Annual Report

Introduction

      We are a NYSE-listed hospitality and leisure company primarily engaged in the ownership, management, development and franchising of mid-scale and upper mid-scale, full service hotels under our Red Lion brand. As of December 31, 2005, our hotel system contained 64 hotels located in 11 states and one Canadian province, with 11,330 rooms and 550,929 square feet of meeting space. We own and operate 35 hotels, of which 22 are wholly owned and 13 are leased. At December 31, 2005, 4 of the owned hotels are held for sale and included as discontinued operations. We also manage 2 hotels owned by third parties and franchise 27 hotels. In addition to our hotel operations, we are engaged in entertainment and real estate operations.

      We own the Red Lion brand which was established over thirty years ago. Today, the Red Lion name is well recognized in the western United States and well regarded by customers. In focus groups and market research, the Red Lion name, logo and recognition for superior service are consistently identified by consumers when asked about their full service lodging selection and habits. With strong identity and three years of reinvestment in infrastructure, brand image enhancement and updated services and standards, Red Lion is set to expand its presence.

      During the past three years, we have developed a new brand image, innovative marketing programs, elevated product and service standards, state of the art technology and comprehensive training and evaluation tools. All of this is to accomplish the goal of delivering consistently genuine service to our guests and setting the foundation for future growth. The Red Lion service ethic is as at home in an urban metropolis as it is in smaller markets. We are not a cookie cutter brand and each of our hotels reflects the local market. While a hotel’s attributes may vary from market to market, our keen adherence to customer service standards and brand touch-points makes guests feel at home no matter where they are.

      We intend to grow our hotel operations primarily by expanding the number of hotels franchised and managed, and also joint ventured or owned under the Red Lion brand. We expect to add anchor properties in key Western U.S. urban markets complemented by leading properties in secondary cities. We intend to progressively move east leveraging the momentum of our Western growth.

      Our hotels are known for their meeting facilities and superior food and beverage operations. Our mix of business is well balanced between group business, business travelers, and the leisure traveler with the mix varying by location. We maintain and manage our own Central Reservation Call Center with links to the various travel agent global distribution systems (“GDS”) and the electronic distribution channels on the internet including our branded website www.redlion.com . To support our owned, managed and franchised hotels we provide all the services typical in our industry: marketing, sales, advertising, frequency program,

revenue management, procurement, quality assurance, education and training, design and construction. In 2005, our sales and marketing efforts and our reservation channels delivered approximately 36% of a hotel’s room revenue.

      In 2005 we dedicated significant resources to several key brand initiatives. We improved our technology infrastructure, introduced our revitalized brand image, changed our corporate name, and announced an aggressive five-year growth plan to double to 100 the number of markets in which Red Lion has a presence. Most importantly, by December 31, 2005, we were well underway with our hotel renovation plan to improve comfort, freshen décor and upgrade technology at our owned and leased hotels as announced in November 2004. There was $19.6 million in capital expenditures related to the hotels segment during 2005 and at year end, 21 of the company’s 31 continuing owned and leased hotels were in active renovations or room renovations were substantially complete.

      In November 2004, we announced our plan to divest 11 of our non-strategic owned hotels, one of our commercial buildings and certain other non-core properties (collectively referred to as “the divestment properties”). We completed the sale of seven of those hotels and the commercial building in 2005, and used the proceeds to finance the renovation program. The activities of those original 11 hotels and the real estate property are considered discontinued operations under generally accepted accounting principles. At December 31, 2005, four of those hotels remained in the system, but were still considered discontinued operations. Unless otherwise identified using phrases such as “from continuing operations”, all references to system hotels, owned or leased hotels, hotel statistics, and measurements of financial performance such as net income and EBITDA include the activities of those discontinued operations.

      For the year ended December 31, 2005, we reported a net income of approximately $4.5 million, compared to net loss of approximately $6.3 million in 2004. These results were materially impacted by the activities of discontinued operations, including gains on dispositions and impairments. For the year ended December 31, 2005, we reported a net loss from continuing operations of approximately $1.1 million, compared to a net loss of approximately $900 thousand in 2004. Revenues from continuing operations in 2005 were $165.0 million compared to $163.1 million in 2004, inclusive of a $3.7 million increase in hotels segment revenues. Operating income for 2005 was $11.6 million compared to $11.2 million in 2004.

      In 2006 and beyond, we intend to focus on capitalizing on the momentum created in 2005 and the continued successful implementation of our strategies. We are committing our time and talents to completing our renovation plan, continuing our expansion program, and making Red Lion a preferred hotel brand for guests, owners and investors.

      For the year ended December 31, 2005, we recorded fully diluted earnings applicable to common shareholders of $0.34 per common share compared to a loss per common share of $(0.51) for the year ended December 31, 2004. Fully diluted losses per common share from continuing operations for those same periods were $(0.09) and $(0.10), respectively. Our EBITDA from continuing operations for the year ended December 31, 2005 was $23.9 million, up 5.9% from 2004 EBITDA of $22.6 million.

