiliated persons for
units of the Partnership did not result in purchase accounting adjustments to
historical net book values as such transactions were between entities under
common control.

     The Company reviews the hotel properties for impairment when events or
changes in circumstances indicate the carrying amounts of the hotel properties
may not be recoverable. When such conditions exist, management estimates the
future cash flows from operations and disposition of the hotel properties. If
the estimated undiscounted future cash flows are less than the carrying amount
of the asset, an adjustment to reduce the carrying amount to the related hotel
property's estimated fair market value would be recorded and an impairment loss
would be recognized. The Company does not believe that there are any factors or
circumstances indicating impairment of any of its investment in hotel
properties.

  Cash and Cash Equivalents

     Cash and cash equivalents are defined as cash on hand and in banks plus
short-term investments with an original maturity of three months or less.

  Deferred Expenses

     Included in deferred expenses at December 31, 1997 and 1996 are the
following:

<TABLE>
<CAPTION>
                                             1997       1996
                                            ------     ------
<S>                                         <C>        <C>
Financing costs..........................   $1,589     $1,307
Franchise fees...........................      627        276
                                            ------     ------
                                             2,216      1,583
Accumulated amortization.................     (161)       (74)
                                            ------     ------
                                            $2,055     $1,509
                                            ======     ======
</TABLE>

     Deferred financing costs are being amortized over the three-year term of
the related credit agreement. Accumulated amortization at December 31, 1997 and
1996 was $111 and $69, respectively.

     Deferred franchise fees are being amortized on a straight-line basis over
the terms of related franchise agreements. Accumulated amortization at December
31, 1997 and 1996 was $50 and $5, respectively.

  Dividends/Distributions

     The Company pays dividends which are dependent upon the receipt of
distributions from the Partnership.

  Revenue Recognition

     The Company recognizes lease revenue on an accrual basis pursuant to the
terms of the respective Percentage Leases.

  Minority Interest

     Minority interest in the Partnership represents the limited partners'
actual proportionate share of the equity in the Partnership. Income is allocated
to minority interest based on the weighted average limited partnership
percentage ownership throughout the period.

                                       F-8
<PAGE>   41
                             BOYKIN LODGING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     Minority interest in joint ventures represents the joint venture partners'
actual proportionate share of the equity in the joint ventures. Income is
allocated to minority interest based on the joint venture partners' percentage
ownership throughout the period, subject to minimum returns to the Partnership,
as defined in the joint venture agreements.

  Income Taxes

     The Company qualifies as a REIT under Sections 856-860 of the Internal
Revenue Code. Accordingly, no provision for income taxes has been reflected in
the accompanying consolidated financial statements.

     The Company's earnings and profits, as defined by federal income tax law,
will determine the taxability of distributions to shareholders. Earnings and
profits will differ from income reported for financial reporting purposes
primarily due to the differences in the estimated useful lives and methods used
to compute depreciation. For federal income tax purposes, dividends to
shareholders applicable to 1997 operating results represent ordinary taxable
income while dividends applicable to 1996 operating results represent a 100%
return of capital.

  Earnings Per Share

     The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share," in March 1997, which
revised the calculation methods and disclosures regarding earnings per share. As
required, the Company adopted SFAS No. 128 in the fourth quarter of 1997 and
restated previously reported earnings per share data.

     The Company's basic and diluted earnings per share for 1997 and 1996 under
SFAS No. 128 are as follows:

<TABLE>
<CAPTION>
                                     YEAR ENDED      PERIOD ENDED
                                    DECEMBER 31,     DECEMBER 31,
                                        1997             1996
                                    ------------     ------------
<S>                                 <C>              <C>
Basic:
  Income before extraordinary
     item........................      $1.60            $ .09
  Extraordinary item.............       (.09)            (.55)
                                       -----            -----
     Net income (loss)...........      $1.51            $(.46)
                                       =====            =====
Diluted:
  Income before extraordinary
     item........................      $1.59            $ .09
  Extraordinary item.............       (.10)            (.54)
                                       -----            -----
     Net income (loss)...........      $1.49            $(.45)
                                       =====            =====
</TABLE>

     Basic earnings per share is based on the weighted average number of common
shares outstanding during the period whereas diluted earnings per share adjusts
the weighted average shares outstanding for the effect of all dilutive
securities. The weighted average number of shares used in determining basic
earnings per share was 9,523,000 for the year ended December 31, 1997 and
8,981,000 for the period November 4, 1996 through December 31, 1996. For 1997
and 1996, diluted per share amounts reflect incremental common shares
outstanding of 72,000 and 55,000 related to unexercised stock options as of
December 31, 1997 and 1996, respectively. There are no adjustments to the
reported amounts of income in computing diluted per share amounts for 1997 and
1996.

  Partnership Units

     At December 31, 1997 and 1996, a total of 1,332,090 and 1,378,000 limited
partnership units were issued and outstanding, respectively. The weighted
average number of limited partnership units outstanding for the periods ended
December 31, 1997 and 1996 were 1,360,000 and 1,378,000 respectively. The
weighted average

                                       F-9
<PAGE>   42
                             BOYKIN LODGING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

number of common shares and limited partnership units outstanding for the
periods ended December 31, 1997 and 1996 were 10,883,000 and 10,359,000,
respectively.

  Fair Value of Financial Instruments

     Fair value is determined by using available market information and
appropriate valuation methodologies. The Company's principal financial
instruments are cash and cash equivalents and borrowings against the credit
facility. Cash and cash equivalents, due to their short maturities, are carried
at amounts which reasonably approximate fair value. As borrowings against the
credit facility bear interest at variable market rates, carrying value
approximates market value at December 31, 1997.

  Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

3.  ACQUISITIONS OF HOTEL PROPERTIES:

  Acquisitions of Businesses

     During the quarter ended March 31, 1997, the Company acquired two hotel
properties for an aggregate consideration of $16,800 which was funded with cash
proceeds from the Initial Offering. The hotel properties acquired were the
118-room Hilton Melbourne Beach in Melbourne, Florida and the 176-room Holiday
Inn Crabtree in Raleigh, North Carolina. These properties were leased to BMC
which operates the properties under long-term Percentage Leases.

     In April 1997, the Company acquired a 485-room resort in French Lick,
Indiana for an aggregate consideration of $20,000. The purchase price was funded
with borrowings under the Company's credit facility. This property was leased to
BMC which operates the property under a long-term Percentage Lease.

     In July 1997, the Company entered a joint venture with CapStar Hotel
Company (CapStar), forming BoyStar Ventures, in which the Partnership has a 91%
interest. BoyStar Ventures purchased the 196-room Holiday Inn -- Minneapolis
West located in Minneapolis, Minnesota for a cash purchase price of $12,300. The
Company's share of the purchase price was funded through borrowings under the
Company's credit facility. CapStar leases and manages the property under a
long-term Percentage Lease.

     In July 1997, the Company acquired a 91% interest in Shawan Road Hotel,
L.P. (Shawan), which owns Marriott's Hunt Valley Inn, a 392-room, full-service
hotel located in a suburb of Baltimore, Maryland, for cash consideration of
$27,300. The purchase price was funded through borrowings under the credit
facility. Davidson Hotel Company leases and manages the property under a
long-term Percentage Lease.

     In November 1997, the Company entered into a joint venture with a CapStar
affiliate forming Boykin Kansas City L.L.C. (Boykin K.C.), in which the
Partnership has an 80% interest. Boykin K.C. purchased the 388-room Doubletree
Hotel Kansas City located in Kansas City, Missouri for a cash purchase price of
$25,000. The Company's share of the purchase price was funded through borrowings
under the credit facility. CapStar leases and manages the property under a
long-term Percentage Lease.

     In November 1997, the Company entered into a joint venture agreement with
an affiliate of Outrigger Lodging Services (OLS) to form Boykin San Diego,
L.L.C. (Boykin S.D.). The Partnership has a 91% interest in Boykin S.D. which
purchased the 199-room Hampton Inn San Diego Airport/Sea World located in San
Diego, California for an aggregate purchase price of $8,900. The Company's share
of the purchase price was funded

                                      F-10
<PAGE>   43
                             BOYKIN LODGING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

through borrowings under the credit facility. This property is leased and
managed by OLS under a long-term Percentage Lease.

     All of the acquisitions discussed herein were accounted for as purchases
and accordingly, the operating results of the acquired properties have been
included in the accompanying consolidated financial statements commencing on
their respective dates of acquisition.

  Acquisition of Hotel Assets

     In March 1997, the Company purchased the real and personal property of the
Whitehall Inn in Daytona Beach, Florida. The Company's total investment was
$4,200, which was funded with cash proceeds from the Initial Offering. The
Company discontinued operations at the Whitehall Inn in May 1997 and began a
complete renovation of the property. The renovation, which is expected to cost
$6,600, is being funded from borrowings under the credit facility. The Company
began business operations with a Radisson franchise affiliation in January 1998.
The property is leased to BMC which manages the resort under a long-term
Percentage Lease.

4.  INVESTMENT IN HOTEL PROPERTIES:

     Investment in hotel properties as of December 31, 1997 and 1996 consists of
the following:

<TABLE>
<CAPTION>
                                          1997         1996
                                        --------     --------
<S>                                     <C>          <C>
Land.................................   $ 21,248     $ 10,892
Buildings and improvements...........    186,415       89,337
Furniture and equipment..............     28,004       13,707
Construction in progress.............      7,418          725
                                        --------     --------
                                         243,085      114,661
Less-Accumulated depreciation........    (11,434)      (1,339)
                                        --------     --------
                                        $231,651     $113,322
                                        ========     ========
</TABLE>

     The seventeen hotel properties owned by the Company at December 31, 1997
are located in Florida (4), Ohio (3), North Carolina (3), California (2), New
York (1), Maryland (1), Indiana (1), Missouri (1) and Minnesota (1), and are
subject to Percentage Leases as described in Note 9.

5.  CREDIT FACILITY:

     In November 1996, the Company obtained a three-year commitment for a
$75,000 credit facility to be used for acquisitions, capital improvements,
working capital and general corporate purposes. Until October 1997, borrowings
against the credit facility bore interest at a floating rate of prime rate plus
 .5% (8.75% at December 31, 1996) or, at the Company's election, 2% over various
Eurodollar (LIBOR) rates. As of December 31, 1996, the Company had no
outstanding borrowings against the credit facility.

     On October 15, 1997, the Company secured a $75,000 increase in the existing
credit facility and a one year extension of the term of the credit facility. The
maximum amount of borrowings that may be made under the credit facility is
$150,000, subject to borrowing base and loan-to-value limitations. At December
31, 1997, the Company had $30,233 of availability under the credit facility.
Until November 30, 1997, interest on credit facility borrowings was at LIBOR
plus 1.75%; after November 30, 1997, interest fluctuates at LIBOR plus 1.40% to
1.75% (7.5% at December 31, 1997), as defined. The Company is required to pay a
 .25% fee on the unused portion of the credit facility. The credit facility is
secured by first mortgages on thirteen of the Company's hotel properties.

                                      F-11
<PAGE>   44
                             BOYKIN LODGING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     The credit facility requires, among other things, the Company maintain a
minimum net worth, a coverage ratio of EBITDA to debt service, and a coverage
ratio of EBITDA to debt service and fixed charges. Further, the Company is
required to maintain the franchise agreements at each of the hotel properties
and to maintain its REIT status. The Company was in compliance with its
covenants at December 31, 1997 and 1996.

6.  DESCRIPTION OF CAPITAL STOCK:

  Common Shares

     Holders of the Company's common shares are entitled to receive dividends,
as and if declared by the Board of Directors of the Company, out of funds
legally available therefor. The holders of common shares, upon any liquidation,
dissolution or winding-up of the Company, are entitled to share ratably in any
assets remaining after payment in full of all liabilities of the Company and all
preferences of the holders of any outstanding preferred shares. The common
shares possess ordinary voting rights, each share entitling the holder thereof
to one vote. Holders of common shares do not have cumulative voting rights in
the election of directors and do not have preemptive rights.

  Preferred Shares

     The Board of Directors is authorized to provide for the issuance of two
classes of preferred shares (collectively, the Preferred Shares), each in one or
more series, to establish the number of shares in each series and to fix the
designation, powers, preferences and rights (other than voting rights) of each
series and the qualifications, limitations or restrictions thereon. An aggregate
of ten million Preferred Shares are authorized. Because the Board of Directors
has the power to establish the preferences and rights of each series of
Preferred Shares, the Board of Directors may afford the holders of any series of
Preferred Shares preferences, powers and rights senior to the rights of holders
of common shares. The issuance of Preferred Shares could have the effect of
delaying or preventing a change in control of the Company. No Preferred Shares
had been issued or were outstanding as of December 31, 1997 and 1996.

  Additional Shares

     In November 1997, the Company filed a shelf registration statement with the
Securities and Exchange Commission for the issuance of up to $300 million in
securities over the next two years. Securities issued under this registration
statement may be preferred shares, depository shares, common shares or any
combination thereof and may be issued at different times, depending on market
conditions. Warrants on these securities may also be issued. Terms of issuance
of any securities covered by this registration statement would be determined at
the time of their offering.

7.  PURCHASE OF PARTNERSHIP INTERESTS:

     During 1997, the Partnership purchased 45,910 of its outstanding limited
partnership units for aggregate cash consideration of $1,074. The excess of the
aggregate purchase price paid over the capital account balances of the units
purchased was $610 and was recorded as additional investment in hotel
properties. As a result of the purchases and the use of proceeds from the
issuances of common shares discussed in Notes 10 and 13 to purchase additional
general partnership units, the Company's general partnership interest in the
Partnership increased from 84.5% to 85.0% as of December 31, 1997.

