U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

     (Mark One)
     [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
          EXCHANGE ACT OF 1934
          For the fiscal year ended  December 31, 1998
                                     -----------------
          OR

     [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
          SECURITIES EXCHANGE ACT OF 1934
          For the transition period from _______ to _______

                        Commission File Number 001-13957
                                               ---------

                       CAVANAUGHS HOSPITALITY CORPORATION
               --------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

     WASHINGTON                                             91-1032187     
     -------------------------------                   --------------------
     (State or Other Jurisdiction of                     (I.R.S. Employer  
     Incorporation or Organization)                     Identification No.)

                      201 WEST NORTH RIVER DRIVE, SUITE 100
                          SPOKANE WASHINGTON 99201-2293
               --------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

     Registrant's Telephone Number, Including Area Code:  (509) 459-6100

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

                                                     Name of Each Exchange 
     Title of Each Class                              on Which Registered  
     ----------------------------------------       -----------------------
     Common Stock, par value $.01 per share;        New York Stock Exchange

     Securities registered under Section 12(g) of the Exchange Act:  None

     Indicate by check mark whether the registrant: (1) has filed all
     reports required to be filed by Section 13 or 15(d) of the Securities
     Exchange Act of 1934 during the preceding 12 months (or for such
     shorter period that the registrant was required to file such reports),
     and (2) has been subject to such filing requirements for the past 90
     days.  Yes [X]   No [ ]
     
<PAGE>
     Indicate by check mark if disclosure of delinquent filers pursuant to
     Item 405 of Regulation S-K is not contained herein, and will not be
     contained, to the best of registrant's knowledge, in definitive proxy
     or information statements incorporated by reference in Part III of
     this Form 10-K or any amendment to this Form 10-K. [X]

     The aggregate market value of the Registrant's voting common stock
     held by non-affiliates was $46,245,472 as of March 5, 1999.  There
     were 12,660,847 shares of the Registrant's common stock outstanding as
     of March 5, 1999.
     
<PAGE>
                      DOCUMENTS INCORPORATED BY REFERENCE.

     Documents incorporated by reference herein:  Proxy statement which
     will be filed with the Commission pursuant to Regulation 14A within
     120 days of the end of the Registrant's 1998 fiscal year is
     incorporated by reference herein in Part III.



                                TABLE OF CONTENTS

     Part   Item No.   Description
     ---------------------------------------------------------------------
     I      1          Business 
     I      2          Properties
     I      3          Legal Proceedings 
     I      4          Submission Of Matter To A Vote Of The Security
                         Holders
     II     5          Market For Registrant's Common Equity and Related
                         Stockholder Matters
     II     6          Selected Financial Data
     II     7          Management's Discussion and Analysis Of Financial
                         Condition and Results of Operations 
     II     7A         Quantitative and Qualitative Disclosures About
                       Market Risk
     II     8          Financial Statements and Supplementary Data 
     III    9          Changes In and Disagreements With Accountants On
                         Accounting and Financial Disclosure
     III    10         Directors and Executive Officers Of The Registrant
     III    11         Executive Compensation
     III    12         Security Ownership Of Certain Beneficial Owners and
                         Management
     III    13         Certain Relationships and Related Transactions
     IV     14         Exhibits, Financial Statement Schedules, and Report
                        On Form 8-K 
     
<PAGE>

     PART I


     ITEM 1.  Business
     -----------------
     THE COMPANY
      
     Cavanaughs Hospitality Corporation (the "Company") is a hotel
     operating company that owns, operates, acquires, develops, renovates
     and repositions full service hotels in the Northwest under its
     proprietary brand name, "Cavanaughs(R)".  The Company's hotel
     portfolio contains 19 full service hotels (the "Hotels"), with 3,933
     guest rooms and approximately 196,900 square feet of meeting space,
     located in Seattle, Olympia, Spokane, Yakima and Kennewick,
     Washington; Boise, Idaho Falls, Pocatello, Post Falls and Twin Falls,
     Idaho; Kalispell and Helena, Montana; Portland, Oregon; and Salt Lake
     City, Utah.  The Company plans to pursue additional growth
     opportunities by continuing to acquire and develop full service hotels
     in the Northwest.  Substantially all of the Company's assets,
     including the Hotels, are owned by Cavanaughs Hospitality Limited
     Partnership (Operating Partnership), the day to day operations of
     which are managed by the Company in its capacity as sole general
     partner.  With more than 20 years of experience in the lodging
     industry, management believes the Company enjoys an excellent
     reputation in, and its Cavanaughs brand name is well recognized
     throughout, the Northwest.  The Company also provides entertainment
     services, including event ticketing and theatrical presentations and
     other special events, and property management services for third
     partes and owns and manages retail and office properties.

     The Company is seeking to become the dominant full service hotel
     company in the Northwest by providing customers with access to a
     Cavanaughs brand hotel in multiple locations throughout the region. 
     As a result of consolidation among hotel chains, the Company believes
     there is an absence of a dominant Northwest based, regionally focused
     hotel company.  The Company's growth strategy focuses on: (i) the
     acquisition and re-branding of full service hotels with the Cavanaughs
     name, (ii) the acquisition, conversion and redevelopment of non-hotel
     properties into Cavanaughs brand hotels, (iii) the construction of new
     Cavanaughs hotels and (iv) the expansion of existing Cavanaughs
     Hotels.  As part of the Company's acquisition strategy, it completed
     acquisition of 11 full service hotels in 1998.  The Company completed
     an initial public offering in April 1998, raising approximately $81.3
     million net of issuance costs.  Proceeds from the offering were used
     to pay down debt and fund acquisitions.

     The Company's operating strategy is designed to enhance its revenue
     and operating margins by increasing revenue per available room
     ("REVPAR"), average daily rates ("ADR"), occupancy and operating
     efficiencies at the Hotels.  This strategy includes: (i) building
     brand name recognition by maintaining its strategic focus on the
     Northwest; (ii) promoting a coordinated marketing program utilizing
     corporate
     
<PAGE>
     level sales and marketing departments in conjunction with local hotel-
     based sales and marketing personnel; (iii) controlling operating
     expenses and achieving cost reductions through operating efficiencies
     and economies of scale; (iv) enhancing guest satisfaction and loyalty
     by providing high quality service; (v) utilizing the Company's yield
     management and proprietary management information systems to enable
     the general managers of each Hotel to optimize REVPAR, ADR, occupancy
     and net income; (vi) maintaining a consistent level of quality at the
     Hotels through its maintenance and capital expenditure programs; (vii)
     emphasizing the quality of the Company's food and beverage services to
     attract convention, group and special event business and to create
     local awareness of the Hotels; (viii) providing valuable guest benefit
     programs that promote customer loyalty, such as frequent flier mileage
     and repeat guest programs; and (ix) attracting and retaining qualified
     employees by providing on-going training and stock incentive programs
     at all levels of employment to enhance productivity and align the
     efforts of employees with the Company's objectives.  For the calendar
     year ended December 31, 1998, the Company's revenues were $86.3
     million, operating income was $20.3 million, net income was $7.5
     million, REVPAR for Comparable Hotels (Hotels owned for greater than
     one year) was $50.30 and ADR was $82.07. 

     The Company has a $100 million Revolving Credit facility provided by
     U.S. Bank N.A., as agent, which is used by the Company to finance
     property acquisitions, development and capital improvements and for
     general corporate purposes.  As an alternative to debt financing, the
     Company may issue shares of Common Stock or limited partnership
     interests in the Operating Partnership ("OP Units") as consideration
     in future hotel acquisitions.  The issuance of OP Units in exchange
     for hotels may allow the current owners of such hotels to achieve
     certain tax advantages when selling such hotels to the Company.

     In addition to the Hotels, the Company operates two other divisions:
     (i) entertainment, management and services and (ii) rental operations.
     The entertainment, management and services division includes
     computerized event ticketing through G&B Select-a-Seat, which was
     founded in 1987 and processed in excess of 1.8 million tickets in
     1998, and the presentation of shows and special events through
     Cavanaughs Entertainment, formerly G&B Presents, which was also
     founded in 1987 and has presented over 91 Broadway theatrical
     presentations and special events in the last eleven years.  These
     services generate income from ticket sales and handling fees as well
     as additional room occupancy at the Hotels.  The entertainment,
     management and services division is supported by the same Company-
     operated toll-free call center (the "Toll-Free Call Center") used for
     hotel reservations.  The Company's rental operations division includes
     ownership of four office properties and one retail property containing
     in excess of 590,000 square feet of leasable space, the majority of
     which are located near the Hotels, and third-party management and/or
     leasing agent of more than 3.1 million square feet of retail and
     office properties and approximately 2,000 residential units in the
     Northwest.
     
<PAGE>
     The Company, which was formerly known as Goodale and Barbieri
     Companies, was founded in 1937.  Between 1937 and 1976, the Company
     focused on third-party property management services and real estate
     development in Spokane, Washington.  The Company's history of owning
     and operating hotels commenced in 1976 when it constructed the River
     Inn in Spokane.  In 1980, the Company established its proprietary
     Cavanaughs brand name.  After changing its name in October 1997 to
     Cavanaughs Hospitality Corporation, the Company merged with Barbieri
     Investment Company, an affiliated Washington corporation ("BIC").  
     That merger became effective on November 3, 1997.  In connection with
     its merger with BIC, the Company contributed certain assets not
     related to its core hospitality business, including, among other
     things, a long-term residence inn, residential condominiums, a milk
     processing and distribution business, and associated real property, to
     a wholly-owned subsidiary and distributed the capital stock of such
     subsidiary, as well as the capital stock of another wholly-owned
     subsidiary owning recreation real estate in Priest Lake, Idaho and a
     retail sales operation, to the shareholders of the Company.  Shortly
     thereafter, the Company contributed substantially all of its assets to
     the Operating Partnership in exchange for general and limited partner
     interests therein.  The Company is the sole general partner of the
     Operating Partnership and owns a controlling 97.0% interest therein.
     All of the Hotels and the other assets of the Company are held by or
     for the benefit of, and substantially all of the Company's operations
     are conducted through, the Operating Partnership.

     Since 1968, when Donald Barbieri, the Company's Chairman, President
     and Chief Executive Officer, joined the Company, the Company has grown
     from five employees to approximately 2,600 employees.  The Company's
     principal executive offices are located at 201 W. North River Drive,
     Suite 100, Spokane, Washington 99201 and its telephone number is (509)
     459-6100.  The Company's website address is www.cavanaughs.com.


     INDUSTRY OVERVIEW

     The domestic lodging industry completed its fifth year of record
     profitability in 1998, during which time it produced record income of
     $18.9 billion.  PricewaterhouseCoopers LLP's Hospitality Directions
     (February 1999) ("PricewaterhouseCoopers Hospitality Directions")
     indicates that average U.S. hotel occupancy declined slightly in 1998,
     due to supply growth exceeding demand growth, although room starts
     peaked in 1997 at 150,600 rooms and are not expected to reach that
     level in 1998.  Sustained ADR growth has contributed to total lodging
     industry revenue growth, which increased 7.6% from 1997 to 1998.

     The following table reflects the percentage changes in REVPAR, ADR and
     occupancy for the twelve months ended October 31, 1997 and 
     December 31, 1998, compared to the respective prior fiscal year, for
     (i) the Hotels that were open for each of the periods presented, (ii)
     U.S. full service hotels and (iii) all U.S. hotels.
     
<PAGE>
     PERCENTAGE CHANGE VERSUS PRIOR PERIOD
     ---------------------------------------------------------------------
     
<TABLE>
     <CAPTION>
                                      REVPAR(1)         ADR               OCCUPANCY
                                      ---------------   ---------------   ---------------
                                      1997     1998     1997     1998     1997     1998
                                      ------   ------   ------   ------   ------   ------
      <S>                             <C>      <C>      <C>      <C>      <C>      <C>
      Cavanaughs Hotels (2)            8.8%     7.9%     9.1%    10.1%    (1.6)%   (1.3)%
      U.S. Full Service Hotels (3)     7.8%     4.7%     7.8%     6.2%     0.1%    (0.9)%
      U.S. Hotels (3) (4)              5.4%     3.4%     6.4%     4.5%    (0.9)%   (0.6)%

      </TABLE>


     (1) Determined by dividing annual room revenue by annual available
         rooms.
     (2) Includes Comparable Hotels;  Hotels owned greater than one year.
     (3) Source:  Smith Travel Research
     (4) Includes both full service and limited service hotels.


     COMPETITION IN LODGING INDUSTRY
      
     The lodging industry is highly competitive.  The Company competes with
     other national limited and full service hotel companies, as well as
     with various regional and local hotels.  Many of the Company's
     competitors have a larger network of locations and greater financial
     resources than the Company.  Competition in the United States lodging
     industry is based generally on brand name recognition, convenience of
     location, price, range of services and guest amenities offered,
     quality of customer service and overall product.  Demographic or other
     changes in one or more of the Company's markets could impact the
     convenience or desirability of the sites of certain of the Hotels
     which would adversely affect the operations of those Hotels.  Further,
     there can be no assurance that new or existing competitors will not
     offer significantly lower rates or greater convenience, services or
     amenities or significantly expand or improve facilities in a market in
     which the Hotels compete, thereby adversely affecting the Company's
     operations.