      EBITDA represents net income (or loss) before interest expense, income tax benefit or expense, depreciation, and amortization. We utilize EBITDA as a financial measure because management believes that investors find it to be a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core on-going operations. EBITDA from continuing operations is calculated in the same manner, but excludes the operating activities of business units identified as discontinued. As discussed further in Item 6 of this Form  10-K, EBITDA is not intended to represent net income or loss as defined by generally accepted accounting principles in the United States and such information should not be considered as an alternative to net income, cash flows from operations or any other measure of performance prescribed by generally accepted accounting principles in the United States.

      A comprehensive discussion of net income or loss for the years ended December 31, 2005, 2004 and 2003, individual operating unit performances, general corporate expenses and other significant items can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Consolidated Financial Statements and Notes thereto included elsewhere in this annual report.

Overview and Company Strategy

      As discussed above, we are a hospitality and leisure company. Our hotel operations under the Red Lion brand represent approximately 90% of our business. Over the past few years we have made substantial investments in our infrastructure and our product to position the company for growth. We intend to build on the strong brand recognition and identity in the Western United States to expand our presence.

      We intend to deliver revenue growth through both internal and external growth efforts, we expect that internal growth will result from the investments we have made in our product and service delivery. In November 2004, we announced a plan to significantly upgrade our owned and leased hotel portfolio. By December 31, 2005, we were well underway with our hotel renovation plan to improve comfort, freshen décor and upgrade technology at these hotels. At year end, 21 of our 31 continuing owned and leased hotels were in active renovations or room renovations were substantially complete. Guest reaction to the renovated hotels has been positive and we have been able to increase our average daily rates and occupancy in the renovated hotels. In the fourth quarter of 2005, we had substantially completed the room renovations at three hotels. RevPAR at these hotels during the fourth quarter increased 14.5% in the aggregate, driven by an increase of 9.4% in ADR and a 2.7 point increase in occupancy. (See the definition of the terms Rev PAR and ADR, commonly used in the hospitality industry, on Page 5.)

      Our external growth will be focused on expanding the number of hotels under the Red Lion brand. We plan to initially focus our efforts on the Western United States and Canada by pursuing a “hub and spoke” pattern of establishing brand penetration in key cities, followed by expansion into adjoining markets. In 2005, we announced our goal of expanding into 100 markets in five years from our current base of 50 markets. While the majority of our growth will come from adding additional franchised and managed hotels, in key urban markets we will also consider joint ventures or wholly owned hotels.

      Through our entertainment division, which includes our TicketsWest.com, Inc. subsidiary (“TicketsWest”), we provide event ticket distribution services and promote and present a variety of entertainment productions. TicketsWest offers ticketing inventory management systems, call center services and outlet and electronic channel distribution. We have also developed an electronic ticketing platform that is integrated with our electronic hotel distribution system, allowing us to cross-sell leisure and entertainment packages.

      Our real estate division engages in the traditional real estate related services that we have pursued since we were originally founded, including developing, managing and acting as a broker for sales and leases of commercial and multi-unit residential properties. Our real estate division derives a substantial part of its revenues from fees it generates from services it provides to third parties.

      We trace our history back to 1937, with the founding of our predecessor as a general commercial real estate development and management business. In the 1970s, our predecessor began focusing on the development and management of hotels. Its successor company was incorporated in the State of Washington on April 25, 1978. We continued to grow our hotel business under the brand name Cavanaughs throughout the 1980s and 1990s, and in 1998 we completed the initial public offering of our common stock. We acquired WestCoast Hotels, Inc. on December 31, 1999, which added more than 4,800 rooms in 20 cities to our system of hotels, enhanced our presence in certain key western “hub” markets, and launched our company into the franchise business. Following this acquisition, we rebranded our Cavanaughs hotels to the WestCoast brand and changed our name to WestCoast Hospitality Corporation. On December 31, 2001, we acquired Red Lion Hotels, Inc., which added more than 7,400 rooms in 40 cities to our system of hotels, further enhanced our presence in a number of “hub” markets and afforded us the opportunity to expand our franchise business to include the Red Lion brand. In September 2005, the company changed its name to Red Lion Hotels Corporation to convey its focus on the Red Lion brand. The company also launched its new Red Lion brand image, new website and adopted a new corporate logo.

      Our senior management team, led by our President and Chief Executive Officer, Arthur M. Coffey, brings an experienced and innovative approach to the management of our operations. Our executive committee members have an average of over 20 years of hospitality industry experience. The balance of our senior management team is comprised of officers with strengths including hotel development, ownership and

management; e-commerce; franchising, sales and marketing; food and beverage management; entertainment production and real estate services. Their extensive expertise, along with their diverse working backgrounds provides our company with a broad perspective from which we can make strategic management and operational decisions.