8.  EXTRAORDINARY ITEM:

     In acquiring the interest in Shawan discussed in Note 3, the Partnership
assumed and then retired the underlying mortgage indebtedness of Shawan.
Deferred financing costs related to the assumed debt totaled $155 and were
written off upon retirement of the debt. In connection with obtaining the
increased credit facility

                                      F-12
<PAGE>   45
                             BOYKIN LODGING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

discussed in Note 5, the Company wrote off existing deferred financing costs
totaling $899. These charges, net of $172 of minority interest, were reflected
as an extraordinary item in the accompanying consolidated statement of
operations for 1997.

     In acquiring the Initial Hotels in 1996, the Partnership assumed the
underlying mortgage indebtedness of the properties. Using a portion of the
proceeds from (i) the sale of the general partnership interest to the Company,
and (ii) the Note, the Partnership retired all of the mortgage indebtedness. In
connection therewith, an extraordinary loss of $5,878 was incurred for the
payment of prepayment penalties and other fees ($5,821) and the writeoff of
deferred financing costs ($57).

9.  PERCENTAGE LEASE AGREEMENTS:

     The Percentage Leases have noncancelable remaining terms ranging from three
to 10 years, subject to earlier termination on the occurrence of certain
contingencies, as defined. The rent due under each Percentage Lease is the
greater of minimum rent, as defined, or percentage rent. Percentage rent
applicable to room and other hotel revenues varies by lease and is calculated by
multiplying fixed percentages by the total amounts of such revenues over
specified threshold amounts. Both the minimum rent and the revenue thresholds
used in computing percentage rents applicable to room and other hotel revenues
are subject to annual adjustments based on increases in the United States
Consumer Price Index (CPI). Percentage rent applicable to food and beverage
revenues is calculated by multiplying fixed percentages by the total amounts of
such revenues. Percentage Lease revenue for the year ended December 31, 1997 and
the period November 4, 1996 through December 31, 1996 was $37,884 and $3,258,
respectively, of which approximately $12,303 and $306, respectively, was in
excess of minimum rent.

     Future minimum rentals (ignoring future CPI increases) to be received by
the Company from BMC and from other lessees pursuant to the Percentage Leases
for each of the years in the period 1998 to 2002 and in total thereafter are as
follows:

<TABLE>
<CAPTION>
                                          OTHER
                              BMC        LESSEES      TOTALS
                            --------     -------     --------
<S>                         <C>          <C>         <C>
1998.....................   $ 25,204     $ 8,431     $ 33,635
1999.....................     25,204       8,725       33,929
2000.....................     25,204       8,925       34,129
2001.....................     19,002       8,925       27,927
2002.....................     12,171       7,526       19,697
Thereafter...............     36,692      27,201       63,893
                            --------     -------     --------
                            $143,477     $69,733     $213,210
                            ========     =======     ========
</TABLE>

10.  SHARE COMPENSATION PLANS:

     The Company has a Long-Term Incentive Plan (LTIP) which provides for the
granting to eligible employees of incentive or nonqualified share options,
restricted shares, deferred shares, share purchase rights and share appreciation
rights in tandem with options, or any combination thereof. The Company has
reserved 1,000,000 common shares for issuance under the LTIP.

     The term of each option granted will not exceed ten years from date of
grant, and the exercise price may not be less than 100% of the fair market value
of the Company's common shares on the grant date. On November 4, 1996, the
Company granted options to purchase an aggregate of 400,000 common shares to
certain executives. During 1997, the Company granted an additional 148,500
common shares to officers and employees and 5,000 options were exercised at an
exercise price of $20 per share.

                                      F-13
<PAGE>   46
                             BOYKIN LODGING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     On November 4, 1996, non-employee directors received options for the
purchase of an aggregate of 25,000 shares, exercisable at $20 per share. During
1997, the Company granted an additional 30,000 share options to the non-employee
directors. The options have a term of 10 years and vest fully one year after the
grant date.

     The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its employee
share option plan. If the Company had elected to recognize compensation costs
for the LTIP based on the fair value at the grant dates for option awards
consistent with the method prescribed by SFAS No. 123, reported amounts of net
income (loss) and earnings per share would have been changed to the pro forma
amounts indicated below.

<TABLE>
<CAPTION>
                                        YEAR ENDED              PERIOD ENDED
                                    DECEMBER 31, 1997        DECEMBER 31, 1996
                                   --------------------     --------------------
                                      AS          PRO          AS          PRO
                                   REPORTED      FORMA      REPORTED      FORMA
                                   --------     -------     --------     -------
<S>                                <C>          <C>         <C>          <C>
Net income (loss)...............   $14,342      $13,845     $(4,107)     $(4,166)
Basic earnings per share........      1.51         1.46        (.46)        (.46)
</TABLE>

     The fair value of employee share options used to compute the pro forma
amounts of net income (loss) and basic earnings per share was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
                                          OPTIONS ISSUED IN:
                                        -----------------------
                                          1997          1996
                                        ---------     ---------
<S>                                     <C>           <C>
Dividend yield.......................       6.50%         7.75%
Expected volatility..................       18.2%         17.3%
Risk-free interest rate..............       6.16%         6.32%
Expected holding period..............   5.4 years     8.5 years
</TABLE>

     At December 31, 1997 and 1996, the Company had outstanding 598,500 and
425,000 options, respectively, to purchase shares at exercise prices ranging
from $20 to $25.63 per share. The weighted average exercise price of the
outstanding options was $21.17 and $20 at December 31, 1997 and 1996,
respectively. The weighted average remaining contractual life of outstanding
options was 9.1 and 9.9 years at December 31, 1997 and 1996, respectively. At
December 31, 1997, 161,666 options were exercisable at a weighted average per
share exercise price of $20.36. No shares were exercisable at December 31, 1996.

     The weighted average fair value of the Company's options granted during the
year ended December 31, 1997 and the period November 4, 1996 through December
31, 1996 was $2.54 and $1.59 per option, respectively.

11.  EMPLOYEE BENEFIT PLAN:

     Effective January 1, 1997, the Company adopted the Boykin Lodging Company
Money Purchase Pension Plan (the Plan), a defined contribution plan established
to provide retirement benefits to eligible employees, as defined. The Plan
provides for the Company to contribute an amount equal to 15.4% of eligible
participants' compensation and 5.7% of eligible participants' compensation in
excess of the contribution and benefit base applicable under Social Security at
the beginning of the plan year, subject to limitations under law. The Company's
contribution for the year ended December 31, 1997 totaled $127.

12.  COMMITMENTS:

     In general, the Percentage Leases require the Company to establish
aggregate minimum reserves of 4% of total revenue of the hotel properties for
capital expenditures, except that one Percentage Lease requires a reserve equal
to 5% of the hotel property revenue. The Company intends to use the capital
expenditures reserve for the

                                      F-14
<PAGE>   47
                             BOYKIN LODGING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

replacement and refurbishment of furniture, fixtures and equipment and other
capital expenditures although it may make other uses of the amounts in the fund
that it considers appropriate from time to time.

     The land on which one of the Initial Hotels is located is leased under an
operating lease agreement expiring in 2033, which can be extended to 2051. The
lease requires minimum annual rentals of $100, and percentage rentals based on
hotel revenues. The Partnership or the Initial Hotel, as applicable, is
responsible for all taxes, insurance and maintenance on the property. Rental
expense charged to operations for the land lease was as follows:

<TABLE>
<CAPTION>
                                    YEAR ENDED      PERIOD ENDED
                                   DECEMBER 31,     DECEMBER 31,
                                       1997             1996
                                   ------------     -------------
<S>                                <C>              <C>
Minimum rent....................       $100             $  8
Percentage rent.................        730              100
                                       ----             ----
                                       $830             $108
                                       ====             ====
</TABLE>

     The Doubletree Hotel Kansas City purchased by Boykin K.C. in November 1997
underwent a substantial renovation which was completed in April 1997. The
renovation was funded, in part, with $15,110 of proceeds from tax increment
financing bonds issued by the Redevelopment Authority of Kansas City, Missouri
(the Authority). Debt service on the bonds is to be funded entirely by sales
taxes, payroll taxes, real estate taxes, hotel taxes and other specified taxes
and net revenues generated by the hotel. None of these taxes represent
obligations of Boykin K.C., but rather are obligations of CapStar. However, if
the specified taxes generated by the hotel are insufficient to satisfy the debt
service requirements of the bonds, Boykin K.C. would be obligated to fund such
shortfall. In the opinion of management of the Company, it is unlikely that
Boykin K.C. will have to fund any debt service on the bonds.

     The Company's joint venture partners in Boykin K.C. and Shawan have the
right, commencing in January 2000 and July 1999, respectively, and subject to
certain performance criteria, to sell one-half of their respective interests in
these joint ventures to the Company at fair market value, with the Company
retaining the option to fund the purchase price with cash or through the
issuance of common shares.

13.  RELATED PARTY TRANSACTIONS:

     The Chairman, President and Chief Executive Officer of the Company is the
majority shareholder of BMC. BMC was a significant source of the Company's
Percentage Lease revenue through December 31, 1997. At December 31, 1997 and
1996, the Company had rent receivable of $897 and $306, respectively, due from
BMC.

     At December 31, 1997 and 1996, the Company had a payable to BMC of $1,069
and $681, respectively, primarily for the reimbursement of capital expenditure
costs incurred on behalf of the Company.

     In September 1997, BMC purchased 20,000 common shares of the Company for
cash consideration of $491. The Company utilized the proceeds to purchase 20,000
additional general partner units in the Partnership.

     The Initial Hotels were acquired by the Partnership from entities in which
certain officers of the Company and their affiliates had substantial ownership
interests. These officers and their affiliates received 1,222,143 limited
partnership units in exchange for their interests in the hotel properties.

14.  STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:

     During the year ended December 31, 1997, noncash investing and financing
transactions consisted of (i) in connection with acquisition of Shawan, the
Partnership assumed $10,338 of existing debt which was immediately retired after
closing of the transaction, and (ii) approximately $4,893 of dividends and
Partnership distributions which were declared but not paid as of December 31,
1997.

                                      F-15
<PAGE>   48
                             BOYKIN LODGING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     During the period November 4, 1996 to December 31, 1996, noncash investing
and financing transactions consisted of: (i) in connection with the Initial
Offering, approximately $64,000 of historical net book value in hotel properties
was contributed to the Partnership in exchange for Partnership units and the
Partnership assumed approximately $140,000 of debt, and (ii) approximately
$3,091 of dividends and Partnership distributions were declared but not paid as
of December 31, 1996.

     Interest paid during the year ended December 31, 1997 and the period
November 4, 1996 to December 31, 1996 was $2,059 (net of $358 of interest
capitalized with respect to the Daytona Beach property) and $25, respectively.

15.  SUBSEQUENT EVENTS:

     The Company entered into an agreement and plan of merger (the Merger
Agreement) on December 30, 1997 with Red Lion Inns Limited Partnership (Red
Lion), under which the Company agreed to acquire the portfolio of 10
Doubletree-licensed hotels owned by Red Lion (the Doubletree Hotels). If the
proposed merger is consummated, the Doubletree Hotels will continue to be
managed by Doubletree and will continue to be leased to a subsidiary of BMC.
Under the Merger Agreement, the Company will issue 3,110,048 common shares and
pay approximately $35,300 in cash to the Red Lion limited partners and general
partner. The Partnership will become responsible for Red Lion's liabilities,
which the Company estimates will be approximately $156,000. At the time of the
announcement of the Merger Agreement, the consideration value was expected to
total approximately $271,250.

     In February 1998, the Company completed a follow-on equity offering (the
Offering) of 4,500,000 common shares. The Offering price was $25 per share,
resulting in gross proceeds of approximately $112,500 and net proceeds (less the
underwriters' discount and offering expenses) of approximately $106,313. The
Company contributed all of the net proceeds of the Offering to the Partnership
in exchange for 4,500,000 additional general partner units. The Partnership used
the proceeds to pay down existing indebtedness under the credit facility, and to
purchase limited partnership units from two unaffiliated limited partners. The
remaining proceeds will be used to fund future acquisitions and for general
corporate purposes. After the Offering and the use of proceeds therefrom, the
Company will have a 90% (92% if the Red Lion merger is consummated) general
partnership interest in the Partnership.

     In the first quarter of 1998, the Company executed an agreement to acquire
two hotels containing a total of 568 guest rooms at an aggregate purchase price
of $37,000. The hotels are located in Knoxville, Tennessee and High Point, North
Carolina. The transactions are expected to close in March 1998 and will be
funded with remaining cash proceeds from the Offering and borrowings against the
credit facility. In addition, the Company executed an agreement to acquire a
hotel located in Florida which contains 207 guest rooms at a cash purchase price
of $19,250. Upon the satisfactory completion of the Company's due diligence
review, this transaction is expected to close in the second quarter of 1998 and
will be funded with borrowings against the credit facility.

16.  PRO FORMA FINANCIAL INFORMATION (UNAUDITED):

     The pro forma financial information set forth below is presented as if (i)
the Initial Offering and the related formation transactions and (ii) the
acquisitions of the properties discussed in Note 3 had been consummated as of
January 1, 1996. The pro forma financial information is not necessarily
indicative of what actual results of operations of the Company would have been
assuming the Initial Offering and the related formation transactions

                                      F-16
<PAGE>   49
                             BOYKIN LODGING COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

and the acquisitions had been consummated as of January 1, 1996, nor does it
purport to represent the results of operations for future periods.