     RISK FACTORS

     An investment in the Common Stock of the Company involves various
     risks.  Prior to making a decision to invest in the Company, investors
     should carefully consider the risk factors, described in the Form S-1
     filed by the Company on March 27, 1998 and which became effective on
     April 1, 1998.  In addition, investors should also consult and
     consider other information contained in the public filings of the
     Company.
     
<PAGE>
     FORWARD LOOKING STATEMENTS

     Statements that are not based on historical facts are forward-looking
     statements subject to uncertainties and risks, including, but not
     limited to, (i) the acquisition and re-branding of full service hotels
     with the Cavanaughs name, (ii) the acquisition, conversion and
     redevelopment of non-hotel properties into Cavanaughs brand hotels,
     (iii) the construction of new Cavanaughs hotels and (iv) the expansion
     of existing Cavanaughs hotels.  The Company's actual results may
     differ significantly from those anticipated in these forward-looking
     statements as a result of these and other risks and factors detailed
     in the Company's filings with the Securities and Exchange Commission.

     TRADEMARKS

     "Cavanaughs(R)" is a registered trademark of the Company in the United
     States and reserved in Canada.


     SEGMENT REVENUES

     The information required by this item is contained in, and
     incorporated by reference from the Financial Statements and
     supplementary data, note 15, contained herein.
     
<PAGE>

 
    ITEM 2. Properties
     ------------------
     HOTEL PROPERTIES
      
     The Company's hotel portfolio currently contains 19 full service
     Hotels, with 3,933 guest rooms and approximately 196,900 square feet
     of meeting space, located in the Northwest.  The following table sets
     forth certain information regarding the Company's hotel portfolio at
     December 31, 1998.

     
<TABLE>
     <capiton>
                                                                                         Meeting
                                                          Year Built/  Year       Guest  Space
                                      Location            Acquired     Renovated  Rooms  (sq. ft.)
                                      ------------------  -----------  ---------  -----  ---------
      <S>                             <C>                 <C>          <C>        <C>    <C>
      Cavanaughs on Fifth Avenue      Seattle, WA            1996        1996      297     12,500
      Cavanaughs Inn at the Park      Spokane, WA            1983        1997      402     26,300
      Cavanaughs River Inn            Spokane, WA            1976        1997      245      3,700
      Cavanaughs Fourth Avenue        Spokane, WA            1991        1997      153      2,600
      Cavanaughs Ridpath Hotel        Spokane, WA            1998        1996      342     16,000
      Cavanaughs at Yakima Center     Yakima, WA             1991        1997      155     11,000
      Cavanaughs Gateway Hotel        Yakima, WA             1997        1997      172      8,000
      Cavanaughs at Columbia Center   Kennewick, WA          1978        1997      162      9,700
      Cavanaughs at Capitol Lake      Olympia, WA            1998        1998      177     17,000
      Cavanaughs on the Falls         Idaho Falls, ID        1998        1994      142      8,800
      Cavanaughs Templins Resort      Post Falls, ID         1998        1996      167     11,000
      Cavanaughs Park Center Suites   Boise, ID              1998        1996      238      2,200
      Cavanaughs Canyon Springs Hotel Twin Falls, ID         1998        1990      112      4,300
      Cavanaughs Pocatello Hotel      Pocatello, ID          1998        1993      152     12,000
      Cavanaughs Colonial Inn         Helena,MT              1998        1985      149     14,000
      Cavanaughs at Kalispell Center  Kalispell, MT          1986        1997      132     10,500
      Cavanaughs Outlaw Hotel         Kalispell, MT          1998        1995      220     11,000
      Cavanaughs Olympus Hotel        Salt Lake City, UT     1998        1997      393     12,800
      Cavanaughs Hillsboro Hotel      Portland, OR           1998        1997      123      3,500
                                                                                 -----    -------
        Total                                                                    3,933    196,900
                                                                                 =====    =======
      </TABLE>


     ENTERTAINMENT SERVICES AND THIRD-PARTY PROPERTY MANAGEMENT   

     The entertainment, management and services division of the Company is
     comprised of: (i) G&B Select-a-Seat, a full service theatrical and
     event ticketing agency, (ii) Cavanaughs Entertainment, formerly G&B
     Presents, a promoter of touring Broadway shows and other special
     events, and (iii) G&B Real Estate Services, a third-party property
     management service.  Reservations for entertainment events and hotel
     information and reservations are made through the Toll-Free Call
     Center.  The combination of event ticketing, presentation of Broadway
     shows, hotel event packages and a centralized reservations system
     enables the Company to offer packages for hotel guests, generating
     additional room night occupancy and income from ticket distribution
     service fees.
     
<PAGE>
     RENTAL OPERATIONS   

     The Company is the owner and manager of approximately 590,000 square
     feet of leasable office and retail space located in Spokane,
     Washington and Kalispell, Montana.  The Company's corporate
     headquarters is located in the Spokane CHC Building and occupies
     25,061 square feet of this 100,350 square foot building.



     ITEM 3. LEGAL PROCEEDINGS  

     At any given time, the Company is subject to claims and actions
     incident to the operation of its business.  While the outcome of these
     proceedings cannot be predicted, it is the opinion of management that
     none of such proceedings, individually or in the aggregate, will have
     a material adverse effect on the Company's business, financial
     condition or results of operations.



     ITEM 4. SUBMISSION OF MATTER TO A VOTE OF THE SECURITY HOLDERS  

     No matters have been submitted to a vote of security holders during
     the fourth quarter of 1998.



     PART II


     ITEM 5. Market for Registrant's Common Equity and Related Stockholder
             Matters
     ---------------------------------------------------------------------
     The Company's Common Stock is listed on the New York Stock Exchange
     ("NYSE") under the symbol "CVH".  The following table sets forth for
     the periods indicated the high and low closing sale prices for the
     Common Stock on the NYSE.

                                                   High         Low
                                                   ----------   ---------
     1999:
       First Quarter (through March 5, 1999)       $12          $7 5/8

     1998:
       Fourth Quarter (ended December 31, 1998)     12 15/16     6  7/8  
       Third Quarter (ended September 30, 1998)     14  3/4      7 15/16
       Second Quarter (ended June 30, 1998)         17  3/8     10  7/8   


     The Company's common stock commenced trading on the NYSE on April 3,
     1998; therefore, market information prior to the second quarter 1998
     is not applicable.   

     The last reported sale price of the Common Stock on the NYSE on 
     March 5, 1999 was $8 3/16.  As of March 5, 1999, there were
     approximately 83 holders of record of the Common Stock.
     
<PAGE>
     The Company does not anticipate paying any cash dividends on the
     Common Stock in the foreseeable future.  The Company intends to retain
     earnings to provide funds for the continued growth and development of
     its business.  See "Management's Discussion and Analysis of Financial
     Condition and Results of Operations--Liquidity and Capital Resources."
     Any determination to pay cash dividends in the future will be at the
     discretion of the Board and will depend upon, among other things, the
     Company's results of operations, financial condition, contractual
     restrictions and other factors deemed relevant by the Board.  In
     addition, the Revolving Credit Facility includes restrictions on the
     payment of dividends.  As of December 31, 1998 the Company was
     restricted from paying dividends under the terms and conditions of the
     Revolving Credit Facility.

     On January 1, 1998, the Company issued 44,837 OP units, 32,608 OP
     units, 8,154 OP Units, and 65,218 OP units to Donald K. Barbieri and
     Heather M. Barbieri, Thomas M. Barbieri and Eileen Barbieri, Richard
     L. Barbieri and Cara Lyn Tangen, and the Barbieri Family Foundation,
     Inc., respectively, in connection with the Company's purchase of the
     Lincoln Building.  The OP Units were issued without registration under
     the Securities Act pursuant to the exemption from registration
     afforded by Section 4(2) of the Securities Act and the rules and
     regulations promulgated thereunder.  The Company issued 12,228
     restricted common shares to Kathryn Barbieri in connection with the
     purchase of the Lincoln Building.

     On April 20, 1998, the Company issued 100,000 OP units to Templin's
     Resort & Conference Center, Inc. in connection with the Company's
     purchase of Templin's Resort & Conference Center.  The OP Units were
     issued without registration under the Securities Act pursuant to the
     exemption from registration afforded by Section 4(2) of the Securities
     Act and the rules and regulations promulgated thereunder.

     On April 28, 1998, the Company issued 145,148 OP units to Dunson
     Ridpath Hotel associates Limited Partnership, a Washington limited
     partnership, in connection with the Company's purchase of the Ridpath
     Hotel.  The OP Units were issued without registration under the
     Securities Act pursuant to the exemption from registration afforded by
     Section 4(2) of the Securities Act and the rules and regulations
     promulgated thereunder.
     
<PAGE>

     ITEM 6. Selected Financial Data
     -------------------------------

     The following table sets forth selected combined financial data of the
     Company as of and for the year ended December 31, 1998, the two months
     ended December 31, 1996 and 1997, and each of the four years in the
     period ended October 31, 1997.  The selected combined statement of
     operations data for the fiscal year ended October 31, 1994 and the two
     months ended December 31, 1996 and the selected combined balance sheet
     data as of October 31, 1994 and 1995 and December 31, 1996 are derived
     from the Company's unaudited financial statements and reflect all
     normal recurring adjustments, which in the opinion of management, are
     necessary for a fair presentation.  The selected combined statement of
     operations data for the fiscal years ended October 31, 1995, 1996,
     1997, the two months ended December 31, 1997, and year ended 
     December 31, 1998, and the selected combined balance sheet data as of
     October 31, 1996 and 1997, and December 31, 1997, are derived from the
     Company's audited financial statements included elsewhere in this
     Report. 

     The selected combined financial data set forth below should be read in
     conjunction with, and are qualified in their entirety by, the
     Historical Combined Financial Statements and related notes, 
     "Management's Discussion and Analysis of Financial Condition and
     Results of Operations" and other financial information included
     elsewhere in this Report.
     
<PAGE>
     
<TABLE>
     <CAPTION>

                                                                                                                    Fiscal Year
                                                                                              Two Months Ended      Ended
                                                  Fiscal Year Ended October 31, (1)           December 31,          December 31,
                                                  -----------------------------------------   -------------------   ------------
                                                  1994       1995       1996       1997       1996       1997       1998
                                                  --------   --------   --------   --------   --------   --------   ------------
                                                             (In Thousands, Except Per Share Data and Hotel Statistics)
      <S>                                         <C>        <C>        <C>        <C>        <C>        <C>        <C>
      STATEMENTS OF OPERATIONS DATA:
      ------------------------------
      Revenues:
        Hotels and restaurants:
          Rooms                                   $ 17,531   $ 17,587   $ 20,972   $ 25,147   $  2,998   $  3,626     $ 46,688
          Food and beverage                         12,027     12,397     12,141     13,926      2,271      2,756       24,400
          Other                                      1,015      1,260      2,092      2,589        414        447        4,084
                                                  --------   --------   --------   --------   --------   --------     --------
            Total hotels and restaurants            30,573     31,244     35,205     41,662      5,683      6,829       75,172
        Entertainment, management and services       3,205      3,092      3,168      3,842        483        840        4,006
        Rental operations                            4,987      6,027      6,790      6,539      1,191      1,169        7,155
                                                  --------   --------   --------   --------   --------   --------     --------
            Total revenue                           38,765     40,363     45,163     52,043      7,357      8,838       86,333
                                                  --------   --------   --------   --------   --------   --------     --------
      OPERATING EXPENSES:
      -------------------
      Direct:
        Hotels and restaurants:
          Rooms                                      4,868      4,931      5,719      6,820        958      1,167       12,562
          Food and beverage                          9,657     10,034     10,181     11,483      1,822      2,208       19,588
          Other                                        808        716      1,008      1,066        149        170        1,802
                                                  --------   --------   --------   --------   --------   --------     --------
            Total hotels and restaurants            15,333     15,681     16,908     19,369      2,929      3,545       33,952
                                                  --------   --------   --------   --------   --------   --------     --------
        Entertainment, management and services       1,519      1,802      2,204      2,052        397        602        2,685
        Rental operations                              783      1,026      1,464      1,506        243        303        1,570
                                                  --------   --------   --------   --------   --------   --------     --------
            Total direct operating expenses         17,635     18,509     20,576     22,927      3,569      4,450       38,207
                                                  --------   --------   --------   --------   --------   --------     --------
      Undistributed operating expenses:
        Selling, general and administrative       $  3,992   $  5,426   $  6,461   $  8,188   $  1,161   $  1,225     $ 11,569
        Property operating costs (2)                 5,554      5,022      4,997      5,518        944      1,022       10,132
        Depreciation and amortization                3,419      3,428      4,215      4,775        759        798        6,115
                                                  --------   --------   --------   --------   --------   --------     --------
            Total undistributed operating 
              expenses                              12,965     13,876     15,673     18,481      2,864      3,045       27,816
                                                  --------   --------   --------   --------   --------   --------     --------
            Total expenses                          30,600     32,385     36,249     41,408      6,433      7,495       66,023
                                                  --------   --------   --------   --------   --------   --------     --------
      </TABLE>