Hospitality Industry Performance Measures

      We believe that the following performance measures, which are widely used in the hospitality industry and appear throughout this annual report, are important to our discussion of operating performance:

      Comparable hotels are hotels that have been owned, leased, managed or franchised by us for more than one year. Throughout this report, unless otherwise stated, RevPAR, ADR and average occupancy statistics are calculated using statistics for comparable hotels. When presented in this report, the above performance measures will be identified as belonging to a particular market segment, system wide, or for continuing operations versus discontinued operations or total combined operations.

Business Segments

      We operate in four reportable segments: hotels; franchise and management; entertainment; and real estate. The hotels segment derives revenue primarily from guest room rentals and food and beverage operations at our owned and leased hotels. The franchise and management segment is engaged primarily in licensing our brands to franchisees and managing hotels for third party owners. This segment generates revenue from franchise fees that are typically based on a percent of room revenues and are charged to hotel owners in exchange for the use of our brands and access to our central services programs. These programs include the reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. It also reflects revenue from management fees charged to the owners of our managed hotels, typically based on a percentage of the hotel’s gross revenues plus an incentive fee based on operating performance. The entertainment segment derives revenue primarily from ticketing services and promotion and presentation of entertainment productions. The real estate segment generates revenue from owning, managing, leasing and developing commercial retail and office properties and multi-unit residential properties.

      Effective April 1, 2005, we re-organized the presentation of what we consider our operating segments under the provisions of FASB Statement No. 131 “Disclosures about Segments of an Enterprise and Related Information” to closer reflect how we evaluate our business lines. The new presentation is reflected in the accompanying financial statements, notes thereto, in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and this Item 1. All comparative periods have been reclassified to conform to the current presentation.

      The following table illustrates, for the periods indicated, revenue per reportable business segment and the percentage of total revenue generated by each segment, excluding the activities of business units identified as discontinued operations in the consolidated financial statements. For additional information regarding segments, please refer to “Business Segments” in the notes to our consolidated financial statements that are part of this annual report.

Hotel Operations

      Hotel operations include our hotels (hotel and related restaurant/banquet operations), as well as our franchise and management segment.

      We owned 22 hotels with a total of 4,426 rooms and more than 241,000 square feet of meeting space as of December 31, 2005. The number of owned properties includes three hotels for which some or all of the underlying land is leased. The lease expiration dates range from 2014 to 2062. For additional information, refer to “Operating Lease Commitments” in the notes to the consolidated financial statements. We operate restaurants in 21 of our owned hotels.

      As of December 31, 2005 we leased 13 hotels with a total of 2,183 rooms and more than 99,000 square feet of meeting space. Under these leases, we are responsible for hotel operations and management. We recognize revenues and associated expenses with leased hotel operations. Lease terms, with expiration dates ranging from 2020 to 2033 and having renewal provisions, typically require us to pay fixed monthly rent and variable rent based on a percentage of revenue if certain sales thresholds are reached. In addition, we are responsible for repairs and maintenance, operating expenses and management of operations. Refer to “Operating Lease Commitments” in the notes to the consolidated financial statements for additional information. We operate restaurants in 10 of our leased hotels.

      Of these 35 hotels, four have been identified as assets held for sale and are classified as discontinued operations on the consolidated balance sheets and for the consolidated statements of operations. Those four hotels aggregate 821 rooms and approximately 42,000 square feet of meeting space.

      As of December 31, 2005, we managed two third-party owned hotels with a total of 326 rooms and more than 37,000 square feet of meeting space. Under the typical management agreement, we manage virtually all aspects of the hotel’s operations, while the hotel owner is responsible for operating and other expenses. Our management fees are based on a percentage of the hotel’s gross revenue plus an incentive fee based on operating performance.

      As of December 31, 2005, we had franchise arrangements with 27 hotels that were owned and operated by third parties under our licensed brand names. These hotels had at that date a total of 4,395 rooms and more than 171,000 square feet of meeting space. We do not have management or operational responsibility for franchised hotels. However, we do make available certain services to those hotels, which include reservation systems, advertising and national sales, a guest loyalty program, revenue management tools, quality inspections and brand standards. We receive royalties for use of the brand names. We also administer central services programs for the benefit of our system hotels and franchisees.

      The hotels in our system primarily operate under the Red Lion brand. Our Red Lion brand is nationally recognized and is typically associated with three-and four-star full-service hotels. As discussed below, we plan to focus our growth strategy on conversion of new hotels to our Red Lion brand.

      The following tables provide certain information about our system of hotels:

System-wide Hotels as of December 31, 2005:

      Hotel statistics:

Hotel System Growth Strategy

      We intend to grow our hotel operations primarily by increasing the number of hotels franchised and managed under our Red Lion brand, with an initial focus on the western region of the United States and Canada. In 2005, we announced our goal of expanding our presence to 100 markets in five years from our current base of 50 markets. We anticipate that most of our growth will come through conversion of three-and four-star hotels to the nationally recognized Red Lion brand. Our expansion of the Red Lion brand will follow our “hub and spoke” expansion model. Initially, we will seek to achieve a presence in key hub cities. Then we will seek to expand into surrounding areas to increase brand penetration in the market.