<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                  DECEMBER 31,
                                                               -------------------
                                                                1997        1996
                                                               -------     -------
<S>                                                            <C>         <C>
Lease revenue...............................................   $42,789     $39,730
                                                               -------     -------
Real estate related depreciation and amortization...........    11,704      10,976
Real estate and personal property taxes, insurance and
  ground rent...............................................     5,744       5,468
General and administrative..................................     2,404       1,450
Interest expense............................................     5,235       5,165
Amortization of deferred financing costs....................       454         436
                                                               -------     -------
Income before minority interest and extraordinary item......    17,248      16,235
Minority interest...........................................    (2,091)     (1,951)
                                                               -------     -------
Income before extraordinary item............................   $15,157     $14,284
                                                               =======     =======
Income per share before extraordinary item:
  Basic.....................................................     $1.59       $1.50
  Diluted...................................................     $1.58       $1.49
</TABLE>

17.  QUARTERLY OPERATING RESULTS (UNAUDITED):

     The Company's unaudited consolidated quarterly operating data for the year
ended December 31, 1997 follows. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
quarterly results have been reflected in the data. Quarterly operating results
for 1997 are not necessarily indicative of the results to be achieved in
succeeding quarters or years.

<TABLE>
<CAPTION>
                                                             FOR THE 1997 QUARTER ENDED
                                               ------------------------------------------------------
                                               MARCH 31,    JUNE 30,    SEPTEMBER 30,    DECEMBER 31,
                                               ---------    --------    -------------    ------------
<S>                                            <C>          <C>         <C>              <C>
Total revenues...............................   $7,439       $9,728        $12,036          $9,063
Income before extraordinary item.............    3,381        4,373          5,373           2,097
Net income...................................    3,381        4,373          5,232           1,356
Earnings per share:
  Income before extraordinary item-
     Basic...................................      .36          .46            .56             .22
     Diluted.................................      .35          .46            .56             .22
  Net income-
     Basic...................................      .36          .46            .55             .14
     Diluted.................................      .35          .46            .55             .14
Weighted average number to common shares
  outstanding................................    9,516        9,516          9,522           9,537
Diluted number of common shares
  outstanding................................    9,575        9,553          9,596           9,651
                                                ======       ======        =======          ======
</TABLE>

     Previously reported amounts of earnings per share have been restated to
reflect the Company's adoption of SFAS No. 128 as discussed in Note 2.

                                      F-17
<PAGE>   50

                             BOYKIN LODGING COMPANY

            SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION

                            AS OF DECEMBER 31, 1997

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                     Costs Capitalized
                                                                       Subsequent to              Gross Amounts at Which
                                               Initial Cost             Acquisition             Carried At Close of Period
                                          -----------------------   --------------------   -------------------------------------
                           Encumbrances             Buildings and          Buildings and             Buildings and
       DESCRIPTION             (a)         Land     Improvements    Land   Improvements     Land     Improvements    Total(b)(c)
       -----------         ------------   -------   -------------   ----   -------------   -------   -------------   -----------
<S>                        <C>            <C>       <C>             <C>    <C>             <C>       <C>             <C>
Berkeley Marina Raddison,
 Berkeley, California.....     $ --       $    --     $ 10,807      $--       $  120       $    --     $ 10,927       $ 10,927
Buffalo Marriott,
 Buffalo, New York........       --         1,164       15,174       --           78         1,164       15,252         16,416
Cleveland Airport
 Marriott,
 Cleveland, Ohio..........       --         1,175       11,441       --          198         1,175       11,639         12,814
Cleveland Marriott East,
 Beachwood, Ohio..........       --         1,918       19,514       --          452         1,918       19,966         21,884
Columbus North Marriott,
 Columbus, Ohio...........       --         1,635       12,873        3          483         1,638       13,356         14,994
Melbourne Quality Suites,
 Melbourne, Florida.......       --         3,092        7,819       --          430         3,092        8,249         11,341
Radisson Inn Sanibel
 Gateway,
 Ft. Myers, Florida.......       --           718        2,686       --           49           718        2,735          3,453
Lake Norman Hampton Inn,
 Charlotte, North
 Carolina.................       --           490        4,131       --          293           490        4,424          4,914
Lake Norman Holiday Inn,
 Charlotte, North
 Carolina.................       --           700        4,435       --          387           700        4,822          5,522
Holiday Inn Crabtree,
 Raleigh, North
 Carolina.................       --           725        6,542       --          136           725        6,678          7,403
Melbourne Hilton
 Oceanfront,
 Melbourne, Florida.......       --           852        7,699       --           96           852        7,795          8,647
Daytona Beach Radisson
 Resort,
 Daytona Beach, Florida...       --           386        3,470       --           --           386        3,470          3,856
French Lick Springs
 Resort,
 French Lick, Indiana.....       --         2,000       16,000       --          338         2,000       16,338         18,338
Holiday Inn Minneapolis
 West,
 Minneapolis, Minnesota...       --         1,000       10,604       --           31         1,000       10,635         11,635
Marriott's Hunt Valley
 Inn,
 Baltimore, Maryland......       --         2,890       21,575       --           --         2,890       21,575         24,465
Hampton Inn San Diego
 Airport/Sea World,
 San Diego, California....       --         1,000        7,400       --           --         1,000        7,400          8,400
Doubletree Hotel Kansas
 City,
 Kansas City, Missouri....       --         1,500       21,154       --           --         1,500       21,154         22,654
                               ----       -------     --------      ----      ------       -------     --------       --------
   Total..................     $ --       $21,245     $183,324      $ 3       $3,091       $21,248     $186,415       $207,663
                               ====       =======     ========      ====      ======       =======     ========       ========

<CAPTION>

                              Accumulated                                                         Life on Which
                              Depreciation       Net Book Value                                  Depreciation in
                             Buildings and     Land and Buildings     Date of        Date of     Income Statement
       DESCRIPTION          Improvements(d)     and Improvements    Construction   Acquisition     is Computed
       -----------          ---------------    ------------------   ------------   -----------   ----------------
<S>                         <C>                <C>                  <C>            <C>           <C>
Berkeley Marina Raddison,
 Berkeley, California.....       $  634             $ 10,293            1972          1996           20 years
Buffalo Marriott,
 Buffalo, New York........          712               15,704            1981          1996           25 years
Cleveland Airport
 Marriott,
 Cleveland, Ohio..........          682               12,132            1970          1996           20 years
Cleveland Marriott East,
 Beachwood, Ohio..........          931               20,953            1977          1996           25 years
Columbus North Marriott,
 Columbus, Ohio...........          618               14,376            1981          1996           25 years
Melbourne Quality Suites,
 Melbourne, Florida.......          195               11,146            1986          1996           30 years
Radisson Inn Sanibel
 Gateway,
 Ft. Myers, Florida.......          102                3,351            1986          1996           30 years
Lake Norman Hampton Inn,
 Charlotte, North
 Carolina.................          165                4,749            1991          1996           30 years
Lake Norman Holiday Inn,
 Charlotte, North
 Carolina.................          180                5,342            1987          1996           30 years
Holiday Inn Crabtree,
 Raleigh, North
 Carolina.................          126                7,277            1974          1997           30 years
Melbourne Hilton
 Oceanfront,
 Melbourne, Florida.......          179                8,468            1986          1997           40 years
Daytona Beach Radisson
 Resort,
 Daytona Beach, Florida...           19                3,837            1974          1997           40 years
French Lick Springs
 Resort,
 French Lick, Indiana.....          306               18,032            1903          1997           30 years
Holiday Inn Minneapolis
 West,
 Minneapolis, Minnesota...          147               11,488            1986          1997           30 years
Marriott's Hunt Valley
 Inn,
 Baltimore, Maryland......          300               24,165            1971          1997           30 years
Hampton Inn San Diego
 Airport/Sea World,
 San Diego, California....           41                8,359            1989          1997           30 years
Doubletree Hotel Kansas
 City,
 Kansas City, Missouri....           59               22,595            1969          1997           30 years
                                 ------             --------
   Total..................       $5,396             $202,267
                                 ======             ========
</TABLE>

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

(a) All properties except Berkeley Marina Radisson, Daytona Beach Radisson
    Resort, Hampton Inn San Diego Airport/Sea World and Doubletree Hotel Kansas
    City, are collateral for outstanding borrowings under the Company's credit
    facility.

(b) Aggregate cost for federal income tax reporting purposes at December 31,
    1997 is as follows:

                                      F-18
<PAGE>   51

<TABLE>
            <S>                                                    <C>
            Land.................................................  $ 20,647
            Buildings and improvements...........................   244,237
                                                                   --------
                                                                   $264,884
                                                                   ========
</TABLE>

(c) Reconciliation of Gross Cost Amounts of Land, Buildings and Improvements:

<TABLE>
            <S>                                                    <C>
            Balance at November 4, 1996--inception of
              operations.........................................  $ 99,772
            Improvements and other additions.....................       457
                                                                   --------
            Balance at December 31, 1996.........................   100,229
            Acquisitions.........................................   104,797
            Improvements and other additions.....................     2,637
                                                                   --------
            Balance at December 31, 1997.........................  $207,663
                                                                   ========
</TABLE>

(d) Reconciliation of Accumulated Depreciation of Buildings and Improvements:

<TABLE>
            <S>                                                    <C>
            Balance at November 4, 1996--inception of
              operations.........................................  $     --
            Depreciation expense.................................       630
                                                                   --------
            Balance at December 31, 1996.........................       630
            Depreciation expense.................................     4,766
                                                                   --------
            Balance at December 31, 1997.........................  $  5,396
                                                                   ========
</TABLE>

                                      F-19
<PAGE>   52

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Boykin Lodging Company:

     We have audited the accompanying combined balance sheet of the Initial
Hotels, as defined in Note 1 to the combined financial statements, as of
November 3, 1996 and the related combined statements of operations, partners'
deficit and cash flows for the period January 1, 1996 to November 3, 1996 and
the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of the Initial Hotels as of
November 3, 1996, and the combined results of their operations and their cash
flows for the period January 1, 1996 to November 3, 1996 and the year ended
December 31, 1995, in conformity with generally accepted accounting principles.

                                            ARTHUR ANDERSEN LLP

Cleveland, Ohio,
February 25, 1997.

                                      F-20
<PAGE>   53

                                 INITIAL HOTELS

                             COMBINED BALANCE SHEET

                             AS OF NOVEMBER 3, 1996

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<S>                                                           <C>
                           ASSETS
Investments in hotel properties, at cost:
  Land......................................................   $  8,572
  Buildings and improvements................................     97,213
  Furniture and equipment...................................     38,842
  Construction in progress..................................      1,054
                                                               --------
                                                                145,681
  Less Accumulated depreciation.............................     69,080
                                                               --------
  Net investment in hotel properties........................     76,601
Cash and cash equivalents...................................      5,302
Accounts receivable, net of allowance for doubtful accounts
  of $20 at November 3, 1996................................      4,290
Receivables from affiliate..................................        625
Inventories.................................................        458
Prepaids and other assets...................................      1,079
Cash held in escrow.........................................      2,370
Deferred expenses, net......................................      2,315
                                                               --------
                                                               $ 93,040
                                                               ========

             LIABILITIES AND PARTNERS' DEFICIT
Mortgage notes payable......................................   $132,588
Advances from and accrued interest due to partners..........      7,979
Accounts payable:
  Trade.....................................................      1,703
  Affiliate.................................................          4
  Management fees to related party..........................      1,166
  Bank overdraft............................................        138
Accrued expenses and other liabilities......................      6,961
                                                               --------
                                                                150,539
Partners' deficit...........................................    (57,499)
                                                               --------
                                                               $ 93,040
                                                               ========
</TABLE>

          The accompanying notes to combined financial statements are
                an integral part of this combined balance sheet.

                                      F-21
<PAGE>   54

                                 INITIAL HOTELS

                       COMBINED STATEMENTS OF OPERATIONS

            FOR THE PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 3, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                PERIOD        YEAR
                                                              JANUARY 1,     ENDED
                                                                THROUGH     DECEMBER
                                                              NOVEMBER 3,     31,
                                                                 1996         1995
                                                              -----------   --------
<S>                                                           <C>           <C>
Revenues from hotel operations:
  Room revenue..............................................    $51,627     $50,730
  Food and beverage revenue.................................     20,062      22,984
  Other revenue.............................................      4,148       4,490
                                                                -------     -------
     Total revenues.........................................     75,837      78,204
                                                                -------     -------
Expenses:
  Departmental expenses
     Rooms..................................................     11,683      11,896
     Food and beverage......................................     14,613      16,597
     Other..................................................      2,124       2,313
  General and administrative................................      6,574       6,832
  Advertising and promotion.................................      3,027       3,253
  Utilities.................................................      3,039       3,245
  Management fees to related party..........................      3,366       3,280
  Franchisor royalties and other charges....................      4,081       3,813
  Repairs and maintenance...................................      3,468       3,771
  Real estate and personal property taxes, insurance and
     rent...................................................      3,228       3,579
  Interest expense..........................................     12,802      13,430
  Interest expense on partner advances......................        628         739
  Depreciation and amortization.............................      6,308       6,545
  Unallocated business interruption insurance (income)
     expense................................................        118        (474)
  Gain on property insurance recovery.......................        (32)       (670)
  Other.....................................................        274         103
                                                                -------     -------
     Total expenses.........................................     75,301      78,252
                                                                -------     -------
     Income (loss) before extraordinary item................        536         (48)
Extraordinary item -- gain (loss) on early extinguishment of
  debt......................................................     (1,315)        556
                                                                -------     -------
Net income (loss)...........................................    $  (779)    $   508
                                                                =======     =======
</TABLE>

          The accompanying notes to combined financial statements are
                 an integral part of these combined statements.