      
<PAGE>
      
<TABLE>
      <CAPTION>

                                                                                                                    Fiscal Year
                                                                                              Two Months Ended      Ended
                                                  Fiscal Year Ended October 31, (1)           December 31,          December 31,
                                                  -----------------------------------------   -------------------   ------------
                                                  1994       1995       1996       1997       1996       1997       1998
                                                  --------   --------   --------   --------   --------   --------   ------------
                                                   (In Thousands, Except Per Share Data and Hotel Statistics)
      <S>                                         <C>        <C>        <C>        <C>        <C>        <C>        <C>
      Operating income (2)                           8,165      7,978      8,914     10,635        924      1,343       20,310
      Interest expense                               5,649      6,866      7,319      8,817      1,317      1,422        8,127
      Other                                            249        471        310        823        119         79           90
      Income (loss) before income taxes and 
        extraordinary item (2)                       2,765      1,583      1,905      2,641       (274)        --       12,364
      Income taxes                                     574        542        730        932       (104)        (6)       4,310
      Extraordinary item (3)                            --         --         --         --         --         --          546
                                                  --------   --------   --------   --------   --------   --------     --------
      Net income (loss) (2)(3)                    $  2,191   $  1,041   $  1,175   $  1,709   $   (170)  $      6     $  7,508

      Pro forma net income per share (4)                --         --         --   $   0.24         --         --           --
      Shares used in the pro forma per share 
        calculation (4)                                 --         --         --   $  7,072         --         --           --
      Dividends per share (5)                           --         --         --         --         --         --           --
      Net income per share-basic and diluted            --         --         --         --         --         --         0.66
      Weighted average shares outstanding               --         --         --         --         --      7,072       11,347

      BALANCE SHEET DATA:
      -------------------
      Total assets                                $ 86,911   $107,018   $120,087   $124,104   $119,941   $125,117     $244,903
      Current maturities of long-term debt and 
        capital leases                               2,458     10,306     10,509      4,784     10,753      4,092        2,172
      Long-term debt and capital leases
        excluding current maturities                66,755     77,636     88,799     96,026     88,769     96,558      128,378
      Stockholders' equity (6)                       5,055      8,791      9,613      8,526      9,089      8,532       93,931

      OTHER DATA:
      -----------
      EBITDA (2)(7)                               $ 11,584   $ 11,406   $ 13,129   $ 15,410   $  1,683   $  2,141     $ 26,425
      EBITDA as a percentage of revenues             29.88%     28.26%     29.07%     29.61%     22.88%     24.22%       30.61%
      Net cash provided by operating 
        activities (8)                                  --      3,586      5,200      6,610        287      1,094       14,178
      Net cash used in investing activities (8)         --    (24,428)   (13,184)    (6,268)    (1,523)    (3,294)    (108,745)
      Net cash provided by (used in) financing 
        activities (8)                                  --     19,178      9,258     (1,102)      (261)       715       93,879

      </TABLE>

      
<PAGE>
      
<TABLE>
      <CAPTION>

                                                                                                                    Fiscal Year
                                                                                              Two Months Ended      Ended
                                                  Fiscal Year Ended October 31, (1)           December 31,          December 31,
                                                  -----------------------------------------   -------------------   ------------
                                                  1994       1995       1996       1997       1996       1997       1998
                                                  --------   --------   --------   --------   --------   --------   ------------
                                                            (In Thousands, Except Per Share Data and Hotel Statistics)
      <S>                                         <C>        <C>        <C>        <C>        <C>        <C>        <C>
      HOTEL STATISTICS:
      -----------------
        Hotels open (at end of period)                   6          6          7          8          7          8           19
        Available rooms (at end of period)           1,242      1,242      1,539      1,718      1,539      1,718        3,933
        REVPAR (9)(10)(13)                        $  38.70   $  38.83   $  42.04   $  45.72   $  31.93   $  36.11     $  50.30
        ADR (11)(13)                              $  60.27   $  61.54   $  67.29   $  73.43   $  64.88   $  71.22     $  82.07
        Average occupancy 
         percentage (10)(12)(13)                      65.2%      65.5%      64.5%      63.5%      50.7%      51.8%        61.3%

      </TABLE>



     (1)  The summary combined financial and other data has been presented
          as though (i) the predecessor businesses of Cavanaughs
          Hospitality Corporation, Barbieri Investment Company, G&B:
          Lincoln Building Partnership and their respective subsidiaries
          and partnerships which they controlled had been combined as of
          October 31, 1994, 1995, 1996 and 1997 and (ii) the spin-off of
          certain subsidiaries engaged in businesses not related to the
          core hospitality business of the Company had occurred as of
          October 31, 1994, 1995, 1996 and 1997.  

     (2)  Property operating costs, operating income, income (loss) before
          taxes and extraordinary item, net income (loss), and EBITDA
          reflect a nonrecurring charge of $422,000 related to final
          settlement of litigation in 1997.

     (3)  The Company incurred $546,378 extraordinary expense net of income
          taxes for the write-off of prepayment penalties and deferred loan
          fees in connection with the repayment of indebtedness out of the
          proceeds of the April 1998 initial public offering.
     
<PAGE>
     (4)  Due to the Merger, which was consummated in November 1997, the
          historical earnings per share is not relevant or meaningful.
          Therefore, pro forma earnings per share for the year ended
          October 31, 1997 has been presented based upon the number of
          shares of Common Stock of the Company which were outstanding
          after the Merger.

     (5)  Due to the Merger in November 1997, historical dividends per
          share is not relevant or meaningful and therefore is not
          presented.  Dividends historically have been paid to the
          stockholders of Cavanaughs Hospitality Corporation and BIC.  See
          Combined Statement of Changes in Stockholders' Equity in the
          historical financial statements included elsewhere herein.

     (6)  Changes in stockholders' equity between fiscal years reflect (i)
          net income (loss), (ii) cash dividends and (iii) distributions to
          or contributions from shareholders for the activities related to
          the subsidiaries, investments or divisions which have been
          excluded from the combined financial statements.  See Note 1 to
          the Historical Combined Financial Statements.

     (7)  EBITDA represents income before income taxes and extraordinary
          item, interest expense (net of interest income), depreciation,
          amortization, minority interests, and other income.  EBITDA is
          not intended to represent cash flow from operations as defined by
          generally accepted accounting principles and such information
          should not be considered as an alternative to net income, cash
          flow from operations or any other measure of performance
          prescribed by generally accepted accounting principles.  While
          not all companies calculate EBITDA in the same fashion and
          therefore EBITDA as presented may not be comparable to similarly
          titled measures of other companies, EBITDA is included herein
          because management believes that certain investors find it to be
          a useful tool for measuring the Company's ability to service
          debt.  EBITDA is not necessarily available for management's
          discretionary use due to restrictions included in the Revolving
          Credit Facility and other considerations.

     (8)  Cash flow from operating, investing and financing activities has
          not been provided for the year ended October 31, 1994.  Due to
          the mergers of the companies and partnerships described in Note 1
          to the Combined financial statements, in the opinion of
          management, the cost of preparing this information outweighs the
          benefit of providing the data.

     (9)  REVPAR represents the total room revenues divided by total
          available rooms, net of rooms out of service due to significant
          renovations.

     (10) Rooms which were under renovation were excluded from REVPAR and
          average occupancy percentage.  Due to the short duration of
          renovation, in the opinion of management, excluding these rooms
          did not have a material impact on REVPAR and average occupancy
          percentage.
     
<PAGE>

     (11) ADR represents total room revenues divided by the total number of
          rooms occupied by hotel guests on a paid basis.

     (12) Average occupancy percentage represents total rooms occupied
          divided by total available rooms.  Total available rooms
          represents the number of  rooms available multiplied by the
          number of days in the reported period.

     (13) Hotel statistics for the fiscal year ended December 31, 1998, are
          presented for only Comparable Hotels.  Comparable Hotels means
          Hotels owned by the Company for greater than one year.


     ITEM 7.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations.
     --------------------------------------------------------------------
     GENERAL
      
     The following discussion and analysis addresses the results of
     operations for the Company for the years ended October 31, 1995, 1996,
     and 1997 and the two months ended December 31, 1996 and 1997, and the
     years ended December 31, 1997 and 1998.  The following should be read
     in conjunction with the Consolidated Financial Statements and the
     notes thereto and "Selected Financial Data" included elsewhere in this
     report.  In addition to historical information, the following
     Management's Discussion and Analysis of Financial Condition and
     Results of Operations contains forward-looking statements that involve
     risks and uncertainties.  The Company's actual results could differ
     significantly from those anticipated in these forward-looking
     statements as a result of certain factors, including those discussed
     in "Risk Factors" and elsewhere in the Form S-1 Prospectus filed by
     the Company on March 27, 1998.
      
     The financial statements of the Company, which have been audited by
     PricewaterhouseCoopers LLP, have been presented as though the
     predecessor businesses of Cavanaughs Hospitality Corporation (formerly
     known as Goodale and Barbieri Companies), BIC and their respective
     subsidiaries and partnerships which they controlled had been combined
     as of October 31, 1995, 1996 and 1997.  These companies were merged on
     November 3, 1997.  The audited financial statements also include G&B:
     Lincoln Building partnership, a partnership previously controlled by
     the Barbieri Family.  See Note 1 to the Consolidated Financial
     Statements.  Income or loss attributed to the minority interests of
     partners in Cowley Street Limited Partnership and Cavanaughs
     Hospitality Limited Partnership is reported as minority interest in
     partnerships.  The Company has changed its fiscal year end from
     October 31 to December 31, which change took effect with the fiscal
     year beginning on January 1, 1998.
      
     
<PAGE>
     The Company's revenues are derived primarily from the Hotels and
     reflect revenue from rooms, food and beverage and other sources,
     including telephone, guest services, banquet room rentals, gift shops
     and other amenities.  Hotel revenues accounted for 87.1% of total
     revenue in 1998 and increased at a compound annual rate of 34.1% from
     $31.2 million in 1995 to $75.2 million in 1998.  This increase was
     primarily the result of the addition of thirteen hotels during the
     period.  The balance of the Company's revenues are derived from its
     entertainment, management and services and rental operations
     divisions.  These revenues are generated from ticket distribution
     handling fees, real estate management fees, sales commissions and
     rents.  In 1998, entertainment, management and services accounted for
     4.6% of total revenues and rental operations accounted for 8.3% of
     total revenues.  These two divisions are expected to represent a
     smaller percent of total revenues in the future as the Company
     continues to pursue its hotel growth strategy.
      
     As is typical in the hospitality industry, REVPAR, ADR and occupancy
     levels are important performance measures.  The Company's operating
     strategy is focused on enhancing revenue and operating margins by
     increasing REVPAR, ADR, occupancy and operating efficiencies of the
     Hotels.  These performance measures are impacted by a variety of
     factors, including national, regional and local economic conditions,
     degree of competition with other hotels in their respective market
     areas and, in the case of occupancy levels, changes in travel
     patterns.