      Key to this growth strategy is the completion of our reinvestment campaign in our existing owned and leased Red Lion hotels, one of the most significant facility improvement programs in company history. This investment accelerates our ongoing program to improve hotel quality by increasing customer comfort, freshening decor and modernizing with new technology. We believe that by improving the quality of our existing product in areas where customers’ quality expectations are continuing to grow, we both position our continuing operations to take advantage of the growth potential in our existing markets, and make the Red Lion brand more attractive for franchise opportunities.

      We intend to increase the number of management agreements we have with third-party hotel owners by marketing our management services. We believe that our experience in managing our own hotels and those of third parties gives us a competitive advantage to obtain such agreements.

      Our strategy has been to initially increase occupancy through strategic marketing and investment in our properties, and then to increase rates as demand increases for our rooms. For six consecutive quarters through June 2005, we increased occupancy. We built on this demand by increasing the average daily rate during 2005 in the majority of our markets. We believe that the combined effect of this strategy was that RevPAR for our hotels increased at a faster rate during 2005, than for many of the hotels in our markets that we consider direct competitors.

      Our brand strengthening initiatives, marketing efforts and technological upgrades are achieving desired results. We continue to increase the number of reservations we receive through electronic distribution systems that include our own branded websites and third-party internet channels (alternative distributions systems or ADS). Our central reservations and distribution management technology allows us to manage the yield on these ADS channels on a real-time, hotel-by-hotel basis. We have merchant model agreements with leading

ADS providers, which typically entitle the provider to keep a fixed percentage of the price paid by the customer for each room booked. This allows us to maximize the yield of a typically lower rated market segment. Our focus on driving customers to our branded website made it one of our fastest growing sources of online reservations during 2005, allowing us to further maximize our yield on those types of bookings. Our success reflects our management of these distribution channels and our merchant model agreements.

      Through 2004 and 2005 we continued to increase bookings as a result of our focus on direct sales, the “Stay Comfortable” advertising campaign and the “We Promise or We Pay” branded website booking initiative. The “We Promise or We Pay” initiative is designed to encourage guests to book on our branded website, www.redlion.com. Through this initiative, we guarantee to our guests that our branded websites will provide the lowest rate available compared to non-opaque ADS channels. We also launched a marketing campaign designed specifically to increase awareness of our Net4Guests and room amenity upgrade programs known as “Stay Comfortable.” Net4Guests provides hotel guests and GuestAwards loyalty program members access to free high-speed wireless internet.

Guest Loyalty Program

      Our “GuestAwards” guest loyalty program provides our customer base with the flexibility to earn air miles with each qualifying hotel stay or points for every eligible dollar charged to the guest room. GuestAward points are redeemable for complimentary hotel stays, air miles or travel, car rental, merchandise, entertainment and other incentives including stays at our partner hotels. We continue to actively pursue cooperative redemption arrangements with marketing partners to expand the appeal and flexibility of our loyalty plan. In 2005, we added Outrigger Hotels and Resorts in Hawaii as a redemption partner to add value to our amenity program.

E-Commerce

      We maintain a state of the art hotel reservation system that allows us to manage single image inventory through our distribution channels and execute rate management strategies through channels of distribution including voice, global distribution systems and internet sites. In addition, we provide effective and efficient guest service including online hotel reservations, GuestAwards enrollment and ticketing of TicketsWest events, through our websites, www.redlion.com and www.ticketswest.com .

      We are continuing to see positive results from our strategy of managing the ADS channels to drive incremental revenue and increase brand exposure. At the same time, revenue growth on our branded websites has continued to grow. In 2004, we redeveloped our branded websites with a focus on ease of use and comprehensiveness of content. Both conversion and unique visitor traffic have increased. To help drive traffic to the new web sites, we joined a leading meta-search referral site, Sidestep, and are in the process of implementing another. We also implemented a state-of -the-art customer relationship management (“CRM”) database and special electronic offers capability, bringing new levels of service to our system-wide hotels.

Training and Service

      As a continuation of our commitment to guest service and the development of our associates, we expanded our service training programs in 2005. These initiatives include establishing training programs for sales, revenue management, and catering. We also developed “The Red Lion Way,” a new service standard and training designed to give Red Lion Hotel associates the tools to create a positive, memorable guest experience. Through an increased level of personalized service, Red Lion Hotels intends to differentiate itself from the competition.

Marketing

      Our marketing strategy provides quality and value to the hotels in our system. Through consistent national and regional messaging in high visibility markets, we reach the majority of our target segments. In addition, we offer intelligence tools such as rate management strategies, competitive set benchmarking and market demand reports to the hotels.

Corporate Purchasing

      As a benefit to our franchisees and to maximize the purchasing power of our full system of hotels for key products utilized at the properties, we offer corporate purchasing services to all of the hotels in our system.

Competition

      The lodging industry is comprised of numerous national, regional and local hotel companies. We compete against these companies in the mid-scale and upper mid-scale full-service hotel segments of the industry. Competition for occupancy is focused on three, approximately equal, major segments of traveler: the business traveler, which is a significant occupancy driver for our hotel system; the convention and group business traveler, which utilizes room nights, meeting space and food and beverage operations; and the leisure traveler. Marketing efforts throughout the year are geared towards these three major segments.