                                      F-22
<PAGE>   55

                                 INITIAL HOTELS

                    COMBINED STATEMENTS OF PARTNERS' DEFICIT

            FOR THE PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 3, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 NET
                                                              COMBINED
                                                              PARTNERS'
                                                              (DEFICIT)
                                                              ---------
<S>                                                           <C>
Balance, December 31, 1994:                                   $(67,197)
  Net Income................................................       508
  Capital contributions.....................................     7,811
  Cash distributions........................................    (2,015)
  Redemption of partnership interests, net of $9,357
     aggregate cash redemption payments.....................     4,633
                                                              --------
Balance, December 31, 1995..................................   (56,260)
  Net loss..................................................      (779)
  Capital contributions.....................................     1,638
  Cash distributions........................................    (2,029)
  Net loss of Pacific Ohio Partners for the period October
     1, 1995 to December 31, 1995 excluded from these
     statements.............................................       (69)
                                                              --------
Balance, November 3, 1996...................................  $(57,499)
                                                              ========
</TABLE>

          The accompanying notes to combined financial statements are
                 an integral part of these combined statements.

                                      F-23
<PAGE>   56

                                 INITIAL HOTELS

                       COMBINED STATEMENTS OF CASH FLOWS

            FOR THE PERIOD JANUARY 1, 1996 THROUGH NOVEMBER 3, 1996
                      AND THE YEAR ENDED DECEMBER 3, 1995

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                PERIOD
                                                              JANUARY 1,
                                                                THROUGH       YEAR ENDED
                                                              NOVEMBER 3,    DECEMBER 31,
                                                                 1996            1995
                                                              -----------    ------------
<S>                                                           <C>            <C>
Cash flows from operating activities:
  Net income (loss).........................................   $   (779)       $    508
  Adjustments to reconcile net income (loss) to net cash
     provided by operating activities --
     Net loss of Pacific Ohio Partners for the period
      October 1, 1995 to December 31, 1995, excluded from
      the combined statement of operations..................        (69)             --
     Depreciation and amortization expense..................      8,897           7,645
     Deferred interest expense on partner advances..........        628             705
     Extraordinary loss (gain) on early extinguishment of
      debt..................................................      1,315            (556)
     Gain on property insurance recovery....................         --            (670)
     Payments for franchise fees and other deferred costs...       (156)             --
     Changes in assets and liabilities:
       Receivables..........................................     (1,824)           (264)
       Inventories, prepaids and other assets...............       (269)           (221)
       Cash held in escrow..................................        237            (711)
       Accounts payable, accrued expenses and other
        liabilities.........................................        334             739
                                                               --------        --------
       Net cash provided by operating activities............      8,314           7,175
                                                               --------        --------
Cash flows from investing activities:
  Improvements and additions to hotel properties, net.......     (3,061)         (5,366)
  Acquisitions of hotels....................................     (9,721)             --
  Property insurance proceeds received, net.................        320           1,122
                                                               --------        --------
       Net cash used for investing activities...............    (12,462)         (4,244)
                                                               --------        --------
Cash flows from financing activities:
  Principal payments on mortgage notes payable..............    (43,417)        (54,082)
  Proceeds from refinancing and new borrowings of mortgage
     debt...................................................     51,173          66,250
  Payment of debt prepayment premium and debt issuance
     costs..................................................       (424)         (4,473)
  Payments on advances from partners........................       (400)           (529)
  Capital contributions.....................................      1,638             188
  Cash distributions paid...................................     (2,029)         (2,015)
  Redemptions of partnership interests......................         --          (9,357)
                                                               --------        --------
       Net cash provided by (used for) financing
        activities..........................................      6,541          (4,018)
                                                               --------        --------
Net change in cash and cash equivalents.....................      2,393          (1,087)
Cash and cash equivalents at beginning of period............      2,909           3,996
                                                               --------        --------
Cash and cash equivalents at end of period..................   $  5,302        $  2,909
                                                               ========        ========
Supplemental disclosures of cash flow information:
     Cash paid during the period for interest...............   $ 10,088        $ 12,056
Supplemental schedule of noncash investing and financing
  activities:
     Contributions of partner advances to capital...........         --           7,623
     Mortgage principal forgiven............................         --           2,335
     Prepayment penalty financed with additional
      borrowing.............................................      1,246              --
</TABLE>

          The accompanying notes to combined financial statements are
                 an integral part of these combined statements.
                                      F-24
<PAGE>   57

                                 INITIAL HOTELS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                  AS OF NOVEMBER 3, 1996 AND DECEMBER 31, 1995

                         (DOLLAR AMOUNTS IN THOUSANDS)

1.  ORGANIZATION AND BASIS OF PRESENTATION:

  Organization

     The Initial Hotels consist of the following hotels:

<TABLE>
<CAPTION>
                                                                          NUMBER OF
              PROPERTY NAME                           LOCATION              ROOMS
              -------------                           --------            ---------
<S>                                         <C>                           <C>
Berkeley Marina Marriott..................  Berkeley, California             373
Buffalo Marriott..........................  Buffalo, New York                356
Cleveland Airport Marriott................  Cleveland, Ohio                  375
Cleveland Marriott East...................  Beachwood, Ohio                  403
Columbus Marriott North...................  Columbus, Ohio                   300
Melbourne Quality Suites Inn..............  Melbourne, Florida               208
Radisson Inn Sanibel Gateway..............  Ft. Myers, Florida               157
Hampton Inn...............................  Charlotte, N. Carolina           117
Holiday Inn...............................  Charlotte, N. Carolina           119
</TABLE>

     Boykin Management Company (BMC) was involved in the development of each of
the above hotels except the Hampton Inn and Holiday Inn and has managed all of
the Initial Hotels excluding the Hampton Inn and Holiday Inn since their
respective inceptions. The hotels were owned by partnerships (Boykin
Partnerships) in which the shareholders of The Boykin Company (TBC), BMC's
parent company, and certain officers and employees of BMC (collectively, BMC
Affiliates) had significant direct and indirect ownership interests.

     As of November 3, 1996, the Initial Hotels were owned as follows:

<TABLE>
<CAPTION>
                                                                 PARTNERSHIP
                                                                   INTEREST
                                                              ------------------
                                                                 BMC       THIRD
                                                              AFFILIATES   PARTY
                                                              ----------   -----
<S>                                                           <C>          <C>
Berkeley Marina Associates, L.P. (BMLP).....................     100%        0%
Buffalo Hotel Joint Venture (BHJV)..........................      50%       50%
Pacific Ohio Partners (POP).................................     100%        0%
Beachwood Hotel Joint Venture (Beachwood)...................      35%       65%
Columbus Hotel Joint Venture (CHJV).........................      50%       50%
Melbourne Oceanfront Hotel Associates (MOHA)................     100%        0%
Fort Myers Hotel Partnership (FMHP).........................     100%        0%
B.B.G., I, L.L.C. (BBG).....................................      46%       54%
</TABLE>

     Boykin Lodging Company (the Company) is an Ohio corporation which has been
established to acquire equity interests in hotel properties.

     The Company sold 8,275,000 shares of its common stock in an initial public
offering on November 4, 1996. On November 29, 1996, the underwriters exercised
their overallotment option and purchased an additional 1,241,250 of the
Company's common shares (together with the initial public offering, the
Offering). The Company contributed all of the net proceeds of the Offering to
Boykin Hotel Properties, L.P., an Ohio limited partnership (the Partnership) in
exchange for an approximate 84.5% general partnership interest and a $40 million
convertible note (the Note). The Company will elect to be taxed as a real estate
investment trust pursuant to Sections 856 -- 860 of the Internal Revenue Code.

     The partners of the Boykin Partnerships contributed their respective
partnership interests to the Partnership in exchange for cash and partnership
interests. The Partnership used a portion of the proceeds from the sale of the
general partnership interest and the Note to the Company to retire mortgage
indebtedness encumbering the Initial

                                      F-25
<PAGE>   58
                                 INITIAL HOTELS

              NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED

Hotels. All of the Initial Hotels are leased to Boykin Management Company
Limited Liability Company (the Lessee) pursuant to operating leases which
contain provisions for rent based on the revenues of the Initial Hotels. The
Lessee is an affiliate of TBC.

  Basis of Presentation

     Management believes that these combined financial statements result in a
more meaningful presentation of the Initial Hotel businesses acquired by the
Partnership and thus appropriately reflect the historical financial position and
results of operations of the predecessor of the Company. All significant
intercompany balances and transactions have been eliminated.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Accounting Periods

     For 1995, all of the Boykin Partnerships except POP and BBG have been
included in the accompanying combined financial statements based on a December
31 year-end. The accompanying combined financial statements as of December 31,
1995 include the accounts of POP as of September 30, 1995. See Note 3 for
discussion of BBG.

     For the period ended November 3, 1996, POP's operating results were
adjusted to exclude the three-month period October 1, 1995 to December 31, 1995.
The total revenues and net loss of POP excluded from the combined statements of
operations for the period ended November 3, 1996 were $3,328 and $69,
respectively.

     In the opinion of management, the effect of nonconforming period ends is
not material to the combined financial statements.

  Hotel Properties

     Hotel properties are stated at cost. Depreciation is computed using
primarily the straight-line method based upon the following estimated useful
lives:

<TABLE>
<S>                                                        <C>
Buildings and improvements...............................  7-40 years
Furniture and equipment..................................  3-20 years
</TABLE>

     The partners and management of the Boykin Partnerships review the hotel
properties for impairment when events or changes in circumstances indicate the
carrying amounts of the hotel properties may not be recoverable. When such
conditions exist, management estimates the future cash flows from operations and
disposition of the hotel properties. If the estimated undiscounted future cash
flows are less than the carrying amount of the asset, an adjustment to reduce
the carrying amount to the related hotel property's estimated fair market value
would be recorded and an impairment loss would be recognized. No such impairment
losses have been recognized.

     Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulated depreciation are removed from the
accounts, and the gain or loss is included in the determination of net income or
loss.

  Cash and Cash Equivalents

     All highly liquid investments with an original maturity date of three
months or less when purchased are considered to be cash equivalents.

  Inventories

     Inventories consisting primarily of food and beverages and gift store
merchandise are stated at the lower of first-in, first-out cost or market.

                                      F-26
<PAGE>   59
                                 INITIAL HOTELS

              NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED

  Cash Held in Escrow

     Cash held in escrow consists of amounts for real estate taxes remitted to
the lenders which hold the mortgages on the hotel facilities and amounts
deposited for the replacement of hotel real and personal property pursuant to
the terms of certain mortgage and franchise agreements.

  Deferred Expenses

     Deferred expenses consist of initial franchise fees and deferred loan
costs. Amortization of initial franchise fees is computed on a straight-line
basis over the terms of the franchise agreements while deferred loan coasts are
amortized over the terms of the related loan agreements. The amortization of
deferred loan costs of $805 and $519 for the period ended November 3, 1996, and
for the year ended December 31, 1995, respectively, is included in interest
expense in the accompanying combined statements of operations. Accumulated
amortization of deferred expenses was $1,472 at November 3, 1996.

  Revenue Recognition

     Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion of
accounts receivable which is estimated to be uncollectable. Such losses have
been within management's expectations.

  Income Taxes

     The Boykin Partnerships are not subject to federal or state income taxes;
however, they must file informational income tax returns and the partners must
take income or loss of the Boykin Partnerships into consideration when filing
their respective tax returns.

  Management's Use of Estimates in the Preparation of Financial Statements

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

3.  ACQUISITION:

     On February 8, 1996, BBG acquired the Holiday Inn and Hampton Inn from
Norman Associates and Norman Associates II in exchange for aggregate cash
consideration of $9,721. BBG funded the purchase price with first and second
mortgage debt borrowings aggregating $9,500 and contributed capital. The
acquisition was accounted for as a purchase and, accordingly, the operating
results of the Holiday Inn and Hampton Inn have been included in the
accompanying combined financial statements commencing February 8, 1996.

4.  MORTGAGE NOTES PAYABLE:

     Mortgage notes payable had various repayment terms and had various
scheduled maturity dates during the period 1998 to 2004. Interest rates on the
mortgage notes ranged from 8.54% to 13.25%. Certain of the mortgage notes
required the payment of additional interest upon maturity or repayment in full.
The additional interest was charged to interest expense utilizing the effective
interest rate method over the contractual term of the notes and was $1,383 for
the period ended November 3, 1996 and $583 for the year ended December 31, 1995.
All of the mortgage notes payable were collateralized by investments in hotel
properties and were paid off with a portion of the proceeds from the Offering.

                                      F-27
<PAGE>   60
                                 INITIAL HOTELS

              NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED

  Debt Extinguishment

     In May 1995, FMHP, MOHA, POP and BMLP refinanced their respective existing
mortgage indebtness, realizing a net extraordinary gain of $556 on the early
extinguishment of debt. The net extraordinary gain was related to the
forgiveness of $2,335 of principal due on the FMHP mortgage reduced by the
payment of prepayment premiums and the writeoff of unamortized deferred
financing costs on the POP and BMLP mortgages. In addition to retiring existing
indebtness, the refinancing proceeds were used to redeem partnership interests
held by non-BMC Affiliate partners of BMLP, MOHA and POP (Note 8).

     The refinancing and concurrent payment of a prepayment penalty on the BHJV
note resulted in an extraordinary loss due to the early extinguishment of debt
in the amount of $1,315 for the period ended November 3, 1996.