     The following table sets forth selected items from the consolidated
     statements of operations as a percent of total revenues and certain
     other selected data:

      
<TABLE>
      <CAPTION>
                                                                                      Fiscal Year
                                    Fiscal Year Ended             Two Months Ended    Ended
                                    October 31,                   December 31,        December 31,
                                    ---------------------------   -----------------   ------------
                                    1995      1996      1997      1996      1997      1998 (1)
                                    -------   -------   -------   -------   -------   ------------
      <S>                           <C>       <C>       <C>       <C>       <C>       <C>
      Revenues:
        Hotels and restaurants        77.4%     78.0%     80.0%     77.2%     77.3%       87.1%
        Entertainment, management 
          and services                 7.7       7.0       7.4       6.6       9.5         4.6
        Rental operations             14.9      15.0      12.6      16.2      13.2         8.3
                                    ------    ------    ------    ------    ------      ------
          Total revenues             100.0%    100.0%    100.0%    100.0%    100.0%      100.0%
                                    ======    ======    ======    ======    ======      ======

      </TABLE>

      
<PAGE>
      
<TABLE>
      <CAPTION>
                                                                                      Fiscal Year
                                    Fiscal Year Ended             Two Months Ended    Ended
                                    October 31,                   December 31,        December 31,
                                    ---------------------------   -----------------   ------------
                                    1995      1996      1997      1996      1997      1998
                                    -------   -------   -------   -------   -------   ------------
      <S>                           <C>       <C>       <C>       <C>       <C>       <C>
      Direct operating expenses       45.9%     45.6%     44.0%     48.5%     50.4%       44.3%
      Undistributed operating 
        expenses:
          Selling, general and 
            administrative            13.4      14.3      15.7      15.8      13.9        13.4
          Property operating costs    12.5      11.1      10.6      12.8      11.6        11.7
          Depreciation and amorti-
            zation                     8.5       9.3       9.2      10.3       9.0         7.1
                                    ------    ------    ------    ------    ------      ------
              Total undistributed 
                operating expenses    34.4      34.7      35.5      38.9      34.5        32.2
      Operating income                19.8      19.7      20.4      12.6      15.2        23.5
      Interest expense net            17.0      16.2      16.9      17.9      16.1         9.0
      Income (loss) before income 
        taxes                          3.9       4.2       5.1      (3.7)      ---        14.3
      Income tax provision (benefit)   1.3       1.6       1.8      (1.4)     (0.1)        5.0
                                    ------    ------    ------    ------    ------      ------
          Net income (loss)            2.6%      2.6%      3.3%     (2.3)%     0.1%        8.7%
                                    ======    ======    ======    ======    ======      ======
      REVPAR (1)                    $38.83    $42.04    $45.72    $31.93    $36.11      $50.30
      ADR (1)                       $61.54    $67.29    $73.43    $64.88    $71.22      $82.07
      Occupancy (1)                   65.5%     64.5%     63.5%     50.7%     51.8%       61.3%

      </TABLE>


     (1)  1998 REVPAR, ADR, Occupancy is for Comparable Hotels (hotels
          owned for greater than one year)


     RESULTS OF OPERATIONS

     COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO THE UNAUDITED YEAR ENDED
     DECEMBER 31, 1997

     Total revenues increased $32.8 million, or 61.3%, from $53.5 million
     in 1997 to $86.3 million in 1998.  This increase is attributed
     primarily to revenue generated from the addition of eleven Hotels in
     the period, increases in total rooms occupied and REVPAR increases at
     the Comparable Hotels (Hotels owned by the Company for greater than
     one year).
      
     Total hotel and restaurant revenues increased $32.4 million, or 75.6%,
     from $42.8 million in 1997 to $75.2 million in 1998.  Comparable Hotel
     ADR increased $7.53, or 10.1%, from $74.54 in 1997 to $82.07 in 1998.
     Comparable Hotel REVPAR increased $3.68, or 7.9%, from $46.62 in 1997
     to $50.30 in 1998.  The Company acquired eleven Hotels in 1998 which
     added 559,808 available rooms, an increase of 102%.
     
<PAGE>
     Entertainment, management and services revenues decreased $0.2
     million, or 5.1%, from $4.2 million in 1997 to $4.0 million in 1998.
     Entertainment revenue decreased primarily from lower attendance at
     entertainment events and the reduction of third-party management
     contracts. 

     Rental income increased $0.7 million, or 10.4%, from $6.5 million in
     1997 to $7.2 million in 1998 primarily from lease escalations and new
     lease contracts in the Company's office and retail buildings.
      
     Direct operating expenses increased $14.1 million, or 58.8%, from
     $24.1 million in 1997 to $38.2 million in 1998, primarily due to the
     increase in the number of hotel guests served.  This represents a
     decline in direct operating expenses as a percentage of total revenues
     from 45.0% in 1997 to 44.3% in 1998.  The improvement in direct
     operating expense percentages is attributed to the increase in room
     revenue while the Company was able to effectively control expenses and
     gain volume efficiencies.

     Total undistributed operating expenses increased $9.4 million, or
     51.3%, from $18.4 million in 1997 to $27.8 million in 1998.  Total
     undistributed operating expenses include selling, general and
     administrative expenses, which increased 47.3% from $7.9 million in
     1997 to $11.6 million in 1998, and depreciation and amortization,
     which increased 27.2% from $4.8 million in 1997 to $6.1 million in
     1998.  Total undistributed operating expenses as a percentage of total
     revenues decreased 2.1% from 34.3% in 1997 to 32.2% in 1998.  The
     decrease in undistributed operating expenses as a percentage of total
     revenues is primarily attributed to the increase in Comparable Hotel
     REVPAR and the addition of eleven Hotels which the Company believes
     has lead to greater efficiencies.
      
     Operating income increased $9.2 million, or 83.4%, from $11.1 million
     in 1997 to $20.3 million in 1998.  As a percentage of total revenues,
     operating income increased from 20.7% in 1997 to 23.5% in 1998This
     increase is due primarily to an increase in REVPAR, the addition of
     eleven hotels and improvements in the hotel departmental margins.
      
     Interest expense decreased $0.8 million, or 9.2%, from $8.9 million in
     1997 to $8.1 million in 1998.  This decrease is primarily related to
     the repayment of debt with the proceeds from the initial public
     offering and the reduction of the weighted average interest rate
     charged the Company for its remaining debt.  Interest expense
     initially declined as a result of the application of the net proceeds
     of the offering, but is expected to increase in the future due to the
     funding of hotel acquisitions with additional debt.

     Income tax provision increased 338.4%, from $1.0 million in 1997 to
     $4.3 million in 1998, due to the increase in income before taxes.  The
     effective income tax provision rate was 34.1% and 34.9% for 1997 and
     1998 respectively.
     
<PAGE>
     The Company recorded an extraordinary item related to prepayment
     penalties and the write-off of deferred loan fees of $546,000 net of
     $282,000 of income taxes due to the repayment of debt with proceeds
     from the initial public offering.

     Net income increased $5.6 million, or 295.3%, from $1.9 million in
     1997 to $7.5 million in 1998.  

     Earnings per share before extraordinary item increased 165% from $0.27
     in 1997 to $0.71 in 1998.  


     COMPARISON OF TWO MONTHS ENDED DECEMBER 31, 1997 TO TWO MONTHS ENDED
     DECEMBER 31, 1996

     The Company is including this stub period financial information due to
     the change in fiscal year end from October 31, to December 31, as of
     the fiscal year beginning January 1, 1998.
      
     Total revenues increased $1.5 million, or 20.1%, from $7.4 million in
     the last two months of 1996 to $8.8 million in the comparable period
     of 1997.  This increase is attributed primarily to revenue generated
     from increases in total rooms occupied, ADR and REVPAR, and the
     addition of Cavanaughs Gateway Hotel in Yakima, Washington.
      
     Total hotel and restaurant revenues increased $1.1 million, or 20.2%,
     from $5.7 million in the last two months of 1996 to $6.8 million in
     the comparable period of 1997.  ADR increased $6.34, or 9.8%, from
     $64.88 in the last two months of 1996 to $71.22 in the comparable
     period of 1997.  Available room nights increased 7.0% in the last two
     months of 1997.  REVPAR increased $4.18, or 13.1% from $31.93 in the
     last two months of 1996 to $36.11 in the comparable period of 1997.
     The Company's hotel and restaurant revenues increased primarily due to
     an increase in its ADR and total rooms occupied.  In addition,
     Cavanaughs Gateway Hotel was acquired in October 1997.  November and
     December of 1997 were the first two full months of operation for this
     172-room property which also contributed to this increase in revenues.
      
     Entertainment, management and services revenues increased $0.4
     million, or 74.0%, from $0.5 million in the last two months of 1996 to
     $0.8 million in the comparable period of 1997.  Entertainment revenue
     increased due to the greater number of Company-presented shows and
     attendance at such shows.  Management and services revenue increased
     from the addition of new third-party management contracts.
      
     Rental income remained relatively stable at $1.2 million in the last
     two months of 1996 and the comparable period of 1997.
     
<PAGE>
     Direct operating expenses increased $0.9 million, or 24.7%, from $3.6
     million in the last two months of 1996 to $4.5 million in the
     comparable period of 1997, primarily due to the increase in the number
     of hotel guests served and the Broadway shows presented by the
     Company.  This represents an increase in direct operating expenses as
     a percentage of total revenues from 48.5% in the last two months of
     1996 to 50.4% in the comparable period of 1997 which is primarily
     attributable to the higher variable costs associated with the Broadway
     shows.
      
     Total undistributed operating expenses increased $0.2 million, or
     6.3%, from $2.9 million in the last two months of 1996 to $3.0 million
     in the comparable period of 1997.  Total undistributed operating
     expenses include selling, general and administrative expenses, which
     increased 5.5% from the last two months of 1996 to the comparable
     period of 1997, and depreciation and amortization, which increased
     5.1%.  Total undistributed operating expenses as a percentage of total
     revenues decreased 4.4% from 38.9% in the last two months of 1996 to
     34.5% in the comparable period of 1997.  The decrease in undistributed
     operating expenses as a percentage of total revenues is primarily
     attributed to the Company's ability to increase REVPAR of the Hotels
     while effectively controlling its selling, general and administrative
     expenses.
      
     Operating income increased $0.4 million, or 45.3%, from $0.9 million
     in the last two months of 1996 to $1.3 million in the comparable
     period of 1997.  As a percentage of total revenues, operating income
     increased from 12.6% in the last two months of 1996 to 15.2% in the
     comparable period of 1997.  This increase is due primarily to an
     increase in REVPAR.
      
     Interest expense increased $0.1 million, or 8.0%, from $1.3 million in
     the last two months of 1996 to $1.4 million in the comparable period
     of 1997.  This increase is primarily related to the incurrence of
     additional debt used for completion of the conversion of Cavanaughs on
     Fifth Avenue and other corporate purposes.  

     The income tax benefit changed as a result of the change in the pre-
     tax loss.  The effective income tax rate for both periods was 34%.
      
     The Company incurred a net loss of $170,000 in the last two months of
     1996 compared to a net income of $6,000 in the comparable period of
     1997.

     COMPARISON OF YEAR ENDED OCTOBER 31, 1997 TO YEAR ENDED OCTOBER 31,
     1996
      
     Total revenues increased $6.9 million, or 15.2%, from $45.2 million in
     1996 to $52.0 million in 1997.  This increase is attributed primarily
     to revenue generated from increases in total rooms occupied and REVPAR
     and the addition of Cavanaughs on Fifth Avenue in Seattle, Washington.
     
<PAGE>
     Total hotel and restaurant revenues increased $6.5 million, or 18.3%,
     from $35.2 million in 1996 to $41.7 million in 1997.  ADR increased
     $6.14, or 9.1%, from $67.29 in 1996 to $73.43 in 1997.  Available room
     nights increased 10.3% in 1997, REVPAR increased $3.68, or 8.8%, from
     $42.04 in 1996 to $45.72 in 1997.  Cavanaughs on Fifth Avenue opened
     in May 1996; therefore, 1997 was the first full fiscal year of
     operation for this 297-room property which contributed, in part, to
     this increase in revenues.
      
     Entertainment, management and services revenues increased $0.7
     million, or 21.3%, from $3.2 million in 1996 to $3.8 million in 1997.
     Entertainment revenue increased from the addition of new third-party
     management contracts.
      
     Rental income decreased $0.3 million, or 3.7%, from $6.8 million in
     1996 to $6.5 million in 1997 primarily as a result of the Company's
     need to occupy additional space in the CHC Building, its corporate
     headquarters, which had previously been rented to third parties, and
     the receipt of a one-time settlement for a lease termination which
     occurred in 1996.
      
     Direct operating expenses increased $2.4 million, or 11.4%, from $20.6
     million in 1996 to $22.9 million in 1997, primarily due to the
     increase in the number of hotel guests served.  This represents a
     decline in direct operating expenses as a percentage of total revenues
     from 45.6% in 1996 to 44.0% in 1997.  The improvement in direct
     operating expense percentages is attributed to the increase in REVPAR
     while the Company was able to effectively control expenses and gain
     volume efficiencies.
      
     Total undistributed operating expenses increased $2.8 million, or
     17.9%, from $15.7 million in 1996 to $18.5 million in 1997.  Total
     undistributed operating expenses include selling, general and
     administrative expenses, which increased 26.7% from $6.5 million in
     1996 to $8.2 million in 1997, and depreciation and amortization, which
     increased 13.3% from $4.2 million in 1996 to $4.8 million in 1997.
     Total undistributed operating expenses as a percentage of total
     revenues increased 0.8% from 34.7% in 1996 to 35.5% in 1997.  The
     increase in undistributed operating expenses as a percentage of total
     revenues is primarily attributed to the addition of Cavanaughs on
     Fifth Avenue (which management believes had not attained stabilized
     occupancy) and the additional administrative expenses related to
     preparing the Company for future growth and the Offering.
      
     Operating income increased $1.7 million, or 19.3%, from $8.9 million
     in 1996 to $10.6 million in 1997.  As a percentage of total revenues,
     operating income increased from 19.7% in 1996 to 20.4 % in 1997.  This
     increase is due primarily to an increase in REVPAR, the addition of
     Cavanaughs on Fifth Avenue and improvements in the hotel departmental
     margins.
     