      We also compete with other hotel operators and management companies for hotels to add to our system. Our competitors include management companies as well as large hotel chains that own and operate their own hotels and franchise their brands.

Trademarks

      We have registered the following trademarks with the U.S. Patent and Trademark Office: Red Lion, WestCoast, GuestAwards, Net4Guests, Stay Comfortable, TicketsWest, and G&B. We have also registered some of these trademarks in Canada and Mexico, and are in the process of obtaining trademark registrations in Asia and Europe. We also own various derivatives of these trademarks, each of which is registered with or has a registration application pending with the U.S. Patent and Trademark Office. Our trademarks and the associated name recognition are valuable to our business.

Employees

      As of December 31, 2005, we employed approximately 3,526 persons on a full-time and part-time basis, with 3,105 in hotel operations and the remainder in our administrative office and our entertainment and real estate divisions. Approximately 210 persons working in hotel operations were covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and organized settlement of labor disputes. We believe our employee relations are satisfactory.

Seasonality and Impact of External Influences

      Our business is subject to seasonal fluctuations. Significant portions of our revenues and profits are realized from May through October. Our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. In addition, results are affected by national and regional economic conditions, including the magnitude and duration of economic slowdowns and rebounds in the United States; actual and threatened terrorist attacks and international conflicts and their impact on travel; and weather conditions.

Non-core Asset Sales

      We continue to focus on our hotel operations and, as a result, may from time to time seek to opportunistically divest our interests in non-core assets. On November 23, 2004, the Board of Directors approved a plan for the sale of 11 hotels and other real estate owned by us. The activities of these hotels and the commercial office building are considered discontinued operations under generally accepted accounting principles. The net impact of the operations of these business units is segregated and separately disclosed on our consolidated statement of operations, comparative for all periods presented when they existed. Likewise, the assets and liabilities of the business are segregated and separately stated on the consolidated balance sheet for all periods presented when they existed.

      In 2005, we completed the sale of seven of those hotels and our commercial building, with gross proceeds of $52.8 million. At December 31, 2005, the divestment properties were comprised of the following:

      In 2006 we completed the sale of the Red Lion Hotel Hillsboro and a portion of the WestCoast Ridpath Hotel in transactions with gross aggregate proceeds of approximately $5.3 million. Proceeds from these sales have been and will be used to finance the renovation program discussed above.

      The remaining other real estate is considered held for sale under generally accepted accounting principles, but does not meet the definition of a discontinued operation. These assets held for sale are separately disclosed on the consolidated balance sheet as of December 31, 2005 and 2004.

      We believe the following summarizes the risk factors relating to our business:

Our operating results are subject to conditions affecting the lodging industry.

      Our revenues and our operating results are subject to conditions affecting the lodging industry. These include:

      Changes in any of these conditions could adversely impact hotel room demand and pricing and result in reduced occupancy, ADR and RevPAR or could otherwise adversely affect our results of operations and financial condition. We have a limited ability to pass through increased operating costs in the form of higher room rates, so that such increased costs could result in lower operating margins.

If we are unable to compete successfully, our business may be materially harmed.

      The lodging industry is highly competitive. Competition in the industry is primarily based on service quality, range of services, brand name recognition, convenience of location, room rates, guest amenities and quality of accommodations. We compete with other national limited and full service hotel companies as well as various regional and local hotels. Many of our competitors have a larger network of locations and greater financial resources than our company. Additionally, new and existing competitors may offer significantly lower rates, greater convenience, services or amenities or superior facilities, which could attract customers away from our hotels, resulting in a decrease in occupancy, ADR and RevPAR for our hotels. Changes in demographics and other changes in our markets may also adversely impact the convenience or desirability of our hotel locations thereby reducing occupancy, ADR and RevPAR and otherwise adversely impacting our results of operations and financial condition.

Due to the geographic concentration of the hotels in our system, our results of operations and financial condition are subject to fluctuations in regional economic conditions.

      Of the 64 hotels in our system at December 31, 2005, 49 are located in Oregon, Washington, Idaho or Montana. Therefore, our results of operations and financial condition may be significantly affected by the economy of the Pacific Northwest, which is dependent in large part on a limited number of major industries, including agriculture, tourism, technology, timber and aerospace. These industries may be affected by:

      In addition, companies in these industries may decide to relocate all or part of their businesses outside the Pacific Northwest. Any of these factors could materially affect the local economies in which these industries operate and where we have a presence. Other adverse events affecting the Pacific Northwest, such as economic recessions or natural disasters, could cause a loss of revenues for our hotels in this region, which may be greater as a result of our concentration of assets in these areas. In addition, we operate or market multiple hotels within several markets. A downturn in general economic or other relevant conditions in these specific markets or in any other market in which we operate could lead to a decline in demand in these markets and cause a loss of revenues from these hotels.

Our expenses may remain constant even if revenues decline.