5.  PROPERTY DAMAGE FROM HURRICANE:

     On August 2, 1995, certain hotel property of MOHA was damaged by
wind-driven rain associated with hurricane Erin. The damage led to the temporary
closure of the hotel until restoration of the damaged property took place. The
temporary closure reduced the available room nights for the year ended December
31, 1995 by 20,430 rooms, or 27% of the otherwise available room nights.
Management estimated that the temporary closure resulted in $1,261 in lost
revenue, and $1,093 in lost net income.

     MOHA made a business interruption insurance claim for reimbursement of the
lost net income. Included in the combined statement of operations for the year
ended December 31, 1995 was $1,093 of income related to this claim. This income
was offset against departmental expenses and various other expense categories in
the aggregate amounts of $178 and $441, respectively.

     In addition, MOHA made a property insurance claim for the damage to hotel
property. The difference between the proceeds received from this claim and the
net book value of the damaged property was reflected in the combined statement
of operations for 1995 as a gain on property insurance recovery. The costs of
replacing and renovating the damaged property were capitalized as additions to
hotel property.

     MOHA submitted its claims to its insurance carrier in 1995, and believed
that the claims were in accordance with the terms of the related insurance
policies. However, in 1996 the business interruption insurance claim was settled
for $975. Accordingly, a loss of $118 has been reflected in the accompanying
combined statements of operations for the period ended November 3, 1996. The
insurance carrier did not adjust the property insurance claim.

6.  RELATED PARTY TRANSACTIONS:

     A substantial portion of the Initial Hotels' management and accounting
functions were performed by BMC, for a fee computed as specified in each hotel's
management agreement. The base management fee is based on percentages of hotel
revenues of 3% or 3.5% except for the Holiday Inn and Hampton Inn for which the
fees were calculated as 5% of hotel revenues. In addition, if specified
operating results are achieved, an incentive fee was due to BMC. The management
agreements with BMC expired at various dates through September 30, 2010.

     Certain other costs relating to purchasing and design services are incurred
by an affiliate of BMC and billed to the hotels. Such purchases approximated
$110 and $143 for the period ended November 3, 1996 and the year ended December
31, 1995, respectively. Furthermore, the hotels made purchases of hotel
furnishings through an affiliate of BMC. These purchases amounted to
approximately $956 and $2,531 for the period ended November 3, 1996 and the year
ended December 31, 1995, respectively.

     Receivables from and payables to affiliates represent amounts due from or
to BMC and its affiliates applicable to insurance charges and various other
items.

     BBG paid a 1% asset management fee to an affiliate of its third-party
owner.

                                      F-28
<PAGE>   61
                                 INITIAL HOTELS

              NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED

7.  ADVANCES FROM PARTNERS:

     Partner advances consisted of the following:

<TABLE>
<CAPTION>
                                                              NOVEMBER 3,
                                                                 1996
                                                              -----------
<S>                                                           <C>
Advances from partners used to complete construction and to
  fund operation, bearing interest at 10% per annum.........    $2,637
Accrued interest payable on advances from partners..........     5,342
                                                                ------
                                                                $7,979
                                                                ======
</TABLE>

     The advances from partners and related accrued interest therein were paid
off by the Partnership with a portion of the proceeds from the Offering.

     Total interest expense on partner advances was $628 for the period ended
November 3, 1996 and $739 for the year ended December 31, 1995.

8.  CHANGES IN OWNERSHIP:

     In May 1995, in connection with the refinancing discussed in Note 4, MOHA,
BMLP and POP redeemed their respective partnership interests held by non-BMC
Affiliates and BMC Affiliates were admitted as new partners. In addition, FMHP
redeemed its partnership interest held by BMLP. As a result of the redemptions,
BMC Affiliates own 100% of these partnerships. The aggregate cash redemption
price paid to non-BMC Affiliates was $9,357. For each partnership, the
difference between the redemption price paid and the related capital account
balances of the partners redeemed was recorded as an adjustment of the carrying
value of the respective investments in hotel properties of MOHA, FMHP, BMLP and
POP.

     The purchase accounting adjustment recorded, which was equal to the cash
paid to redeem the partnership interests plus the deficit capital account
balances of the redeemed partners at the time of the redemptions, was an
aggregate increase in the carrying value of the investments in hotel property as
follows:

<TABLE>
<S>                                                  <C>
Buildings and improvements......................     $10,230
Furniture and equipment.........................       3,760
                                                     -------
                                                     $13,990
                                                     =======
</TABLE>

9.  COMMITMENTS AND CONTINGENCIES:

  Claims and Legal Matters

     Certain of the hotels are involved in claims and legal matters incidental
to their businesses. In the opinion of management, the ultimate resolution of
these matters will not have a material impact on the financial position or
results of operations of the hotels.

  Franchise Agreements

     Under the terms of hotel franchise agreements, annual payments for
franchise royalties and reservation and advertising services are due from the
hotels. For eight of the hotels, fees are computed based upon percentages of
gross room revenues. At November 3, 1996, the franchise royalty fees payable by
the Initial Hotels ranged from 3% to 6% of room revenues while the fees for
advertising services ranged from .8% to 4%. For MOHA, the payment is a flat fee
ranging from $6 per month in 1995 to $12 per month in 1998; in 1999 and
thereafter, the fee at MOHA will be at 6% of gross room revenues. The franchise
agreements expire at various dates through 2014.

     The franchise agreements contain provisions whereby the franchisor would be
entitled to additional payments in the event the franchisees would terminate the
franchise agreements prior to maturity.

                                      F-29
<PAGE>   62
                                 INITIAL HOTELS

              NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED

  Other

     The land on which the Berkeley Marina Marriott is located is leased under
an operating lease agreement expiring in 2033 which can be extended to 2051. The
lease requires minimum annual rentals of $100, and percentage rentals based on
hotel revenues. BMLP is responsible for all taxes, insurance and maintenance on
the property. Rental expense charged to operations for the land lease were as
follows:

<TABLE>
<CAPTION>
                                    JANUARY 1,
                                        TO           YEAR ENDED
                                    NOVEMBER 3,     DECEMBER 31,
                                       1996             1995
                                    -----------     ------------
<S>                                 <C>             <C>
Minimum rent.....................      $ 93             $100
Percentage rent..................       535              584
                                       ----             ----
                                       $628             $684
                                       ====             ====
</TABLE>

10.  FAIR VALUE OF FINANCIAL INSTRUMENTS:

     Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments, whether or not recognized for
financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of the
balance sheet date. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts which could be realized on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.

  Cash Equivalents

     Management estimates that the fair value of cash equivalents approximates
carrying value due to the relative short maturity of these instruments.

  Long-Term Debt

     Management estimates that the fair values of mortgage and other long-term
debt approximate carrying values based upon the hotels' effective borrowing rate
for issuance of debt with similar terms and remaining maturities.

11.  PRO FORMA FINANCIAL INFORMATION:

     Following is pro forma data assuming that (i) the acquisition of the
Holiday Inn and the Hampton Inn discussed in Note 3, and (ii) the redemption of
the non-BMC affiliates discussed in Note 8 and the related refinancing discussed
in Note 4 had occurred at the beginning of 1995. The pro forma adjustments to
historical operating results are (i) to increase depreciation expense for the
effect of the purchase accounting adjustments to the carrying values of
investments in hotel properties; (ii) to adjust management fee expense for FMHP,
MOHA, BMLP and POP to 4.5% of hotel revenues as required by the terms of the
refinancing and to adjust management fee expense of the Holiday Inn and Hampton
Inn; and (iii) to increase interest expense to reflect the terms of the new
mortgage debt and the amortization of related deferred financing costs.

<TABLE>
<CAPTION>
                                              UNAUDITED
                                    ------------------------------
                                       PERIOD
                                    JANUARY 1, TO      YEAR ENDED
                                     NOVEMBER 3,      DECEMBER 31,
                                        1996              1995
                                    -------------     ------------
<S>                                 <C>               <C>
Total revenues...................      $76,228          $83,071
Loss before extraordinary
  items..........................         (817)          (2,477)
Net loss.........................       (2,132)          (1,921)
</TABLE>

                                      F-30
<PAGE>   63

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Boykin Management Company
Limited Liability Company:

     We have audited the accompanying consolidated balance sheets of Boykin
Management Company Limited Liability Company (an Ohio limited liability company)
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, members' capital and cash flows for the year ended
December 31, 1997 and the period November 4, 1996 (inception of operations)
through December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the financial position of Boykin Management Company
Limited Liability Company and subsidiaries as of December 31, 1997 and 1996 and
the results of their operations and their cash flows for the year ended December
31, 1997 and the period November 4, 1996 (inception of operations) through
December 31, 1996 in conformity with generally accepted accounting principles.

                                          ARTHUR ANDERSEN LLP

Cleveland, Ohio,
  January 29, 1998.

                                      F-31
<PAGE>   64

                           BOYKIN MANAGEMENT COMPANY

                   LIMITED LIABILITY COMPANY AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                        AS OF DECEMBER 31, 1997 AND 1996

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
                           ASSETS
Cash and cash equivalents...................................    $ 6,862        $ 5,469
Accounts receivable-
  Trade, net of allowance for doubtful accounts of $84 and
     $68 at December 31, 1997 and 1996, respectively........      3,859          2,933
  Boykin Hotel Properties, L.P..............................      1,069            681
  Former owners.............................................         --             69

Inventories.................................................        788            470

Property and equipment, net.................................        366            312

Investment in Boykin Lodging Company........................        529             --

Prepaid expenses and other assets...........................        908            587
                                                                -------        -------
                                                                $14,381        $10,521
                                                                =======        =======

              LIABILITIES AND MEMBERS' CAPITAL

Rent payable to Boykin Hotel Properties, L.P................    $   897        $   306

Accounts payable-
  Trade.....................................................      1,746          1,575
  Advance deposits..........................................        259            224
  Bank overdraft liability..................................      2,837          1,234
  Former owners and affiliate...............................          2            640

Accrued expenses-
  Accrued payroll...........................................        391            716
  Accrued vacation..........................................        893            784
  Accrued sales, use and occupancy taxes....................        646            702
  Other accrued liabilities.................................      2,437          1,786
                                                                -------        -------
                                                                 10,108          7,967
                                                                -------        -------
Members' capital-
  Capital contributed.......................................      3,000          3,000
  Retained earnings (deficit)...............................      1,235           (446)
  Unrealized appreciation on investment.....................         38             --
                                                                -------        -------
                                                                  4,273          2,554
                                                                -------        -------
                                                                $14,381        $10,521
                                                                =======        =======
</TABLE>

        The accompanying notes to consolidated financial statements are
                   an integral part of these balance sheets.

                                      F-32
<PAGE>   65

                           BOYKIN MANAGEMENT COMPANY

                   LIMITED LIABILITY COMPANY AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                    FOR THE YEAR ENDED DECEMBER 31, 1997 AND
             THE PERIOD NOVEMBER 4, 1996 (INCEPTION OF OPERATIONS)
                           THROUGH DECEMBER 31, 1996

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                PERIOD
                                                                             NOVEMBER 4,
                                                               YEAR ENDED    1996 THROUGH
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
Revenues:
  Room revenue..............................................    $ 72,751       $ 7,684
  Food and beverage revenue.................................      30,229         3,976
  Other revenue.............................................       7,568           620
  Other revenue.............................................       2,477           382
                                                                --------       -------
     Total revenues.........................................     113,025        12,662
                                                                --------       -------
Expenses:
  Departmental expenses of hotels --
     Rooms..................................................      16,630         2,066
     Food and beverage......................................      21,945         2,894
     Other..................................................       3,867           360
  Cost of goods sold of nonhotel operations.................         619           102
  Percentage lease expense..................................      34,834         3,258
  General and administrative................................      13,232         1,884
  Advertising and promotion.................................       4,906           609
  Utilities.................................................       4,550           558
  Franchisor royalties and other charges....................       5,423           665
  Repairs and maintenance...................................       5,163           674
  Depreciation and amortization.............................          82            19
  Other.....................................................          93            19
                                                                --------       -------
     Total expenses.........................................     111,344        13,108
                                                                --------       -------
Net income (loss)...........................................    $  1,681       $  (446)
                                                                ========       =======
</TABLE>

          The accompanying notes to consolidated financial statements
                   are an integral part of these statements.

                                      F-33
<PAGE>   66

                           BOYKIN MANAGEMENT COMPANY

                   LIMITED LIABILITY COMPANY AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                    FOR THE YEAR ENDED DECEMBER 31, 1997 AND
               THE PERIOD NOVEMBER 1996 (INCEPTION OF OPERATIONS)
                           THROUGH DECEMBER 31, 1996

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                PERIOD
                                                                             NOVEMBER 4,
                                                               YEAR ENDED    1996 THROUGH
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
Cash flows from operating activities:
  Net income (loss).........................................    $ 1,681        $  (446)
  Adjustments to reconcile net income (loss) to net cash
     provided by (used for) operating activities --
     Depreciation and amortization..........................         82             19
     Gain on fixed asset disposal...........................         --            (11)
     Changes in assets and liabilities --
     Accounts receivable....................................     (1,314)         3,231
     Inventories............................................       (318)           (12)
     Prepaid expenses and other assets......................       (321)           531
     Rent payable...........................................        591            306
     Accounts payable.......................................      1,544            952
     Other accrued liabilities..............................        379         (5,210)
                                                                -------        -------
       Net cash provided by (used for) operating
        activities..........................................      2,324           (640)
                                                                -------        -------
Cash flows from investing activities:
  Investment in Boykin Lodging Company......................       (491)            --
  Property additions........................................       (136)            (1)
  Collection of notes and accrued interest due from former
     owner..................................................         --          3,109
  Cash of predecessor entities at date of merger............         --          7,678
  Consideration from sale of fixed asset....................         --             36
                                                                -------        -------
       Net cash provided by (used for) investing
        activities..........................................       (627)        10,822
                                                                -------        -------
Cash flows from financing activities:
  Repayment of debt.........................................         --         (1,420)
                                                                -------        -------
  Payments of obligations to former owners..................       (373)        (3,529)
  Collections of amounts due from former owners.............         69            236
                                                                -------        -------
       Net cash used for financing activities...............       (304)        (4,713)
                                                                -------        -------
Net increase in cash and cash equivalents...................      1,393          5,469
Cash and cash equivalents, beginning of period..............      5,469             --
                                                                -------        -------
Cash and cash equivalents, end of period....................    $ 6,862        $ 5,469
                                                                =======        =======
</TABLE>

        The accompanying notes to consolidated financial statements are
                     an integral part of these statements.