<PAGE>
     Interest expense increased $1.5 million, or 20.5%, from $7.3 million
     in 1996 to $8.8 million in 1997.  This increase is primarily related
     to the incurrence of additional debt used for funding the acquisition
     and conversion of Cavanaughs on Fifth Avenue and other corporate
     purposes.  Interest expense is initially anticipated to decline as a
     result of the application of the net proceeds of the Offering to repay
     certain indebtedness, but is expected to increase in the future due to
     the funding of hotel acquisitions with additional debt.
      
     Income tax provision increased 27.7%, from $0.7 million in 1996 to
     $0.9 million in 1997, due to the increase in income before taxes.  The
     effective income tax rate for both years was 34%.
      
     Net income increased $0.5 million, or 45.4%, from $1.2 million in 1996
     to $1.7 million in 1997.


     COMPARISON OF YEAR ENDED OCTOBER 31, 1996 TO YEAR ENDED OCTOBER 31,
     1995

     Total revenues increased $4.8 million, or 11.9%, from $40.4 million in
     1995 to $45.2 million in 1996.  The increase is attributed primarily
     to the addition of Cavanaughs on Fifth Avenue which opened in May 1996
     and additional rental income from increased occupancy in the rental
     properties.
      
     Total hotel and restaurant revenues increased $4.0 million, or 12.7%,
     from $31.2 million in 1995 to $35.2 million in 1996.  ADR increased
     9.3% from $61.54 in 1995 to $67.29 in 1996.  Available room nights
     increased 10.1% in 1996.  The increase is primarily attributed to the
     addition of Cavanaughs on Fifth Avenue.
      
     Entertainment, management and services revenues increased 2.5% from
     $3.1 million in 1995 to $3.2 million in 1996.
      
     Rental income increased $0.8 million, or 12.7%, from $6.0 million in
     1995 to $6.8 million in 1996.  The increase is primarily attributed to
     increased occupancy and lease payments for the Company's office
     buildings.
      
     Direct operating expenses increased $2.1 million, or 11.2%, from $18.5
     million in 1995 to $20.6 million in 1996.  Direct operating expenses
     as a percentage of total revenues decreased from 45.9% in 1995 to
     45.6% in 1996.  This improvement is attributed primarily to the
     increase in REVPAR while controlling expenses.
      
     Total undistributed operating expenses increased $1.8 million, or
     12.9%, from $13.9 million in 1995 to $15.7 million in 1996.  Total
     undistributed operating expenses include selling, general and
     administrative expenses, which increased 19.1% from $5.4 million in
     1995 to $6.5 million in 1996, and depreciation and amortization, which
     increased 23.0% from $3.4 million in 1995 to $4.2 million in 1996.
     
<PAGE>
     Total undistributed operating expenses as a percentage of total
     revenues increased from 34.4% in 1995 to 34.7% in 1996.  Increased
     expenses are attributed primarily to the addition of Cavanaughs on
     Fifth Avenue which management believes has not attained stabilized
     occupancy.
      
     Operating income increased $0.9 million, or 11.7%, from $8.0 million
     in 1995 to $8.9 million in 1996.  This increase was primarily caused
     by an increase in hotel guests served and an increase in REVPAR
     coupled with the Company controlling operating expenses.
      
     Interest expense increased $0.5 million, or 6.6%, from $6.9 million in
     1995 to $7.3 million in 1996 primarily as a result of the additional
     indebtedness incurred by the Company in connection with the
     acquisition and conversion of Cavanaughs on Fifth Avenue. 
      
     Income tax provision increased 34.7%, from $0.5 million in 1995 to
     $0.7 million in 1996 due to the increase in income before taxes.  The
     effective income tax rate for both years was 34%.
      
     Net income increased $0.1 million, or 12.9%, from $1.0 million in 1995
     to $1.2 million in 1996.

     LIQUIDITY AND CAPITAL RESOURCES
      
     Historically, the Company's principal sources of liquidity have been
     cash on hand, cash generated by operations and borrowings under an
     $80.0 million revolving credit facility.  Cash generated by operations
     in excess of operating expenses is used for capital expenditures and
     to reduce amounts outstanding under the Revolving Credit Facility. 
     The Company has increased the Revolving Credit Facility to $100
     million effective February 26, 1999Hotel acquisitions, development and
     expansion have been and will be financed through a combination of
     internally generated cash, borrowing under credit facilities, and the
     issuance of Common Stock or OP Units.  In April 1998, the Company
     completed an initial public offering.  Proceeds net of issuance cost
     were $81.3 million and were used to pay debt, fund acquisitions and
     other corporate purposes.
      
     The Company's short-term capital needs include food and beverage
     inventory, payroll and the repayment of interest expense on
     outstanding mortgage indebtedness.  Historically, the Company has met
     these needs through internally generated cash.  The Company's long-
     term capital needs include funds for property acquisitions, scheduled
     debt maturities and renovations and other non-recurring capital
     improvements.  The Company anticipates meeting its future long-term
     capital needs through the additional debt financing secured by the
     Hotels, by unsecured private or public debt offerings or by additional
     equity offerings or the issuances of OP Units, along with cash
     generated from internal operations. 
     
<PAGE>
     At December 31, 1998, the Company had $4.3 million in cash and cash
     equivalents.  The Company has made extensive capital expenditures over
     the last three years, investing $13.5 million, $6.2 million, and
     $123.6 million in owned and joint venture properties in 1996, 1997,
     and 1998, respectively.  These expenditures included guest room,
     lounge and restaurant renovations, public area refurbishment,
     telephone and computer system upgrades, tenant improvements, property
     acquisitions, construction, and corporate expenditures and were funded
     from the initial public offering, issuance of operating partnership
     units, operating cash flow and debt.  The Company establishes reserves
     for capital replacement in the amount of 4.0% of the prior year's
     actual gross hotel income to maintain the Hotels at acceptable levels.
     Acquired hotel properties have a separate capital budget for purchase,
     construction, renovation, and branding costs.  Capital expenditures
     planned for Hotels in 1999 are expected to be approximately $12.8
     millionManagement believes the consistent renovation and upgrading of
     the Hotels and other properties is imperative to its long-term
     reputation and customer satisfaction.
      
     To fund its acquisition program and meet its working capital needs,
     the Company has a Revolving Credit Facility.  The Revolving Credit
     Facility has an initial term of five years and an annualized fee for
     the unutilized portion of the facility.  The Company selects from four
     different interest rates when it draws funds: the lender's prime rate
     or one, three, or six month LIBOR plus the applicable margin of 180 to
     250 basis points, depending on the Company's ratio of EBITDA-to-total
     funded debt.  The Revolving Credit Facility allows for the Company to
     draw funds based on the trailing 12 months performance on a pro forma
     basis for both acquired and owned properties.  Funds from the
     Revolving Credit Facility may be used for acquisitions, renovations,
     construction and general corporate purposes.  The Company believes the
     funds available under the Revolving Credit Facility and additional
     debt instruments will be sufficient to meet the Company's near term
     growth plans.  The Operating Partnership is the borrower under the
     Revolving Credit Facility.  The obligations of the Operating
     Partnership under the Revolving Credit Facility are fully guaranteed
     by the Company.  Under the Revolving Credit Facility, the Company is
     permitted to grant new deeds of trust on any future acquired
     properties.  Mandatory prepayments are required to be made in various
     circumstances including the disposition of any property, or future
     acquired property, by the Operating Partnership.

     The Revolving Credit Facility contains various representations,
     warranties, covenants and events of default deemed appropriate for a
     Credit Facility of similar size and nature.  Covenants and provisions
     in the definitive credit agreement governing the Revolving Credit
     Facility include, among other things, limitations on: (i) substantive
     changes in the Company's and Operating Partnership's current business
     activities, (ii) liquidation, dissolution, mergers, consolidations,
     dispositions of material property or assets involving the Company and
     its affiliates or their assets, as the case may be, and acquisitions
     of property or assets of others, (iii) the creation or existence of
     
<PAGE>
     deeds of trust or other liens on property or assets, (iv) the addition
     or existence of indebtedness, including guarantees and other
     contingent obligations, (v) loans and advances to others and
     investments in others, (vi) redemption of subordinated debt, (vii)
     amendment or modification of certain material documents or of the
     Articles in a manner adverse to the interests of the lenders under the
     Revolving Credit Facility, (viii) payment of dividends or
     distributions on the Company's capital stock, and (ix) maintenance of
     certain financial ratios.  Each of the covenants described above
     provide for certain ordinary course of business and other exceptions.
     If the Company breaches any of these covenants and does not obtain a
     waiver of that breach, the breach will constitute an event of default
     under the Revolving Credit Facility.  At December 31, 1998, the
     Company had $76.3 million outstanding under the Revolving Credit
     Facility and was in compliance with all required covenants.  The
     Revolving Credit Facility restricted the Company from paying any
     dividends as of December 31, 1998.
      
     In addition to the Revolving Credit Facility, as of December 31, 1998,
     the Company had debt and capital leases outstanding of approximately
     $54.3 million consisting of primarily variable and fixed rate debt
     secured by individual properties. 

     The Company believes that cash generated by operations will be
     sufficient to fund the Company's operating strategy for the
     foreseeable future, and that any remaining cash generated by
     operations, together with capital available under the Revolving Credit
     Facility (subject to the terms and covenants to be included therein)
     and additional debt financing, will be adequate to fund the Company's
     growth strategy in the near term.  Thereafter, the Company expects
     that future capital needs, including those for property acquisitions,
     will be met through a combination of net cash provided by operations,
     borrowings and additional issuances of Common Stock or OP Units.
      

     SEASONALITY
      
     The lodging industry is affected by normally recurring seasonal
     patterns.  At most of the Hotels, demand is higher in the late spring
     through early fall (May through October) than during the balance of
     the year.  For example, for the year ended December 31, 1998, the
     Company's revenues in the first through fourth quarters were 16.9%,
     24.4%, 32.0% and 26.7%, respectively, of its total revenue for such
     year and the Company's income (loss) before extraordinary items for
     the first through fourth quarters was (1.1)%, 32.9%, 51.4% and 16.8%,
     respectively, of its total net income for such yearDemand also changes
     on different days of the week, with Sunday generally having the lowest
     occupancy.  Accordingly, the Company's revenue, operating profit and
     cash flow are lower during the first and fourth calendar quarters and
     higher during the second and third calendar quarters.
     
<PAGE>
     INFLATION
      
     The effect of inflation, as measured by fluctuations in the Consumer
     Price Index, has not had a material impact on the Company's revenues
     or net income during the periods under review.

     YEAR 2000 ASSESSMENT

     BACKGROUND:  The "Year 2000 problem" arose because many existing
     computer programs use only the last  two digits to refer to a year
     Therefore, these computer programs do not properly recognize a year
     that begins with "20" instead of the familiar "19".  If not corrected,
     many computer applications could fail or create erroneous results. 
     The extent of the potential impact of the Year 2000 problem is not yet
     known, and if not timely corrected, could affect the global economy.

     State of Readiness: 

     IT SYSTEMS:  The Company has completed 100% of the assessment of all
     of its information technology ("IT") hardware and software systems for
     Year 2000 issues.  Of the critical hardware and software applications
     evaluated (hardware and software applications for reservation,
     accounting, payroll and billing functions), only the payroll
     application has been determined to be non-compliant with Year 2000
     functionality.  The Company had anticipated retiring its non-compliant
     payroll application independent of any Year 2000 issues and will
     complete replacement of it with a Year 2000 compliant system by July
     of 1999.  Individual older personal computers which are scheduled for
     replacement in ordinary course of upgrades are not included in these
     percentages.  The Company relies upon certifications from the
     manufacturers, developers and authorized vendors of the specific
     hardware and software applications for evaluation of compliance with
     Year 2000 functionality.

     EMBEDDED SYSTEMS: The Company has completed substantially all of the
     assessment of its critical Embedded Technology systems, which are
     those systems in properties owned or leased by the Company in which a
     microprocessor is embedded in equipment controlling building
     environment, power, lighting, transportation, security, and fire
     safety.  The Company anticipates completion of remediation of all
     affected systems by July 1999.  The evaluation completed to date has
     not revealed any critical Embedded System which is not (or will not
     become so with minor software modifications) compliant with Year 2000
     functionality.  Embedded Systems in properties for which the Company
     provides management services but which are not owned or leased by the
     Company are not included in these percentages.  The Company relies
     upon certifications from the manufacturers, developers and authorized
     vendors of the specific components containing Embedded Systems for
     evaluation of compliance with Year 2000 functionality.
     