      The expenses of owning property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from a hotel. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses are unlikely to decrease proportionately. In such instances, our financial condition and ability to service debt could be adversely affected by:

Our inability to sell real estate if and when desired may adversely affect our financial condition.

      Real estate assets generally cannot be sold quickly. In general, we may not be able to vary our portfolio of hotels or other real estate promptly in response to economic or other conditions. This inability to respond promptly to changes in the performance of our assets could adversely affect our financial condition and ability to service debt, including our debentures. In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell certain of our hotels.

If we are unable to effectively integrate new hotels into our operations, our results of operations and financial condition may suffer.

      We intend to grow our hotel operations partly by acquiring whole or partial interests in hotels. However, we cannot assure you that:

      Based on our experience, newly acquired, developed or converted hotels typically begin with lower occupancy and room rates, thereby resulting in lower revenue. Our expansion within our existing markets could adversely affect the financial performance of our existing hotels in those markets and thus negatively impact our overall results of operations. Expansion into new markets may also present operating and marketing challenges that are different from those we currently encounter in our existing markets. Our inability to anticipate all of the changing demands that expanding operations will impose on our management and management information and reservation systems, or our failure to quickly adapt our systems and procedures to the new markets could result in lost revenue and increased expenses and otherwise have an adverse effect on our results of operations and financial condition.

If our franchisees terminate or fail to renew their relationship with our company, our franchise revenue will decline.

      As of December 31, 2005, there were 27 hotels in our system that were owned by others and operated under franchise agreements with us. At December 31, 2005, four of those were under temporary arrangements that were entered into as part of the sale of the property by us to a third party and expire in early 2006. For the other 23 agreements, although they generally specify a fixed term, they typically contain various early termination provisions, such as the right to terminate upon notice by paying us a termination fee, or the right to terminate if we fail to contribute a negotiated level of revenue to the franchisee through our reservation systems. We cannot assure you that these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms. If these franchise agreements are not renewed, or are terminated prior to the expiration of their respective terms, the resulting decrease in revenue and loss of market penetration could have an adverse effect on our results of operations and financial condition.

We may be unsuccessful in identifying and completing acquisition opportunities, which could limit our ability to implement our long-term growth strategy and result in significant expenses.

      We intend to pursue a full range of growth opportunities, including identifying hotels for acquisition, development, management, rebranding and franchising. We compete for growth opportunities with national and regional hospitality companies, some of which have greater name recognition, marketing support, reservation system capacity and financial resources than we do. Our ability to make acquisitions is dependent upon, among other things, our relationships with owners of existing hotels and certain major hotel investors, financing acquisitions and renovations and successfully integrating new hotels into our operations. We may be unable to find suitable hotels for acquisition, development, management, rebranding or franchising on acceptable terms, or at all. Competition with other hotel companies may increase the cost of acquiring hotels. Even if suitable hotels are identified for acquisition, we may not be able to find lenders or capital partners willing to finance the acquisition of the hotels on acceptable terms. Further, we may not have adequate cash from operations to pursue such growth opportunities. Our failure to compete successfully for acquisitions, to obtain suitable financing for acquisitions we have identified or to attract and maintain relationships with hotel owners and major hotel investors could adversely affect our ability to expand our system of hotels. An inability to implement our growth strategy could limit our ability to grow our revenue base and otherwise adversely affect our results of operations.

Hotel acquisitions could fail to perform in accordance with our expectations, and our hotel development, redevelopment and renovation projects might be more costly than we anticipate.

      We intend to acquire additional hotels and we may acquire other operations in the future. We also intend to continue the redevelopment and re-branding of other acquired hotels into “Red Lion” hotels. In addition, we expect to develop new hotels in the future, depending on market conditions. Hotel redevelopment, renovation and new project development are subject to a number of risks, including:

      As a result of these risks, we could incur substantial costs for a project that is never completed. Further, financing for these projects may not be available or, even if available, may not be on acceptable terms. Any unanticipated delays or expenses incurred in connection with the acquisition, development, redevelopment or renovation of the hotels in our system could impact expected revenues, negatively affect our reputation among hotel customers, owners and franchisees and otherwise adversely impact our results of operations and financial condition.

Risks associated with real estate ownership may adversely affect revenue or increase expenses.

      As of December 31, 2005, our hotel system contained 64 hotels located in 11 states and one Canadian province, with 11,330 rooms and 550,929 square feet of meeting space. We managed 37 of these hotels, including 22 owned hotels, 13 leased hotels and two third-party owned hotels. The remaining 27 hotels were owned and operated by third-party franchisees. We also own commercial and other properties. Accordingly, we are subject to varying degrees of risk that generally arise from the ownership of real property. Revenue from our hotels and other real estate may be adversely affected by changes beyond our control, including the following:

      An increase in interest rates or property and other taxes could increase expenses and adversely affect our cash flow. Adverse conditions such as those discussed above could cause the terms of our borrowings to become unfavorable to us. In such circumstances, if we were in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to sell one or more hotels at times that might not permit realization of the maximum return on our investments. Unfavorable changes in one or more of these conditions could also result in unanticipated expenses and higher operating costs, thereby reducing operating margins and otherwise adversely affecting our results of operations and financial condition.