                                      F-34
<PAGE>   67

                           BOYKIN MANAGEMENT COMPANY

                   LIMITED LIABILITY COMPANY AND SUBSIDIARIES

                  CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
                    FOR THE YEAR ENDED DECEMBER 31, 1997 AND
               PERIOD NOVEMBER 4, 1996 (INCEPTION OF OPERATIONS)
                           THROUGH DECEMBER 31, 1996

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 RETAINED      UNREALIZED
                                                   CONTRIBUTED   EARNINGS    APPRECIATION ON
                                                     CAPITAL     (DEFICIT)     INVESTMENT      TOTAL
                                                   -----------   ---------   ---------------   ------
<S>                                                <C>           <C>         <C>               <C>
Initial capital contribution --
  November 4, 1996...............................    $3,000       $   --          $  --        $3,000
  Net Income.....................................        --         (446)            --          (446)
                                                     ------       ------          -----        ------
Balance at December 31, 1996.....................     3,000         (446)            --         2,554
  Net Income.....................................        --        1,681             --         1,681
  Unrealized appreciation on investment..........        --           --             38            38
                                                     ------       ------          -----        ------
Balance at December 31, 1997.....................    $3,000       $1,235          $  38        $4,273
                                                     ======       ======          =====        ======
</TABLE>

        The accompanying notes to consolidated financial statements are
                     an integral part of these statements.

                                      F-35
<PAGE>   68

                           BOYKIN MANAGEMENT COMPANY

                   LIMITED LIABILITY COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

                         (DOLLAR AMOUNTS IN THOUSANDS)

1.  DESCRIPTION OF BUSINESS:

     Boykin Management Company Limited Liability Company and its subsidiaries
(collectively, the Lessee) (i) lease and operate full and limited service hotels
located throughout the United States pursuant to long-term percentage leases;
(ii) manage full and limited service hotels located throughout the United States
pursuant to management agreements; (iii) provide national purchasing services to
hotels, and (iv) provide interior design services to hotels and other
businesses.

2.  ORGANIZATION:

     The Lessee commenced operations on November 4, 1996 as an Ohio limited
liability company. The Lessee is effectively owned by Robert W. Boykin (53.8%)
and John E. Boykin (46.2%). Robert W. Boykin is the Chairman, President and
Chief Executive Officer of Boykin Lodging Company (the Company).

     Pursuant to formation transactions related to the November 4, 1996 initial
public offering of the Company, Boykin Management Company (BMC) and Bopa Design
Company (doing business as Spectrum Services), wholly owned subsidiaries of The
Boykin Company (TBC), were merged into subsidiaries of the Lessee. In addition,
Purchasing Concepts, Inc. (PCI) contributed its assets to a subsidiary of the
Lessee and that subsidiary assumed PCI's liabilities. TBC and PCI are related
through common ownership. The Lessee and its subsidiaries are the successors to
the businesses of BMC, Spectrum Services and PCI. As the Lessee, BMC, Spectrum
Services and PCI were related through common ownership, there were no purchase
accounting adjustments to the historical carrying values of the assets and
liabilities of BMC, Spectrum Services and PCI upon merger into or contribution
to the subsidiaries of the Lessee. In connection with the formation of the
Lessee, certain assets and liabilities of nine of the Hotels (Note 4) were
assumed by the Lessee.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of
the Lessee and all of its majority-owned subsidiaries. All material intercompany
transactions and balances have been eliminated.

  Cash Equivalents

     All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.

  Inventories

     Inventories consisting primarily of food and beverages and gift store
merchandise are stated at the lower of first-in, first-out cost or market.

                                      F-36
<PAGE>   69
                           BOYKIN MANAGEMENT COMPANY

                   LIMITED LIABILITY COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

  Property and Equipment

     Property and equipment is comprised of the following:

<TABLE>
<CAPTION>
                                                   DECEMBER 31,   DECEMBER 31,
                                                       1997           1996
                                                   ------------   ------------
<S>                                                <C>            <C>
Leasehold improvements...........................     $ 115           $ 69
Furniture and equipment..........................       352            262
                                                      -----           ----
                                                        467            331
Less-Accumulated depreciation and amortization...      (101)           (19)
                                                      -----           ----
                                                      $ 366           $312
                                                      =====           ====
</TABLE>

     Property and equipment is stated at cost. Depreciation and amortization is
calculated using the straight-line and accelerated methods based upon the
following estimated useful lives.

<TABLE>
<S>                                               <C>
Leasehold improvements..........................  7-10 years
Furniture and equipment.........................  3-10 years
</TABLE>

     The management of the Lessee reviews the property and equipment for
impairment when events or changes in circumstances indicate the carrying amounts
of the assets may not be recoverable. When such conditions exist, management
estimates the future cash flows from operations and disposition of the property
and equipment. If the estimated undiscounted future cash flows are less than the
carrying amount of the asset, an adjustment to reduce the carrying amount to the
related assets estimated fair market value would be recorded and an impairment
loss would be recognized.

     Maintenance and repairs are charged to operations as incurred. Upon the
sale or disposition of a fixed asset, the asset and related accumulated
depreciation are removed from the accounts and the gain or loss is included in
the determination of net income or loss.

  Investment in Boykin Lodging Company

     During 1997, the Lessee purchased 20,000 common shares of the Company for
cash consideration of $491. The Lessee accounts for this investment in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The
investment is classified as available-for-sale pursuant to the provisions of
SFAS No. 115. Consequently, these securities are being carried at fair market
value with all unrealized gains and losses being reported as a separate
component of members' capital. Total unrealized appreciation was $38 at December
31, 1997.

  Revenue Recognition

     Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion of
accounts receivable which is estimated to be uncollectable. Such losses have
been within management's expectations.

     For hotels operated by the Lessee pursuant to long-term percentage leases,
the Lessee recognizes the room, food, beverage and other hotel revenues as
earned. For hotels which are managed by a subsidiary of the Lessee pursuant to
management agreements, the Lessee recognizes management fee revenue as earned
pursuant to the terms of the respective agreements.

                                      F-37
<PAGE>   70
                           BOYKIN MANAGEMENT COMPANY

                   LIMITED LIABILITY COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

  Franchise Costs

     The cost of obtaining the franchise licenses is paid by Boykin Hotel
Properties, L.P. (the Partnership), a partnership in which the Company has a
general partnership interest, and the ongoing franchise fees are paid by Lessee.
These fees are generally computed as a percentage of room revenue for each hotel
in accordance with franchise agreements.

  Income Taxes

     The Lessee is a limited liability company which is taxed for federal income
tax purposes as a partnership and, accordingly, no income tax provision has been
recorded.

  Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

  Reclassifications

     Certain reclassifications have been made to the 1996 financial statements
to conform with the 1997 presentation.

4.  PERCENTAGE LEASE AGREEMENTS:

     The Lessee leases 13 hotels (the Hotels) from the Partnership, pursuant to
long-term leases (Percentage Leases). The Hotels are located in Cleveland, Ohio
(2), Columbus, Ohio; Buffalo, New York; Berkeley, California; Raleigh, North
Carolina; Charlotte, North Carolina (2); Ft. Myers, Florida; Melbourne, Florida
(2); Daytona Beach, Florida; and French Lick, Indiana.

     The Percentage Leases have noncancellable remaining terms ranging from
three to ten years, subject to earlier termination on the occurrence of certain
contingencies, as defined. The Percentage Leases do not contain renewal terms.
The Lessee is required to pay the higher of minimum rent, as defined, or a
percentage rent. Percentage rent applicable to room and other hotel revenue
varies by lease and is calculated by multiplying fixed percentages by the total
amounts of such revenues over specified threshold amounts. Percentage rent
related to food and beverage revenues is generally at 6% of such revenues. Both
the threshold amounts used in computing percentage rent and minimum rent on room
and other hotel revenues are subject to annual adjustments as of January 1 of
each year based on increases in the United States Consumer Price Index.

     Other than real estate and personal property taxes, casualty insurance and
capital improvements, which are obligations of the Partnership, the Percentage
Leases require the Lessee to pay all costs and expenses incurred in the
operation of the Hotels.

     The Percentage Leases require the Lessee to indemnify the Company against
all liabilities, costs and expenses incurred by, imposed on or asserted against
the Partnership in the normal course of operating the Hotels.

5.  MANAGEMENT AGREEMENTS:

     A subsidiary of the Lessee manages hotel properties not owned by the
Partnership pursuant to management agreements. Under the terms of the management
agreements, the subsidiary receives a base management fee ranging from 2% to 4%
of the revenues of the managed properties. Under certain agreements, additional
incentive

                                      F-38
<PAGE>   71
                           BOYKIN MANAGEMENT COMPANY

                   LIMITED LIABILITY COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

management fees can be earned in the event certain specified operating results
are achieved. The management agreements expire at various dates through 2006.
Included in other revenue in the accompanying statements of operations for the
1997 and 1996 periods are $1,062 and $122 of management fee revenues.

     Future minimum rent (ignoring CPI increases) to be paid by the Lessee under
the Percentage Leases at December 31, 1997 for each of the years in the period
1998 to 2002 and in total thereafter is as follows:

<TABLE>
<S>                                                           <C>
1998........................................................  $ 25,204
1999........................................................    25,204
2000........................................................    25,204
2001........................................................    19,002
2002........................................................    12,171
Thereafter..................................................    36,692
                                                              --------
                                                              $143,477
                                                              ========
</TABLE>

     Rent expense for the year ended December 31, 1997 and the period November
4, 1996 through December 31, 1996 was $34,834 and $3,258, respectively, of which
approximately $12,303 and $306, respectively, was in excess of minimum rent.

6.  COMMITMENTS AND CONTINGENCIES:

  Claims and Legal Matters

     The Lessee is involved in claims and legal matters incidental to its
businesses. In the opinion of management, the ultimate resolution of these
matters will not have a material impact on the financial position or results of
operations of the Lessee.

  Franchise Agreements

     Under the terms of hotel franchise agreements, annual payments for
franchise royalties and reservation and advertising services are due from the
Hotels. For eleven of the Hotels, fees are computed based upon percentages of
gross room revenues. At December 31, 1997, the franchise royalty fees payable by
the Hotels ranged from 3% to 6% of room revenues while the fees for advertising
services ranged from .8% to 4.0%. For one of the Melbourne, Florida hotels, the
payment is a flat fee which will be $12 per month in 1998; in 1999 and
thereafter, the fee will be at 6% of gross room revenues. The franchise
agreements expire at various dates through 2018. The hotel located in French
Lick, Indiana has no franchise affiliation.

  Other

     Robert W. Boykin and John E. Boykin have entered into an agreement with the
Company pursuant to which they have agreed that any distributions received from
the Lessee (in excess of their tax liabilities with respect to the income of the
Lessee) for a period of 10 years, and any net cash proceeds from any sale of the
Lessee within the same 10-year period, will be used to purchase units in the
Partnership or common shares of the Company. Any units or common shares so
purchased must be held for at least two years from the purchase date.

     Pursuant to an agreement with the Company, during the first 10 years after
the inception of operations of the Lessee, 50% of the Lessee's consolidated
earnings (after distributions to cover income taxes) will be retained in the
Lessee until its consolidated net worth reaches 25% of the aggregate annual rent
payments under the Percentage Leases (and will be retained thereafter during
that period to maintain that level).

                                      F-39
<PAGE>   72
                           BOYKIN MANAGEMENT COMPANY

                   LIMITED LIABILITY COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

7.  RELATED PARTY TRANSACTIONS:

     At December 31, 1997 and 1996, the Lessee had receivables from the
Partnership of $1,069 and $681, respectively, primarily for the reimbursement of
capital expenditure costs incurred on behalf of the Partnership.

     At December 31, 1997 and 1996 the Lessee had payables to the Partnership of
$897 and $306, respectively, for amounts due pursuant to the Percentage Leases.

     In September 1997, the Lessee purchased 20,000 common shares of the Company
for cash consideration of $491. During 1997, the Lessee recognized $9 of
dividend income on this investment.

8.  FAIR VALUE OF FINANCIAL INSTRUMENTS:

     SFAS No. 107 requires all entities to disclose the fair value of certain
financial instruments in their financial statements. The primary financial
instruments of the Lessee are cash and cash equivalents, the fair value of which
approximates historical carrying value due to the short maturity of these
instruments, and the investment in the common shares of the Company, which are
carried at the year end market value as discussed in Note 3.

9.  EMPLOYEE BENEFIT PLANS:

     During 1997, the Lessee established a 401(k) plan for substantially all
employees under which a portion of employee contributions are matched by the
Lessee. The Lessee's matching contributions for 1997 were $91.