<PAGE>
     THIRD PARTY SERVICES: The Company has commenced its evaluation of the
     assessment of services provided by third parties with which the
     Company has a material relationship and anticipates completing that
     evaluation by July of 1999.  These material Third Party Services
     include the private companies and municipalities supplying all
     utilities and communications to the Company.  Evaluation will be by
     means of review of representations made by the third parties or of
     responses to written questionnaires by the Company to the third
     parties.  The Company does not anticipate that its exposure to a
     failure of Third Party Services to be Year 2000 compliant will differ
     from the exposure of communities at large to such failure.

     COST TO ADDRESS YEAR 2000 ISSUES:  The Company's projection of capital
     expenditures and other financial items related to remediation and
     testing of Year 2000 issues is necessarily an estimate because it
     anticipates how remediation and testing will proceed in the future. 
     This assessment also cannot include property specific issues for
     properties which may be acquired in the future and have not as yet
     been evaluated.  Nevertheless, based on the evaluation completed to
     date, the costs to the Company of replacing or modifying IT and
     Embedded Systems to bring them to Year 2000 compliance does not appear
     to be material.  The preceding statement does not include the cost of
     replacement and modification of systems for which the replacement or
     modification was not accelerated by Year 2000 issues, such as the
     Company's payroll system, the costs for which are included in the
     normal capital and operating budgets of the Company.

     RISKS OF YEAR 2000 ISSUES:  The only certainty about the Year 2000
     problem is the difficulty of predicting with certainty what will
     happen.  The Company cannot guarantee that its efforts will prevent
     all consequences.  The failure of vendors, suppliers, customers,
     transportation systems and utilities systems to anticipate and solve
     Year 2000 issues could impact the Company and each community in which
     it operates.  The Company has not identified a material effect from
     Year 2000 issues on the Company's results of operations, liquidity,
     and financial condition.  The worst case effects would appear to be
     analogous to a natural disaster such as a storm or flood, with the
     primary effect being a temporary interruption of utilities,
     transportation and communication services.

     CONTINGENCY PLANS:  Each property owned and/or managed by the Company
     has developed a contingency plan in order to respond to any Year 2000
     problem-related interruption of such property's utility and
     communication services.  The Company anticipates completing an update
     of the operational contingency plans for such properties before
     January 1, 2000The Company has solicited from its material Third Party
     Service Providers information with respect to such providers'
     responses to and compliance with the Year 2000 problem.  The Company
     will, on an on-going basis, carefully monitor the responses it
     receives from these Third Party Service Providers.  Nevertheless,
     there can be no assurance that such plans will be adequate or
     completed in a timely manner and the responses developed by the
     Company's material Third Party Service Providers are beyond the
     general operational control of the Company.
     
<PAGE>
     NEW ACCOUNTING PRONOUNCEMENTS
      
     In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
     issued.  This statement requires that comprehensive income be reported
     in a financial statement that is displayed with the same prominence as
     other financial statements.  Comprehensive income is defined as the
     change in equity of a business enterprise arising from non-owner
     sources.  The classifications of comprehensive income under current
     accounting standards include foreign currency items, minimum pension
     liability adjustments and unrealized gains and losses on certain
     investments in debt and equity securities.  The Company adopted the
     provisions of SFAS No. 130 on January 1, 1998.  However, since the
     Company does not have any comprehensive income items, there was no
     impact on the presentation of its consolidated financial statements.
      
     In June 1997, the Financial Accounting Standards Board issued SFAS No.
     131, "Disclosures about Segments for an Enterprise and Related
     Information."  This statement changed the way public companies report
     information about segments of their business in their annual financial
     statements and requires them to report segment information in their
     quarterly reports issued to shareholders.  It also requires entity-
     wide disclosures about the products and services an entity provides,
     and its major customers.  The Company adopted the provision of SFAS
     No. 131 on January 1, 1998.

     In April 1998, Statement of Position (SOP) 98-5, "Reporting on the
     Costs of Start-up Activities" was issued.  The SOP requires that all
     costs of start-up activities and organization costs be expensed as
     incurred.  The Company is required to implement the SOP on January 1,
     1999 and report the change as a cumulative effect of an accounting
     change in the statement of income.  Management estimates that the
     effect of adopting this new standard will be a charge to operations
     for the year ending December 31, 1999 of approximately $128,000, which
     is net of related income taxes.


 
    ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The following tables summarize the financial instruments held by the
     Company at December 31, 1998, which are sensitive to changes in
     interest rates.  At December 31, 1998, approximately 90% of the
     Company's debt and capital lease obligations are subject to changes in
     market interest rates and are sensitive to those changes.  The Company
     currently has no derivative instruments to offset the risk of interest
     rate changes.  In the future, the Company may choose to use derivative
     instruments, such as interest rate swaps to manage the risk associated
     with interest rate changes.

     The following table presents principal cash flows for debt and capital
     leases outstanding at December 31, 1998, by maturity date and the
     related average interest rate. 
     
<PAGE>
     
<TABLE>
     <CAPTION>
                                                    Outstanding Debt and Capital Lease Obligations (in thousands)
                                                                                                                     Fair
                                            1999      2000      2001      2002      2003      Thereafter   Total     Value
                                            -------   -------   -------   -------   -------   ----------   -------   -------
      <S>                                   <C>       <C>       <C>       <C>       <C>       <C>          <C>       <C>
      Note payable to bank (a)              $    --   $    --   $    --   $    --   $82,480    $    --     $82,480   $82,480
      Long-term debt:
        Fixed rate                              320       344       370       897       427      8,996      11,354    13,128
          Weighted-average interest rate       7.28%     7.28%     7.28%     7.25%     7.25%      7.25%         --%       --%
        Variable rate                         1,218     1,368     1,458     1,562     1,680     27,048      34,334    34,334
          Weighted-average interest rate       7.56%     7.58%     7.59%     7.61%     7.64%      7.67%         --%       --%
      Capital lease obligations                 634       631       496       351       270         --       2,382     2,382
          Weighted-average interest rate       8.00%     8.03%     8.20%     8.64%     8.64%        --%         --%       --%

      </TABLE>



     (a)  The interest rate on the note payable is based on LIBOR plus a
          variable interest margin based on the Company's funded debt
          ratio.  The interest margin can vary from 180 - 250 basis points. 
          At December 31, 1998, the interest margin was 210 basis points.
     
<PAGE>

     Item 8.  Financial Statements and Supplementary Data
     ----------------------------------------------------



     REPORT OF INDEPENDENT ACCOUNTANTS



     To the Board of Directors and Stockholders
     Cavanaughs Hospitality Corporation


     In our opinion, the accompanying consolidated balance sheets and the
     related consolidated statements of operations, changes in
     stockholders' and partners' equity and of cash flows present fairly,
     in all material respects, the financial position of Cavanaughs
     Hospitality Corporation and its subsidiaries at December 31, 1997 and
     1998, and the results of their operations and their cash flows for the
     years ended October 31, 1996 and 1997, the two months ended 
     December 31, 1997 and the year ended December 31, 1998, in conformity
     with generally accepted accounting principles.  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 of these statements in
     accordance with generally accepted auditing standards which 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,
     assessing the accounting principles used and significant estimates
     made by management, and evaluating the overall financial statement
     presentation.  We believe that our audits provide a reasonable basis
     for the opinion expressed above.


                          /s/PricewaterhouseCoopers LLP


     Spokane, Washington
     January 29, 1999

     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND 1998
     (in thousands, except share data)


                                                       1997       1998
                                                       --------   --------
     Assets:
       Current assets:
         Cash and cash equivalents                     $  4,955   $  4,267
         Accounts receivable                              2,785      5,427
         Income taxes refundable                            520        957
         Inventories                                        427        858
         Prepaid expenses and deposits                      580        400
                                                       --------   --------
             Total current assets                         9,267     11,909

       Property and equipment, net                      112,234    227,423
       Other assets, net                                  3,616      5,571
                                                       --------   --------
             Total assets                              $125,117   $244,903
                                                       ========   ========

     Liabilities:
       Current liabilities:
         Payable to affiliate                          $  1,133   $     --
         Note payable to bank                             1,075         --
         Accounts payable                                 3,234      2,831
         Accrued payroll and related benefits               983      1,477
         Accrued interest payable                           689      1,518
         Other accrued expenses                           2,882      3,883
         Long-term debt, due within one year              3,590      1,538
         Capital lease obligations, due within 
           one year                                         502        634
                                                       --------   --------
             Total current liabilities                   14,088     11,881
       Long-term debt, due after one year                94,419     44,150
       Notes payable to bank                                 --     82,480

       Capital lease obligations, due after one year      2,139      1,748
       Deferred income taxes                              5,415      6,349
       Minority interest in partnerships                    524      4,364
                                                       --------   --------
             Total liabilities                          116,585    150,972
                                                       --------   --------

     Commitments and contingencies (Note 10)
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND 1998, CONTINUED
     (in thousands, except share data)


                                                       1997       1998
                                                       --------   --------
     Stockholders' and partners' equity:
       Preferred stock - 5,000,000 shares authorized; 
         $0.01 par value; no shares issued and 
         outstanding                                   $     --   $     --
       Common stock - 50,000,000 shares authorized; 
         $0.01 par value;  7,072,025 and 12,660,847 
         shares issued and outstanding                       71        126
       Partners' deficit                                   (879)        --
       Additional paid-in capital                         3,935     80,892
       Retained earnings                                  5,405     12,913
                                                       --------   --------
             Total stockholders' and partners' equity     8,532     93,931
                                                       --------   --------
             Total liabilities and stockholders' and 
               partners' equity                        $125,117   $244,903
                                                       ========   ========

     The accompanying notes are an integral part of the consolidated
       financial statements.
     
<PAGE>
   CAVANAUGHS HOSPITALITY CORPORATION
   CONSOLIDATED STATEMENTS OF OPERATIONS
   (in thousands, except per share data)


   
<TABLE>
   <CAPTION>

                                                                  Two Months
                                              Years Ended         Ended
                                              October 31,         December 31,        Year Ended
                                              -----------------   -----------------   December 31,
                                              1996      1997      1996      1997      1998
                                              -------   -------   -------   -------   ------------
                                                                (Unaudited)
   <S>                                        <C>       <C>       <C>       <C>       <C>
   Revenues:
     Hotels and restaurants:
       Rooms                                  $20,972   $25,147   $ 2,998   $ 3,626     $46,688
       Food and beverage                       12,141    13,926     2,271     2,756      24,400
       Other                                    2,092     2,589       414       447       4,084
                                              -------   -------   -------   -------     -------
           Total hotels and restaurants        35,205    41,662     5,683     6,829      75,172
     Entertainment, management and services     3,168     3,842       483       840       4,006
     Rental operations                          6,790     6,539     1,191     1,169       7,155
                                              -------   -------   -------   -------     -------
           Total revenues                      45,163    52,043     7,357     8,838      86,333
                                              -------   -------   -------   -------     -------
   Operating expenses:
     Direct:
       Hotels and restaurants:
         Rooms                                  5,719     6,820       958     1,167      12,562
         Food and beverage                     10,181    11,483     1,822     2,208      19,588
         Other                                  1,008     1,066       149       170       1,802
                                              -------   -------   -------   -------     -------
           Total hotels and restaurants        16,908    19,369     2,929     3,545      33,952
       Entertainment, management and 
         services                               2,204     2,052       397       602       2,685
       Rental operations                        1,464     1,506       243       303       1,570
                                              -------   -------   -------   -------     -------
           Total direct expenses               20,576    22,927     3,569     4,450      38,207
                                              -------   -------   -------   -------     -------
     Undistributed operating expenses:
       Selling, general and administrative      6,461     8,188     1,161     1,225      11,569
       Property operating costs                 4,997     5,518       944     1,022      10,132
       Depreciation and amortization            4,215     4,775       759       798       6,115
                                              -------   -------   -------   -------     -------
           Total undistributed operating 
             expenses                          15,673    18,481     2,864     3,045      27,816
                                              -------   -------   -------   -------     -------
           Total expenses                      36,249    41,408     6,433     7,495      66,023
                                              -------   -------   -------   -------     -------
   Operating income                             8,914    10,635       924     1,343      20,310

   </TABLE>

   
<PAGE>
   CAVANAUGHS HOSPITALITY CORPORATION
   CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
   (in thousands, except per share data)

   
<TABLE>
   <CAPTION>

                                                                  Two Months
                                              Years Ended         Ended
                                              October 31,         December 31,        Year Ended
                                              -----------------   -----------------   December 31,
                                              1996      1997      1996      1997      1998
                                              -------   -------   -------   -------   ------------
                                                                (Unaudited)
   <S>                                        <C>       <C>       <C>       <C>       <C>
   Other income (expense):
     Interest expense, net of amounts 
       capitalized                            $(7,319)  $(8,817)  $(1,317)  $(1,422)    $(8,127)
     Interest income                              296       416        92        54         346
     Other income (expense)                       150       348        13        (4)         90
     Minority interest in partnerships           (136)       59        14        29        (255)
                                              -------   -------   -------   -------     -------
   Income (loss) before income taxes            1,905     2,641      (274)       --      12,364
   Income tax provision (benefit)                 730       932      (104)       (6)      4,310
                                              -------   -------   -------   -------     -------
   Income (loss) before extraordinary item      1,175     1,709      (170)        6       8,054
   Extraordinary item, net of tax benefit          --        --        --        --        (546)
                                              -------   -------   -------   -------     -------
   Net income (loss)                          $ 1,175   $ 1,709   $  (170)  $     6     $ 7,508
                                              =======   =======   =======   =======     =======

   Income per share:
     Income per share before extraordinary 
       item                                                                 $    --     $  0.71
     Extraordinary item                                                          --       (0.05)
                                                                            -------     -------
     Net income per share - basic and 
       diluted                                                              $    --        0.66
                                                                            =======     =======
     Weighted-average shares outstanding - 
       basic                                                                  7,072      11,347
                                                                            =======     =======
     Weighted-average shares outstanding - 
       diluted                                                                7,072      11,666
                                                                            =======     =======
     Pro forma net income per share - basic 
       and diluted                                      $  0.24
                                                        =======
     Number of shares used in the pro forma 
       computation                                        7,072
                                                        =======
   </TABLE>


   The accompanying notes are an integral part of the consolidated 
     financial statements.
   