Our properties are subject to risks relating to acts of God, terrorist activity and war and any such event could materially adversely affect our operating results.

      Our financial and operating performance may be adversely affected by acts of God, such as natural disasters, particularly in locations where we own and/or operate significant properties. Some types of losses, such as those from earthquake, hurricane, terrorism and environmental hazards, may be either uninsurable or

too expensive to justify insuring against. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Similarly, war (including the potential for war) and terrorist activity (including threats of terrorist activity), epidemics (such as SARs and bird flu), travel-related accidents, as well as geopolitical uncertainty and international conflict, which impact domestic and international travel, have caused in the past, and may cause in the future, our results to differ materially from anticipated results. Terrorism incidents such as the events of September 11, 2001 and wars such as the Iraq war in 2003 significantly impact international travel and consequently global demand for hotel rooms. In addition, inadequate preparedness, contingency planning or recovery capability in relation to a major incident or crisis may prevent operational continuity and consequently impact the value of the brand or the reputation of our business.

If we fail to comply with privacy regulations, we could be subject to fines or other restrictions on our business.

      We collect and maintain information relating to our guests for various business purposes, including maintaining guest preferences to enhance our customer service and for marketing and promotion purposes and credit card information. The collection and use of personal data are governed by privacy laws and regulations enacted in the U.S. and by various contracts we operate under. Privacy regulation is an evolving area in which different jurisdictions may subject us to inconsistent compliance requirements. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services to our guests. In addition, non-compliance with applicable privacy regulations by us (or in some circumstances non-compliance by third parties engaged by us) could result in fines or restrictions on our use or transfer of data.

Due to the shareholdings of our Chairman together with other members of the Barbieri family, we may be limited in our ability to undertake a change of control transaction requiring shareholder approval.

      As of March 30, 2006, Donald K. Barbieri, our Chairman of the Board, had sole voting and investment power with respect to 8.1% of our outstanding shares of common stock. Heather Barbieri, his ex-spouse, had sole voting and investment power with respect to 7.6% of our outstanding shares of common stock. Pursuant to a trust agreement, Donald K. Barbieri and Heather Barbieri share voting and investment power with respect to 5.7% of our outstanding shares of common stock. Richard L. Barbieri, who is also a director and Donald K. Barbieri’s brother, beneficially owned 3.1% of our outstanding shares of common stock as of March 30, 2006. In addition, we believe that other members of the Barbieri family who are not directors, executive officers or 5% shareholders individually hold outstanding common stock. As such, to the extent they are willing and able to act in concert, they may have the ability as a group to approve or block actions requiring the approval of our shareholders, including a merger or a sale of all the assets of our company or a transaction that results in a change of control.

We may have disputes with the owners of the hotels that we manage or franchise.

      Consistent with our focus on management and franchising, we do not own all the properties in our system of hotels. The nature of our responsibilities under our management agreements to manage each hotel and enforce the standards required for our brands under both management and franchise agreements may, in some instances, be subject to interpretation and may give rise to disagreements. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential hotel owners and joint venture partners but have not always been able to do so. Failure to resolve such disagreements may result in litigation, arbitration or other settlement actions.

We are subject to governmental regulations affecting the lodging industry; the costs of complying with governmental regulations, or our failure to comply with such regulations, could affect our financial condition and results of operations.

      We are subject to numerous federal, state and local government regulations affecting the lodging industry, including building and zoning requirements. Increased government regulation could require us to make unplanned expenditures and result in higher operating costs. Further, we are subject to laws governing our relationship with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees could increase expenses and result in lower operating margins. Under the Americans with Disabilities Act of 1990 (the “ADA”), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. We may be required to remove access barriers or make unplanned, substantial modifications to our hotels to comply with the ADA or to comply with other changes in governmental rules and regulations, which could reduce the number of total available rooms, increase operating costs and have a negative impact on revenues and earnings. Any failure to comply with ADA requirements or other governmental regulations could result in the U.S. government imposing fines or in private litigants winning damage awards against us.

Our business is seasonal in nature, and we are likely to experience fluctuations in our results of operations and financial condition.

      Our business is seasonal in nature, with the months from May through October generally accounting for a greater portion of annual revenues than the months from November through April. Therefore, our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. The seasonal nature of our business increases our vulnerability to risks such as labor force shortages and cash flow problems. Further, if an adverse event such as an actual or threatened terrorist attack, international conflict, regional economic downturn or poor weather conditions should occur during the months of May through October, the adverse impact to our revenues could likely be greater as a result of our seasonal business.

Failure to retain senior management could adversely affect our business.