     Effective January 1, 1997, the Lessee established an incentive compensation
plan for certain senior executives. Participant eligibility and awards under the
plan are at the discretion of the board of directors. The dollar amounts of
individual awards are deemed to be invested in common shares of the Company, and
the balance in each individual participant's account fluctuates with changes in
the market value of the Company shares credited to the respective participant
accounts. The Lessee pays to each participant cash equal to the per share
dividend amount paid by the Company multiplied by the number of Company shares
credited to each participant's account. Participants become fully vested in
their account balances upon the completion of five years of service with the
Lessee or its predecessor. If a participant has been so employed for at least 3
years, but less than 4 full years, the individual is one-third vested, and if
the individual has been employed for at least 4 years, but less than 5 years,
the individual is two-thirds vested. For the year ended December 31, 1997, the
Lessee has recorded a provision of $199 with respect to this plan, which
represents the amortization over the vesting period of the prepaid compensation
associated with the awards.

10.  PRO FORMA FINANCIAL INFORMATION (UNAUDITED):

     The following unaudited pro forma condensed statements of operations for
the years ended December 31, 1997 and 1996 are presented as if the Lessee leased
and operated from January 1, 1996 all of the Hotels leased and operated as of
December 31, 1997.

                                      F-40
<PAGE>   73
                           BOYKIN MANAGEMENT COMPANY

                   LIMITED LIABILITY COMPANY AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

     The pro forma condensed statements of operations do not purport to present
what actual results of operations would have been if the Hotels were operated by
the Lessee pursuant to the Percentage Leases from January 1, 1996 or to project
results for any future period.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                              -----------------
                                                               1997      1996
                                                              -------   -------
                                                                 (UNAUDITED)
<S>                                                           <C>       <C>
Room revenue................................................  $74,682   $69,717
Food and beverage revenue...................................   31,136    30,297
Other hotel revenue.........................................    7,938     7,625
Other revenue...............................................    2,477     2,777
                                                              -------   -------
          Total revenues....................................  116,233   110,416
Departmental expenses of hotels.............................   43,707    42,224
Costs of goods sold of nonhotel operations..................      619     1,686
Percentage lease expense....................................   35,924    33,268
Other expenses..............................................   34,639    32,068
                                                              -------   -------
          Net income........................................  $ 1,344   $ 1,170
                                                              =======   =======
</TABLE>

11.  SUBSEQUENT EVENTS:

     The Company entered into an Agreement and Plan of Merger (the Merger
Agreement) on December 30, 1997 with Red Lion Inns Limited Partnership (Red
Lion), under which the Company agreed to acquire the portfolio of 10
Doubletree-licensed hotels owned by Red Lion (Doubletree Hotels). The Doubletree
Hotels contain 3,062 guest rooms and are located in California, Oregon,
Washington, Colorado, Idaho and Nebraska. Effective January 1, 1998, the
Doubletree Hotels were leased or subleased to Westboy LLC, a wholly-owned
subsidiary of the Lessee. Pursuant to this lease agreement, Westboy LLC is
required to pay a base monthly rental of $1,700 plus a percentage rental. The
lessor is responsible for certain costs of the Doubletree Hotels, including
property taxes, property insurance, capital expenditures, depreciation expense
and ground lease rental. If the proposed merger is consummated, the Doubletree
Hotels will continue to be managed by Doubletree and to be leased to Westboy
LLC.

                                      F-41
<PAGE>   74

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Boykin Management Company, Purchasing Concepts, Inc.
and Bopa Design Company:

     We have audited the accompanying combined statement of net assets of Boykin
Management Company (an Ohio corporation), Purchasing Concepts, Inc. (an Ohio
corporation) and Bopa Design Company (an Ohio corporation) as of November 3,
1996 and the related combined statements of revenues and expenses for the period
ended January 1, 1996 through November 3, 1996 and for the year ended March 31,
1996. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these 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.

     The accompanying financial statements have been prepared to present the
combined net assets of Boykin Management Company, Purchasing Concepts, Inc. and
Bopa Design Company which were merged into or contributed to subsidiaries of
Boykin Management Company Limited Liability Company pursuant to the formation
transactions referred to in Note 2 and the related combined revenues and
expenses of such businesses. These financial statements are not intended to be a
complete presentation of the combined assets, liabilities, revenues and expenses
of Boykin Management Company, Purchasing Concepts, Inc. and Bopa Design Company.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined net assets of Boykin Management Company,
Purchasing Concepts, Inc. and Bopa Design Company as of November 3, 1996 merged
into or contributed to subsidiaries of Boykin Management Company Limited
Liability Company pursuant to the formation transactions referred to in Note 2,
and the revenues and expenses related to such net assets for the period January
1, 1996 through November 3, 1996 and for the year ended March 31, 1996 in
conformity with generally accepted accounting principles.

                                          ARTHUR ANDERSEN LLP

Cleveland, Ohio,
  February 25, 1997.

                                      F-42
<PAGE>   75

              BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC.
                            AND BOPA DESIGN COMPANY

                        COMBINED STATEMENT OF NET ASSETS
                             AS OF NOVEMBER 3, 1996

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<S>                                                           <C>
Cash and cash equivalents...................................  $    7
Management fees and other receivables due from:
  Affiliates................................................   5,048
  Other.....................................................     516
Property and equipment, net.................................     355
Prepaid expenses, deposits and other assets.................      39
                                                              ------
          Total assets......................................   5,965
                                                              ------
Accounts payable:
  Affiliates................................................      97
  Bank overdraft liability..................................     258
  Other.....................................................     148
Advance billings for design services........................      43
Accrued payroll.............................................     230
Other accrued expenses......................................     482
Notes Payable...............................................   1,420
                                                              ------
          Total liabilities.................................   2,678
                                                              ------
Net Assets..................................................  $3,287
                                                              ======
</TABLE>

            The accompanying notes to combined financial statements
                are an integral part of this combined statement.
                                      F-43
<PAGE>   76

              BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC.
                            AND BOPA DESIGN COMPANY

                  COMBINED STATEMENTS OF REVENUES AND EXPENSES
               FOR THE PERIOD JANUARY 1, THROUGH NOVEMBER 3, 1996
                       AND THE YEAR ENDED MARCH 31, 1996

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                PERIOD
                                                              JANUARY 1,
                                                                THROUGH     YEAR ENDED
                                                              NOVEMBER 3,    MARCH 31,
                                                                 1996          1996
                                                              -----------   -----------
<S>                                                           <C>           <C>
Revenues:
  Management fees --
     Affiliates.............................................    $3,402        $3,817
     Other..................................................       731           337
  Design and other fees --
     Affiliates.............................................     1,646         2,819
     Other..................................................     1,435         1,212
  Interest income --
     Affiliates.............................................       225           268
     Other..................................................        --             5
  Other.....................................................       203           175
                                                                ------        ------
          Total revenues....................................     7,642         8,633
                                                                ------        ------
Expenses:
  Cost of sales and operating expenses......................     3,003         3,720
  Selling, general and administrative expenses..............     2,943         2,733
  Depreciation and amortization expense.....................        81            85
  Rent......................................................       100           105
  Interest..................................................        91           170
  Other, net................................................       (38)           --
                                                                ------        ------
          Total expenses....................................     6,180         6,813
                                                                ------        ------
Revenues in excess of expenses..............................    $1,462        $1,820
                                                                ======        ======
</TABLE>

            The accompanying notes to combined financial statements
               are an integral part of these combined statements.
                                      F-44
<PAGE>   77

              BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC.
                            AND BOPA DESIGN COMPANY

                   AS OF NOVEMBER 3, 1996 AND MARCH 31, 1996

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                         (DOLLAR AMOUNTS IN THOUSANDS)

1.  DESCRIPTION OF BUSINESSES:

     Boykin Management Company (BMC), a wholly owned subsidiary of The Boykin
Company (TBC), and certain of its subsidiaries managed and operated full and
limited service hotels located throughout the United States pursuant to
management agreements. See Note 4 for further discussion of the management
agreements. Purchasing Concepts, Inc. (PCI), related to TBC through common
ownership, provided national purchasing services to hotels and restaurants. Bopa
Design Company (doing business as Spectrum Services), a wholly owned subsidiary
of TBC since January 1, 1996, provided interior design services to hotels and
other businesses. Certain of the hotels managed by BMC and served by PCI and
Spectrum Services were related to BMC, PCI and Spectrum Services through common
ownership.

2.  BASIS OF PRESENTATION:

     Pursuant to formation transactions related to the November 4, 1996 initial
public offering of Boykin Lodging Company, BMC and Spectrum Services merged into
subsidiaries of Boykin Management Company Limited Liability Company (BMCL), a
newly formed Ohio Limited Liability Company. Prior to such mergers, BMC and
Spectrum Services transferred certain assets and liabilities to TBC pursuant to
an Assignment and Assumption Agreement. In addition, PCI contributed its assets
to a subsidiary of BMCL and that subsidiary assumed PCI's liabilities.

     BMCL and its subsidiaries are the successors to the businesses of BMC, PCI
and Spectrum Services. BMCL is the lessee of nine hotels formerly affiliated
with TBC which were acquired by Boykin Hotel Properties, L.P., a partnership in
which Boykin Lodging Company is the general partner. The hotels are leased
pursuant to long-term leases which provide for the payment of rents based on
percentages of hotel revenues.

     The accompanying financial statements present on a historical combined
basis the net assets of BMC, PCI and Spectrum Services that ultimately were
merged into or contributed to BMCL and its subsidiaries and the related revenues
and expenses of such businesses. Assets and liabilities of BMC, PCI and Spectrum
Services which were not merged into or contributed to BMCL and its subsidiaries
and the items of revenues and expenses related to such assets and liabilities
have been excluded from the accompanying financial statements. Accordingly, the
accompanying financial statements are not intended to be a complete presentation
of the combined assets, liabilities, revenues and expenses of BMC, PCI and
Spectrum Services (collectively, the Combined Entities).

3.  SIGNIFICANT ACCOUNTING POLICIES:

     The accompanying financial statements have been prepared on the accrual
basis of accounting. All significant intercompany balances and transactions have
been eliminated.

  Accounting Periods

     BMC had a March 31 fiscal year-end, whereas PCI and Spectrum Services
utilized calendar year-ends. The accompanying financial statements for the year
ended March 31, 1996 combine the accounts of BMC as of and for the year ended
March 31, 1996 with the accounts of PCI and Spectrum Services as of and for the
year ended December 31, 1995. Such combined period is referred to as the year
ended March 31, 1996. The accompanying financial statements for the period
January 1, 1996 through November 3, 1996 combine the accounts of BMC, PCI and
Spectrum Services as of November 3, 1996 and for the period January 1, 1996
through November 3, 1996. For the period ended November 3, 1996, the operating
results of BMC have been adjusted to include the

                                      F-45
<PAGE>   78
              BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC.
                            AND BOPA DESIGN COMPANY

              NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED

three-month period January 1, 1996 through March 31, 1996. The total revenues
and revenues in excess of expenses of BMC included in the combined statements of
revenues and expenses for both the year ended March 31, 1996 and the period
January 1, 1996 through November 3, 1996 were $1,006 and $208, respectively.

  Cash and Cash Equivalents

     All highly liquid investments with an original maturity of three months or
less are considered to be cash equivalents.

  Income Taxes

     Income tax attributes of the Combined Entities were not assumed by BMCL or
its subsidiaries. As such, the accompanying combined statements of net assets
include no accrued or deferred income tax liabilities nor any future tax
benefits. The accompanying combined statements of revenues and expenses do not
reflect any federal income tax provisions as BMCL and its subsidiaries were
formed as pass-through entities for tax purposes.

     The taxable income of BMC was included in the consolidated federal income
tax return of its parent company, TBC. PCI and Spectrum Services (prior to
January 1, 1996) were S Corporations for federal income tax reporting purposes.

  Property and Equipment, Net

     Property and equipment, net is comprised of the following at November 3,
1996:

<TABLE>
<CAPTION>
                                                              NOVEMBER 3,
                                                                 1996
                                                              -----------
<S>                                                           <C>
Leasehold improvements......................................     $132
Furniture and equipment.....................................      696
                                                                 ----
                                                                  828
Less-Accumulated depreciation and amortization..............     (473)
                                                                 ----
                                                                 $355
                                                                 ====
</TABLE>

     Property and equipment are stated at cost. Depreciation is computed using
the straight-line and declining balance methods based upon the following
estimated useful lives:

<TABLE>
<S>                                                           <C>
Leasehold improvements......................................  7-10 years
Furniture and equipment.....................................  3-10 years
</TABLE>

     Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulated depreciation are removed from the
accounts and the gain or loss is included in the statement of revenues and
expenses.

  Revenue Recognition

     Revenue is recognized as earned pursuant to the terms of hotel management
agreements with respect to BMC, and as the services of PCI and Spectrum Services
are rendered. Ongoing credit evaluations are performed and an allowance for
potential credit losses is provided against the portion of accounts receivable
which is estimated to be uncollectable. Such losses have been within
management's expectations.

                                      F-46
<PAGE>   79
              BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC.
                            AND BOPA DESIGN COMPANY

              NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED

  Management's Use of Estimates in the Preparation of Financial Statements

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

4.  REVENUES:

     BMC has management agreements with several entities to manage the
operations of hotels and restaurants. Generally, BMC receives a fee based upon
percentages of revenues. In certain management contracts, BMC is entitled to
additional incentive fees in the event the managed property achieves specified
operating results. Certain contracts also include limitations on management
fees, or restrict payment of earned fees to BMC based upon the defined cash flow
of the related property. PCI provides national purchasing services to hotels and
restaurants and Spectrum Services provides interior design services to hotels
and other businesses.