<PAGE>
   CAVANAUGHS HOSPITALITY CORPORATION
   CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' AND PARTNERS' EQUITY
   for the years endedOctober 31, 1996 and 1997, the two months ended 
   December 31, 1997 and the year ended December 31, 1998
   (in thousands, except share and per share data)

   
<TABLE>
   <CAPTION>
                                                                                 Barbieri
                                   Cavanaughs Hospitality Corporation            Investment 
                                   --------------------------------------------  Company
                                   Preferred                                     --------------
                                   Stock           Common Stock                  Common Stock               Additional
                                   --------------  ------------------  Discount  -------------   Partners'  Paid-In     Retained
                                   Shares  Amount  Shares      Amount  on Stock  Shares  Amount  Deficit    Capital     Earnings
                                   ------  ------  ----------  ------  --------  ------  ------  ---------  ----------  --------
   <S>                             <C>     <C>     <C>         <C>     <C>       <C>     <C>     <C>        <C>         <C>
   Balances, October 31, 1995      1,100   $  495       1,858  $   19  $   (318)    929  $  686   $  (594)   $ 3,661    $ 4,842
     Net income (loss)                                                                               (243)                1,418
     Contributions from (distri-
       butions to) stockholders 
       and partners                                                                                    41        126       (248)
     Dividends on Cavanaughs 
       Hospitality Corporation 
       common stock ($85.00 
       per share)                                                                                                          (158)
     Dividends on preferred stock
       ($31.50 per share)                                                                                                   (35)
     Dividends on Barbieri Invest- 
       ment Company common
       stock ($85.00 per share)                                                                                             (79)
                                   ------  ------  ----------  ------  --------  ------  ------   -------    -------    -------
   Balances, October 31, 1996       1,100     495       1,858      19      (318)    929     686      (796)     3,787      5,740
     Net income (loss)                                                                               (101)                1,810
     Distributions to stockholders
       and partners                                                                                                      (1,815)
     Dividends on Cavanaughs 
       Hospitality Corporation 
       common stock ($102.00
        per share)                                                                                                         (188)
     Dividends on preferred stock
       ($31.50 per share)                                                                                                   (35)
     Dividends on Barbieri Invest-
       ment Company common
       stock ($102.00 per share)                                                                                            (95)
     Redemption of stock                                  (92)     (1)                                          (662)
                                   ------  ------  ----------  ------  --------  ------  ------   -------    -------    -------
   Balances, October 31, 1997       1,100     495       1,766      18      (318)    929     686      (897)     3,125      5,417
                                   ------  ------  ----------  ------  --------  ------  ------   -------    -------    -------
   </TABLE>

   
<PAGE>
   CAVANAUGHS HOSPITALITY CORPORATION
   CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' AND PARTNERS' EQUITY
   for the years ended October 31, 1996 and 1997, the two months ended 
   December 31, 1997 and the year ended December 31, 1998
   (in thousands, except share and per share data)

   
<TABLE>
   <CAPTION>
                                                                                 Barbieri
                                   Cavanaughs Hospitality Corporation            Investment 
                                   --------------------------------------------  Company
                                   Preferred                                     --------------
                                   Stock           Common Stock                  Common Stock               Additional
                                   --------------  ------------------  Discount  -------------   Partners'  Paid-In     Retained
                                   Shares  Amount  Shares      Amount  on Stock  Shares  Amount  Deficit    Capital     Earnings
                                   ------  ------  ----------  ------  --------  ------  ------  ---------  ----------  --------
   <S>                             <C>     <C>     <C>         <C>     <C>       <C>     <C>     <C>        <C>         <C>
   Balances, October 31, 1997       1,100  $  495       1,766  $   18  $   (318)    929  $  686   $  (897)   $ 3,125    $ 5,417
                                   ------  ------  ----------  ------  --------  ------  ------   -------    -------    -------
   Net income (loss)                                                                                   18                   (12)
     Effect of merger              (1,100)   (495)  7,070,259      53       318    (929)   (686)                 810
                                   ------  ------  ----------  ------  --------  ------  ------   -------    -------    -------
   Balances, December 31, 1997          0       0   7,072,025      71         0       0       0      (879)     3,935      5,405
     Net income                                                                                                           7,508
     Stock issued for acquisition
       of partnership interest                         12,228                                         879       (879)
     Stock issued for cash, net
       of issuance costs                            5,951,250      59                                         81,269
     Stock issued under employee
       stock purchase plan                             18,752                                                    184
     Stock issued to directors 
       and certain senior 
       management                                      11,692                                                    174
     Income tax effect of stock 
       grants                                                                                                    (25)
     Purchases and retirement of 
       stock                                         (405,100)     (4)                                        (3,766)
                                   ------  ------  ----------  ------  --------  ------  ------   -------    -------    -------
   Balances, December 31, 1998          0  $    0  12,660,847  $  126  $      0       0  $    0   $     0    $80,892    $12,913
                                   ======  ======  ==========  ======  ========  ======  ======   =======    =======    =======
   </TABLE>


   The accompanying notes are an integral part of the consolidated 
     financial statements.
   
<PAGE>
   CAVANAUGHS HOSPITALITY CORPORATION
   CONSOLIDATED STATEMENTS OF CASH FLOWS
   (in thousands)

   
<TABLE>
   <CAPTION>

                                                                  Two Months
                                              Years Ended         Ended
                                              October 31,         December 31,        Year Ended
                                              -----------------   -----------------   December 31,
                                              1996      1997      1996      1997      1998
                                              -------   -------   -------   -------   ------------
                                                                (Unaudited)
   <S>                                        <C>       <C>       <C>       <C>       <C>
   Operating activities:
     Net income (loss)                        $ 1,175   $ 1,709   $  (170)  $     6     $  7,508
     Adjustments to reconcile net income 
       (loss) to net cash provided by 
         operating activities:
           Depreciation and amortization        4,215     4,775       759       798        6,115
           Gain on disposition of property 
             and equipment                         --      (322)       --        --          (80)
           Deferred income tax provision 
             (benefit)                             89       948        --        (2)         934
           Minority interest in partnerships      136       (59)      (14)      (29)         255
           Extraordinary item-write-off of 
             deferred loan fees                    --        --        --        --          546
           Compensation expense related to 
             stock issuance                        --        --        --        --          174
           Change in:
             Accounts receivable                 (356)   (1,086)     (675)       21       (2,642)
             Inventories                          (50)       (2)       15       (51)        (431)
             Prepaid expenses and deposits        (64)     (733)      195        28           (2)
             Accounts payable                  (1,576)      483       (24)      971         (523)
             Accrued payroll and related 
               benefits                           189        13      (248)      140          494
             Accrued interest payable              21        30       (27)      (52)         829
             Other accrued expenses             1,421       854       476      (736)       1,001
                                              -------   -------   -------   -------     --------                        
                 Net cash provided by oper-
                   ating activities             5,200     6,610       287     1,094       14,178
                                              -------   -------   -------   -------     --------  
   Investing activities:
     Additions to property and equipment      (13,457)   (6,192)   (1,589)   (2,400)      (7,772)
     Proceeds from disposition of property 
       and equipment                              185     1,159        --        --          172
     Acquisitions of property and equipment        --        --        --        --      (99,356)
     Payment for purchase option agreement         --      (500)       --        --           --
     Issuance of note receivable                   --        --        --        --      (17,112)
     Payment received on note receivable           --        --        --        --       17,112
     Other, net                                    88      (735)       66      (894)      (1,789)
                                              -------   -------   -------   -------     --------
                 Net cash used in investing 
                   activities                 (13,184)   (6,268)   (1,523)   (3,294)    (108,745)
                                              -------   -------   -------   -------     --------
   </TABLE>

   
<PAGE>
   CAVANAUGHS HOSPITALITY CORPORATION
   CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
   (in thousands)

   
<TABLE>
   <CAPTION>

                                                                  Two Months
                                              Years Ended         Ended
                                              October 31,         December 31,        Year Ended
                                              -----------------   -----------------   December 31,
                                              1996      1997      1996      1997      1998
                                              -------   -------   -------   -------   ------------
                                                                (Unaudited)
   <S>                                        <C>       <C>       <C>       <C>       <C>
   Financing activities:
     Distributions to stockholders and 
       partners                               $  (122)  $(1,815)  $  (353)  $    --     $     --
     Dividends to stockholders                   (272)     (318)       --        --           --
     Proceeds from note payable to bank            --        --        --     1,075       84,405
     Repayment of note payable to bank             --        --        --        --       (3,135)
     Proceeds from long-term debt              34,735    10,559     7,595     2,982        8,433
     Repayment of long-term debt              (24,844)   (9,539)   (7,435)   (3,029)     (70,655)
     Proceeds from sale of stock, net of 
       issuance costs                              --        --        --        --       81,328
     Purchase and retirement of common stock       --      (663)       --        --       (3,770)
     Proceeds from issuance of common stock 
       under employee stock purchase plan          --        --        --        --          184
     Principal payments on capital lease 
       obligations                               (239)     (659)      (68)     (113)        (537)
     Advances from (payments to) affiliate         --     1,333        --      (200)      (1,133)
     Additions to deferred financing costs         --        --        --        --       (1,241)
                                              -------   -------   -------   -------     --------
                 Net cash provided by (used 
                   in) financing activities     9,258    (1,102)     (261)      715       93,879
                                              -------   -------   -------   -------     --------
   Change in cash and cash equivalents:
     Net increase (decrease) in cash and 
       cash equivalents                         1,274      (760)   (1,497)   (1,485)        (688)
     Cash and cash equivalents at beginning 
       of period                                5,926     7,200     7,200     6,440        4,955
                                              -------   -------   -------   -------     --------
     Cash and cash equivalents at end of 
       period                                 $ 7,200   $ 6,440   $ 5,703   $ 4,955     $  4,267
                                              =======   =======   =======   =======     ========

   </TABLE>

   
<PAGE>
   CAVANAUGHS HOSPITALITY CORPORATION
   CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
   (in thousands)

   
<TABLE>
   <CAPTION>

                                                                  Two Months
                                              Years Ended         Ended
                                              October 31,         December 31,        Year Ended
                                              -----------------   -----------------   December 31,
                                              1996      1997      1996      1997      1998
                                              -------   -------   -------   -------   ------------
                                                                (Unaudited)
   <S>                                        <C>       <C>       <C>       <C>       <C>
   Supplemental disclosure of cash flow 
     information:
       Cash paid during period for:
         Interest (net of amount 
           capitalized)                       $ 7,298   $ 8,787   $ 1,344   $ 1,474     $  7,297
         Income taxes                             130     1,646        --        --        3,554

       Noncash investing and financing 
         activities:
           Assumption of capital leases       $ 1,714   $   641   $   122   $    --     $    278
           Issuance of note payable for 
             purchase option                       --       500        --        --           --
           Issuance of operating partnership 
             units for property acquisitions       --        --        --        --        3,677
           Acquisitions of property through 
             assumption of debt or issuance 
             of note payable                       --        --        --        --       10,066
           Stock issued for partial acquisi-
             tion of partnership interest          --        --        --        --          879
   </TABLE>



   The accompanying notes are an integral part of the consolidated 
     financial statements.
   