      We place substantial reliance on the lodging industry experience and the institutional knowledge of members of our senior management team. Mr. Coffey, Mr. Narayan and Mr. Taffin are particularly important to our future success due to their substantial experience in the lodging industry, and with either the Red Lion brand or our company. The loss of the services of these members of our senior management team could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for Mr. Coffey, Mr. Narayan, or Mr. Taffin could be difficult, and competition for such personnel of similar experience is intense. We do not carry key person insurance on any of our senior management.

If we are unable to locate lessees for our office and retail space our revenues and cash flow may be adversely affected.

      We own for lease to others over 375,000 square feet of office and retail space in Spokane, Washington and Kalispell, Montana. We are subject to the risk that leases for this space might not be renewed upon their expiration, the space may not be relet or the terms of renewal or reletting such space (including the cost of required renovations) might be less favorable to us than current lease terms. Vacancies could result due to the termination of a tenant’s tenancy, the tenant’s financial failure or a breach of the tenant’s obligations. We may be unable to locate tenants for rental spaces vacated in the future or we may be limited to renting space on unfavorable terms. Delays or difficulties in attracting tenants and costs incurred in preparing for tenants could reduce cash flow, decrease the value of a property and jeopardize our ability to pay our expenses.

We are subject to risks associated with managing and leasing commercial properties owned by third parties.

      We plan to continue to manage and lease properties owned by third parties. Risks associated with these activities include the risks that:

The performance of our entertainment division is particularly subject to fluctuations in economic conditions.

      Our entertainment division, which comprised 6.0% of our total revenues from continuing operations in 2005, engages in event ticketing and the presentation of various entertainment productions. We have in the past attracted additional hotel guests by cross selling to them tickets to entertainment events through our TicketsWest subsidiary. Our entertainment division is vulnerable to risks associated with changes in general regional and economic conditions, the potential for significant competition and a change in consumer trends, among others. In addition, we face the risk that Broadway shows and other entertainment productions will not tour the Pacific Northwest or that such productions will not choose us as a presenter or promoter.

We face risks relating to litigation.

      At any given time, we are subject to claims and actions incidental to the operation of our business. The outcome of these proceedings cannot be predicted. If a plaintiff were successful in a claim against our company, we could be faced with the payment of a material sum of money and we may not be insured for such a loss. If this were to occur it could have an adverse effect on our financial condition.

We may experience material losses in excess of insurance coverage.

      We carry comprehensive liability, public area liability, fire, flood, boiler and machinery, extended coverage and rental loss insurance covering our properties. There are, however, certain types of catastrophic losses that are not generally insured because it is not economically feasible to insure against such losses. Should an uninsured loss or a loss in excess of insured limits occur with respect to any particular property, we could lose our capital invested in the property, as well as the anticipated future revenue from the property and, in the case of debt which is with recourse to us, would remain obligated for any mortgage debt or other financial obligations related to the property. We cannot assure you that material losses in excess of insurance coverage will not occur in the future. Any such loss could have an adverse effect on our results of operations and financial condition.

We are subject to environmental risks that could be costly.

      Our operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of compliance with future environmental legislation. Under current federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the ability of the owner of the property to borrow using such property

as collateral for a loan or to sell such property. Environmental laws also may impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated, and may impose remedial or compliance costs. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have an adverse effect on our results of operations and financial condition. We have not performed Phase II environmental assessments on two of our owned properties for which Phase II assessments were recommended, because we determined that any further investigation was not warranted. We cannot assure you that these properties do not have any environmental concerns associated with them. While we have not been notified by any governmental authority and we have no other knowledge of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in connection with any of our properties, we have not performed Phase I environmental assessments on all of our leased properties. We cannot assure you that we will not discover problems that currently exist but of which we have no current knowledge that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our existing and future properties will not be affected by the condition of neighboring properties (such as the presence of leaking underground storage tanks) or by third parties (whether neighbors such as dry cleaners or others) unrelated to us.

We have incurred debt financing and may incur increased indebtedness in connection with future acquisitions.

      A substantial portion of our outstanding indebtedness is secured by individual properties. Neither our Articles of Incorporation nor our Bylaws limit the amount of indebtedness that we may incur. Subject to limitations in our debt instruments, we may incur additional debt in the future to finance acquisitions and renovations and for general corporate purposes. Accordingly, we could become highly leveraged, resulting in an increase in debt service that could adversely affect our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions (including increases in interest rates) and could impair our ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise. Our indebtedness is, and will likely continue to be, secured by mortgages on our owned hotels. We cannot assure you that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets, including our hotels, to foreclosure. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable to us. In such circumstances, if we are in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to sell one or more hotels in our system at times that may not permit realization of the maximum return on our investments. Economic conditions could result in higher interest rates, which would increase debt service requirements on variable rate debt and could reduce the amount of cash available for various corporate purposes.

The increasing use of third-party travel websites by consumers may adversely affect our profitability.

      Some of our hotel rooms may be booked through third-party travel websites such as Travelocity.com, Expedia.com and Priceline.com. If these internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Moreover, some of these internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. We believe that these internet intermediaries hope that consumers will eventually develop brand loyalties to their reservation systems. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through internet intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be adversely affected.

      Not applicable.