     Revenues from affiliates in the accompanying combined statements of
revenues and expenses represent revenues earned by the Combined Entities on
goods or services provided to various hotel properties in which the respective
owners of the Combined Entities or their affiliates had direct or indirect
ownership interests.

     Other revenues consisted primarily of telephone commissions.

5.  NOTES PAYABLE:

     Notes payable consisted of the following:

<TABLE>
<CAPTION>
                                                              NOVEMBER 3,
                                                                 1996
                                                              -----------
<S>                                                           <C>
Installment note payable to a bank in quarterly installments
  of $75, plus interest at prime plus  1/2%; last
  installment due September 1, 1999; guaranteed by TBC and
  certain TBC shareholders..................................    $  775
$1,000 line of credit with a bank, due on demand; bearing
  interest at prime; guaranteed by TBC and certain TBC
  shareholders..............................................       645
                                                                ------
                                                                $1,420
                                                                ======
</TABLE>

     All of the debt shown above was retired by BMCL upon completion of the
formation transactions discussed in Note 2.

6.  COMMITMENTS AND CONTINGENCIES:

     BMC was a guarantor of the mortgage debt (only in the event certain
specified limited events occur) of the following entities:

<TABLE>
<CAPTION>
                                                                 DEBT
                                                              OUTSTANDING
                                                              NOVEMBER 3,
                                                                 1996
                                                              -----------
<S>                                                           <C>
Borrower:
  Melbourne Oceanfront Hotel Associates.....................    $13,129
  Fort Myers Hotel Partnership..............................      4,951
  Berkeley Marina Associates Limited Partnership............     29,290
  Pacific Ohio Partners.....................................     19,543
</TABLE>

                                      F-47
<PAGE>   80
              BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC.
                            AND BOPA DESIGN COMPANY

              NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED

     All of the guaranteed debt shown above was paid off by Boykin Hotel
Properties, L.P. on November 4, 1996.

     In October 1992, BMC entered into a five-year lease agreement for office
space. The lease provides for two, three-year renewal options. The annual rent
is $126. As an incentive to enter into the lease, BMC received a $70 payment
from the lessor which is being recognized as a reduction of rent expense on a
straight-line basis over the five-year lease term.

     The Combined Entities are involved in claims and legal matters incidental
to their businesses. In the opinion of management of the Combined Entities, the
ultimate resolution of these matters will not have a material impact on the
financial position or the results of operations of the Combined Entities.

7.  RELATED PARTY TRANSACTIONS:

     Management fees and other receivables due from affiliates are comprised of
the following at November 3, 1996:

<TABLE>
<CAPTION>
                                                              NOVEMBER 3,
                                                                 1996
                                                              -----------
<S>                                                           <C>
Management fees receivable..................................    $1,160
Design fees receivable......................................       140
Loans and interest receivable from Boykin Columbus Joint
  Venture (BCJV)............................................     3,109
Receivable from Boykin Lodging Company......................       514
Other (reimbursable expenses, etc.).........................       125
                                                                ------
                                                                $5,048
                                                                ======
</TABLE>

     In general, the above amounts are due from partnerships or joint ventures
in which certain owners and officers of PCI, Spectrum Services or TBC, had
ownership interests. These partnerships or joint ventures owned hotel properties
which were managed by BMC.

     The shareholders of TBC, certain of their family members and certain
officers of BMC are material partners in BCJV. BMC advanced funds to BCJV in
connection with the construction of a hotel in Columbus, Ohio and to fund
operating deficits of that hotel. The loans receivable from BCJV accrued
interest at 10% per annum. Interest income earned on the loans to BCJV was $223
and $260 in the period January 1, 1996 through November 3, 1996 and the year
ended March 31, 1996, respectively. The loans and interest receivable from BCJV
were paid off in connection with the initial public offering of Boykin Lodging
Company.

     The receivable from Boykin Lodging Company represents expenses incurred by
BMC related to the initial public offering of Boykin Lodging Company. These
expenses were reimbursed from the proceeds of the initial public offering.

     Accounts payable to affiliates are comprised of property insurance retro
premium adjustments and telephone commissions received by BMC and payable to the
various affiliated hotels at the respective statement dates.

     Advance billings for design services are related primarily to billings to
affiliates.

     BMC guaranteed the mortgage debt of Fort Myers Hotel Partnership until such
debt was refinanced in May 1995. No guarantee fee was earned in 1996.

8.  FAIR VALUE OF FINANCIAL INSTRUMENTS:

     Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments, whether or not recognized for
financial statement purposes. Disclosure about fair value of financial
instruments is based on pertinent information available to management as of
November 3, 1996. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts which could be realized on
disposition of the

                                      F-48
<PAGE>   81
              BOYKIN MANAGEMENT COMPANY, PURCHASING CONCEPTS, INC.
                            AND BOPA DESIGN COMPANY

              NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED

financial instruments. The use of different market assumptions and/or estimation
methodology may have a material effect on the estimated fair value amounts.

  Cash Equivalents

     Management estimates that the fair value of cash equivalents approximates
carrying value due to the relatively short maturity of these instruments.

  Loans and Interest Receivable

     Management estimates that the fair value of the loans and interest
receivable from BCJV approximates carrying value based upon the discounted
expected cash flows at an interest rate commensurate with the creditworthiness
of BCJV.

  Notes Payable

     Management estimates that the fair values of notes payable approximate
carrying values based upon BMC's effective borrowing rate for issuance of debt
with similar terms and remaining maturities.

                                      F-49
<PAGE>   82

                                    PART IV

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

     (a) See page F-1 for an index to financial statements.

<TABLE>
<CAPTION>
EXHIBITS
--------
<C>          <S>
  2.1 ***    Agreement and Plan of Merger dated as of December 30, 1997
             by and among Red Lion Inns Limited Partnership, Red Lion
             Properties, Inc., Red Lion Inns Operating L.P., Boykin Hotel
             Properties, L.P., Boykin Lodging Company, Boykin Acquisition
             Corporation I, Inc., Boykin Acquisition Corporation II,
             Inc., and Boykin Acquisition Partnership, L.P.
  3.1 *      Amended and Restated Articles of Incorporation
  3.2 *      Code of Regulations
  4.1 *      Specimen Share Certificate
 10.1 *      Limited Partnership Agreement of Boykin Hotel Properties,
             L.P.
 10.2 *      Form of Registration Rights Agreement
 10.3 *      Long-Term Incentive Plan
 10.4 *      Directors' Deferred Compensation Plan
 10.5 *      Employment Agreement between the Company and Robert W.
             Boykin
 10.6 *      Employment Agreement between the Company and Raymond P.
             Heitland
 10.7 *      Employment Agreement between the Company and Mark L. Bishop
 10.8 *      Form of Percentage Lease
 10.9 *      Intercompany Convertible Note
 10.10*      Agreements with General Partners of the Contributed
             Partnerships
 10.11*      Form of Noncompetition Agreement
 10.12*      Alignment of Interests Agreement
 10.13**     Description of Employment Arrangement between the Company
             and Paul A. O'Neil
 11          Statement re Computation of Per Share Earnings
 23.1        Consent of Independent Public Accountants
 27.1        Financial Data Schedule
 27.2        Financial Data Schedule
 27.3        Financial Data Schedule
 27.4        Financial Data Schedule
 27.5        Financial Data Schedule
 99.1 ***    Partnership Interest Assignment Agreement dated as of
             December 30, 1997 by and among Red Lion Properties, Inc.,
             Boykin Hotel Properties, L.P., Boykin Lodging Company and
             West Doughboy LLC.
 99.2 ***    Percentage Lease Agreement dated as of December 30, 1997 by
             and between Red Lion Inns Operating L.P. and Westboy LLC
 99.3 ***    Termination of Management Agreement dated as of December 30,
             1997 by and between Red Lion Inns Operating L.P. and Red
             Lion Hotels, Inc.
 99.4 ***    Management Agreement dated as of December 30, 1997 by and
             between Red Lion Hotels, Inc. and Westboy LLC.
 99.5 ***    Owner Agreement dated as of December 30, 1997 by and among
             Red Lion Inns Operating L.P., Westboy LLC and Red Lion
             Hotels, Inc.
 99.6 ***    Joint Press Release of Red Lion Inns Limited Partnership and
             Boykin Lodging Company dated as of December 30, 1997.
</TABLE>

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

  * Incorporated by reference from Amendment No. 3 to the Company's Registration
    Statement on Form S-11 (Registration No. 333-6341) (the "Form S-11") filed
    on October 24, 1996. Each of the above exhibits has the same exhibit number
    in the Form S-11.

 ** Incorporated by reference from the Company's Form 10-Q for the quarter ended
    June 30, 1997.

*** Incorporated by reference from the Company's Form 8-K filing on January 8,
    1998 related to the Proposed Merger.

     (b) No reports on Form 8-K were filed during the quarter ended December 31,
         1997. Forms 8-K were filed during the quarter ended March 31, 1998 with
         respect to the Proposed Merger, the Offering and the acquisition of the
         1998 Hotels.
<PAGE>   83

                                   SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

<TABLE>
<S>             <C>
March 31, 1998  BOYKIN LODGING COMPANY

                By: /s/ ROBERT W. BOYKIN
                ------------------------------------------------
</TABLE>

     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<S>             <C>
March 31, 1998  /s/ ROBERT W. BOYKIN
                ------------------------------------------------
                Robert W. Boykin
                Director, Chairman of the Board,
                President and Chief Executive Officer
                (Principal Executive Officer)

March 31, 1998  /s/ RAYMOND P. HEITLAND
                ------------------------------------------------
                Raymond P. Heitland
                Director, Chief Financial Officer
                (Principal Accounting Officer)

March 31, 1998
                ------------------------------------------------
                Ivan J. Winfield
                Director

March 31, 1998  /s/ LEE C. HOWLEY, JR.
                ------------------------------------------------
                Lee C. Howley, Jr.
                Director

March 31, 1998
                ------------------------------------------------
                Frank E. Mosier
                Director

March 31, 1998  /s/ WILLIAM H. SCHECTER
                ------------------------------------------------
                William H. Schecter
                Director

March 31, 1998  /s/ ALBERT T. ADAMS
                ------------------------------------------------
                Albert T. Adams
                Director
</TABLE>
<PAGE>   84

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                           SEQUENTIALLY
                                                                             NUMBERED
                                       EXHIBITS                               PAGES
                                       --------                            ------------
<C>          <S>                                                           <C>
  2.1        Agreement and Plan of Merger dated as of December 30, 1997        ***
             by and among Red Lion Inns Limited Partnership, Red Lion
             Properties, Inc., Red Lion Inns Operating L.P., Boykin Hotel
             Properties, L.P., Boykin Lodging Company, Boykin Acquisition
             Corporation I, Inc., Boykin Acquisition Corporation II,
             Inc., and Boykin Acquisition Partnership, L.P.
  3.1        Amended and Restated Articles of Incorporation                    *
  3.2        Code of Regulations                                               *
  4.1        Specimen Share Certificate                                        *
 10.1        Limited Partnership Agreement of Boykin Hotel Properties,         *
             L.P.
 10.2        Form of Registration Rights Agreement                             *
 10.3        Long-Term Incentive Plan                                          *
 10.4        Directors' Deferred Compensation Plan                             *
 10.5        Employment Agreement between the Company and Robert W.            *
             Boykin
 10.6        Employment Agreement between the Company and Raymond P.           *
             Heitland
 10.7        Employment Agreement between the Company and Mark L. Bishop       *
 10.8        Form of Percentage Lease                                          *
 10.9        Intercompany Convertible Note                                     *
 10.10       Agreements with General Partners of the Contributed               *
             Partnerships
 10.11       Form of Noncompetition Agreement                                  *
 10.12       Alignment of Interests Agreement                                  *
 10.13       Description of Employment Arrangement between the Company         **
 11          Statement re Computation of Per Share Earnings
 23.1        Consent of Independent Public Accountants
 27.1        Financial Data Schedule
 27.2        Financial Data Schedule
 27.3        Financial Data Schedule
 27.4        Financial Data Schedule
 27.5        Financial Data Schedule
 99.1        Partnership Interest Assignment Agreement dated as of             ***
             December
 99.2        30, 1997 by and among Red Lion Properties, Inc., Boykin           ***
             Hotel Properties, L.P., Boykin Lodging Company and West
             Doughboy LLC. Percentage Lease Agreement dated as of
             December 30, 1997 by and between Red Lion Inns Operating
             L.P. and Westboy LLC
 99.3        Termination of Management Agreement dated as of December 30,      ***
             1997 by and between Red Lion Inns Operating L.P. and Red
             Lion Hotels, Inc.
 99.4        Management Agreement dated as of December 30, 1997 by and         ***
             between Red Lion Hotels, Inc. and Westboy LLC.
 99.5        Owner Agreement dated as of December 30, 1997 by and among        ***
             Red Lion Inns Operating L.P., Westboy LLC and Red Lion
             Hotels, Inc.
 99.6        Joint Press Release of Red Lion Inns Limited Partnership and      ***
             Boykin Lodging Company dated as of December 30, 1997.
</TABLE>

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

  * Incorporated by reference from Amendment No. 3 to the Company's registration
    statement on Form S-11 (the "Form S-11") filed on (Registration No.
    333-6341) October 24, 1996. Each of the above exhibits has the same exhibit
    number in the Form S-11.

 ** Incorporated by reference from the Company's Form 10-Q for the quarter ended
    June 30, 1997.

*** Incorporated by reference from the Company's Form 8-K filing on January 8,
    1998 related to the Proposed Merger.