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     (Information for the two months ended December 31, 1996 is unaudited)


      1.  ORGANIZATION:

          At December 31, 1997, the Company controlled and operated
          (through ownership or lease with purchase option agreements)
          eight hotel properties.  At December 31, 1998, the Company
          controlled and operated 19 hotel properties in Seattle, Spokane,
          Yakima, Kennewick and Olympia, Washington; Post Falls, Boise,
          Twin Falls, Pocatello and Idaho Falls, Idaho; Kalispell and
          Helena, Montana; Portland, Oregon and Salt Lake City, Utah under
          its Cavanaughs(R) brand.  Additionally, the Company provides
          computerized ticketing for entertainment events and arranges
          Broadway and other entertainment event productions.  The Company
          also leases retail and office space in buildings owned by the
          Company and manages residential and commercial properties in
          Washington, Idaho and Montana.  The Company's operations are
          segregated into three divisions:  (1) hotels and restaurants, 
          (2) entertainment, management and services, and (3) rental
          operations.

          In November 1997, the Company distributed certain of its
          operations (consisting of subsidiaries, partnership investments
          or divisions of the Company) to the existing stockholders as they
          were dissimilar to the predominant business of the Company. 
          These operations consisted primarily of  real estate development,
          a wholesale dairy processor and a long-term residence inn
          operation.  These operations have historically been managed and
          financed autonomously, will be operated autonomously in the
          future and do not have material financial commitments, guarantees
          or contingent liabilities associated with the Company.
          Accordingly, these operations have been excluded from the
          consolidated financial statements for all periods presented.  The
          effects of excluding the subsidiaries, investments or divisions
          are recorded as a contribution from or distribution to
          stockholders and partners.

          In November 1997, the Company contributed all of its assets to
          Cavanaughs Hospitality Limited Partnership (CHLP) in exchange for
          the general partnership interest (which holds a 1% interest in
          CHLP) and limited partnership interests.  Operating Units (OP
          Units) of CHLP were issued as limited partnership interests.  OP
          Units are convertible to common stock of Cavanaughs Hospitality
          Corporation on a one-for-one basis.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      1.  ORGANIZATION, CONTINUED:

          Prior to January 1, 1998, the combined financial statements
          included the operations of Cavanaughs Hospitality Corporation
          (including its merged and predecessor entities which included
          Barbieri Investment Company (BIC)) and G & B: Lincoln Building
          Limited Partnership (Lincoln Building) as these entities were
          under common control through the Barbieri family.  On January 1,
          1998, the Company issued common stock and OP Units in CHLP to the
          partners of Lincoln Building in exchange for the assets and
          liabilities of Lincoln Building.

          The consolidated financial statements as of and for the year
          ended December 31, 1998 include the accounts of Cavanaughs
          Hospitality Corporation, its wholly owned subsidiaries, a 50%
          interest in Cowley Street Limited Partnership and its general and
          limited partnership interest in CHLP.  All of these entities are
          collectively referred to as "the Company."  All significant
          intercompany transactions and amounts have been eliminated in the
          consolidated financial statements.

          Effective December 31, 1997, the Company changed its fiscal year
          end from October 31 to December 31; therefore, the consolidated
          financial statements presented herein are audited as of and for
          the two months ended December 31, 1997 with comparative unaudited
          consolidated financial statements for the two months ended
          December 31, 1996.


      2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

            CASH AND CASH EQUIVALENTS

            Cash equivalents consist of short-term, highly liquid
            investments with remaining maturities at time of purchase of
            three months or less.  The Company places its cash with high
            credit quality institutions.  At times, cash balances may be in
            excess of federal insurance limits.

            The Company maintains several trust accounts for owners of real
            properties which it manages.  These cash accounts are not owned
            by the Company and therefore, are not included in the
            consolidated financial statements.  At December 31, 1998, these
            accounts totaled approximately $2,090,000.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

            INVENTORIES

            Inventories consist primarily of food and beverage products
            held for sale at the restaurants operated by the Company.
            Inventories are valued at the lower of cost, determined on a
            first-in, first-out basis, or net realizable value.

            PROPERTY AND EQUIPMENT

            Property and equipment is stated at cost.  Depreciation is
            provided using the straight-line method over the lesser of the
            estimated useful lives of the related assets or the lease term
            as follows:

                Buildings                                 25-40 years
                Equipment                                  5-20 years
                Furniture and fixtures                       15 years
                Landscaping and land improvements            15 years

            Major additions and betterments are capitalized.  Costs of
            maintenance and repairs which do not improve or extend the
            lives of the respective assets are expensed currently.  When
            items are disposed of, the related costs and accumulated
            depreciation are removed from the accounts and any gain or loss
            is recognized in operations.  Management of the Company
            periodically reviews the net carrying value of all properties
            to determine whether there has been a permanent impairment of
            value and assesses the need for any write-downs in carrying
            value.

            INTEREST CAPITALIZATION

            The Company capitalizes interest costs during the construction
            period for qualifying assets.  During the years ended 
            October 31, 1996 and 1997, the two months ended December 31,
            1996 and 1997 and the year ended December 31, 1998, the Company
            capitalized approximately $1,412,000, $6,000, $12,000, $17,000
            and $363,000 of interest costs, respectively.

            OTHER ASSETS

            Other assets primarily include deferred loan fees, deferred
            stock offering costs, purchase option payments and prepaid
            rental income.  Deferred loan fees are amortized using the
            interest method over the term of the related loan agreement.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

            OTHER ASSETS, CONTINUED

            The Company has deferred purchase option payments made pursuant
            to a purchase agreement for a hotel property which is currently
            being leased and operated by the Company (see Note 10).  If the
            option is exercised, the option payments will offset a portion
            of the purchase price.  If the option is not exercised, the
            option payments will be charged to operations.  At December 31,
            1997, the Company also had deferred stock offering costs
            related to its initial public offering.  When the offering was
            completed in April 1998, the deferred offering costs were
            offset against the proceeds of the offering.

            INCOME TAXES

            Prior to their merger, Cavanaughs Hospitality Corporation and
            BIC filed separate federal and state income tax returns.  CHLP,
            the Lincoln Building and the other partnerships which are
            partially or wholly owned by Cavanaughs Hospitality Corporation
            are not tax paying entities.  However, the income tax
            attributes of these partnerships flow through to the respective
            partners of the partnerships.

            LEASE INCOME

            The Company records rental income from operating leases which
            contain fixed escalation clauses on the straight-line method.
            The difference between income earned and lease payments
            received from the tenants is included in other assets on the
            consolidated balance sheets.  Rental income from retail lessees
            which is contingent upon the lessees' revenues is recorded as
            income in the period earned.

            EARNINGS PER SHARE

            Due to the combination of the companies and partnerships,
            historical earnings per share information prior to the
            combination is not relevant or meaningful.  Therefore, only pro
            forma earnings per share for the year ended October 31, 1997
            has been presented based upon the number of common shares of
            Cavanaughs Hospitality Corporation which were outstanding after
            the merger of the companies and partnerships.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

            EARNINGS PER SHARE, CONTINUED

            Net income per share - basic is computed by dividing net income
            by the weighted-average number of common shares outstanding
            during the period.  Net income per share - diluted is computed
            by adjusting net income by the effect of the minority interest
            related to OP units and increasing the weighted-average number
            of common shares outstanding by the effect of the OP units and
            the additional common shares that would have been outstanding
            if the dilutive potential common shares (stock options) had
            been issued.  There is no difference between basic and diluted
            earnings per share because the stock options are antidilutive.

            ACCOUNTING FOR STOCK OPTIONS

            As permitted by Statement of Financial Accounting Standards
            No. 123 (SFAS 123), "Accounting for Stock-Based Compensation",
            the Company has chosen to measure compensation cost for stock-
            based employee compensation plans using the intrinsic value
            method of accounting prescribed by Accounting Principles Board
            Opinion No. 25, "Accounting for Stock Issued to Employees" and
            to provide the disclosure only requirements of SFAS 123.

            NEW ACCOUNTING PRONOUNCEMENTS

            In June 1997, SFAS No. 130, "Reporting Comprehensive Income",
            was issued.  This Statement requires that comprehensive income
            be reported in a financial statement that is displayed with the
            same prominence as other financial statements.  Comprehensive
            income is defined as the change in equity of a business
            enterprise arising from non-owner sources.  The classifications
            of comprehensive income under current accounting standards
            include foreign currency items, minimum pension liability
            adjustments, and unrealized gains and losses on certain
            investments in debt and equity securities.  The Company adopted
            the provisions of SFAS No. 130 on January 1, 1998.  However,
            since the Company does not have any comprehensive income items,
            there was no impact on the presentation of its consolidated
            financial statements.

            In June 1997, the Financial Accounting Standards Board issued
            SFAS No. 131, "Disclosures about Segments for an Enterprise and
            Related Information".  This Statement changes the way public
            companies report information about segments of their business
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

            NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED

            in their annual financial statements and requires them to
            report selected segment information in their quarterly reports
            issued to shareholders.  It also requires entity-wide
            disclosures about the products and services an entity provides,
            and its major customers.  The Company adopted the provisions of
            SFAS No. 131 on January 1, 1998.  Accordingly, prior periods
            presented include disclosures required by this new standard.

            In April 1998, Statement of Position (SOP) 98-5, "Reporting on
            the Costs of Start-up Activities" was issued.  The SOP requires
            that all costs of start-up activities and organization costs be
            expensed as incurred.  The Company is required to implement the
            SOP on January 1, 1999 and report the change as a cumulative
            effect of an accounting change in the statement of income. 
            Management estimates that the effect of adopting this new
            standard will be a charge to operations for the year ending
            December 31, 1999 of approximately $128,000, which is net of
            related income taxes.

            RECLASSIFICATIONS

            Certain prior year amounts have been reclassified to conform
            with the 1998 presentation.  These reclassifications had no
            effect on net income (loss) or retained earnings as previously
            reported.

            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 dates of the financial statements and
            the reported amounts of revenues and expenses during the
            reporting periods.  Actual results could differ from those
            estimates.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      3.  PROPERTY AND EQUIPMENT:

          Property and equipment at December 31, 1997 and 1998 is
          summarized as follows (in thousands):

                                                        1997      1998
                                                        --------  --------
            Buildings and equipment                     $110,812  $191,680
            Furniture and fixture                         14,258    14,926
            Equipment acquired under capital leases        4,543     4,633
            Landscaping and land improvements                863     1,260
                                                        --------  --------
                                                         130,476   212,499
            Less accumulated depreciation and 
              amortization                               (34,445)  (40,302)
                                                        --------  --------
                                                          96,031   172,197
            Land                                          16,203    54,056
            Construction in progress                                 1,170
                                                        --------  --------
                                                        $112,234  $227,423
                                                        ========  ========

      4.  LONG-TERM DEBT:

          Long-term debt consists of mortgage notes payable and notes and
          contracts payable, collateralized by real property, equipment and
          the assignment of certain rental income.  Long-term debt as of
          December 31, 1997 and 1998 is as follows (amounts outstanding in
          thousands):
                                                        1997      1998
                                                        --------  --------
            Note payable in monthly installments of 
              $79,828 including interest at 7.25%,
              through June 2006, collateralized by 
              real property                             $  9,744  $ 10,855
            Note payable in monthly installments of 
              $64,637 including interest at a 
              variable rate (7.88% at December 31, 
              1997 and 7.36% at December 31, 1998), 
              through September 2007, collateralized 
              by assignment of certain rental income       7,746     7,602
            Industrial revenue bonds payable in 
              monthly installments of $73,668 
              including interest at a variable rate 
              (7.65% at December 31, 1997 and 1998), 
              through May 2009, collateralized by real 
              property                                     7,504     7,182
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      4.  LONG-TERM DEBT, CONTINUED:
                                                        1997      1998
                                                        --------  --------
            Note payable in monthly installments of 
              $65,393, including interest at a 
              variable rate (9.5% at December 31, 
              1997 and 7.79% at December 31, 1998), 
              through June 2018, collateralized by 
              real property                             $  7,110  $  6,985
            Note payable in monthly installments of 
              $56,875 including interest at a 
              variable rate (9.0% at December 31, 
              1997 and 1998), through April 2004,
              collateralized by real property              4,775     4,654
            Note payable in monthly installments of 
              $23,006 including interest at a
              variable rate (8.25% at December 31, 
              1998), through January 2008, collater-
              alized by real property                         --     2,649
            Industrial revenue bonds payable in 
              monthly installments of $19,167 
              including interest at a variable rate 
              (4.2% at December 31, 1998), through 
              January 2007, collateralized by real 
              property                                        --     2,271
            Note payable in monthly installments of 
              $18,845 including interest at an index 
              rate plus 1.5%, subject to a minimum of 
              9.5% and a maximum of 12.0% (10.0% at 
              December 31, 1997 and 1998), through 
              December 2011, collateralized by real 
              property                                     1,687     1,630
            Note payable in monthly installments of 
              $9,076, including interest at a 
              variable rate (9.5% at December 31, 
              1997 and 7.7% at December 31, 1998), 
              through November 2009, collateralized 
              by certain equipment and furniture 
              and fixtures                                   754       711
            Note payable in monthly installments of 
              $7,024 including interest at a variable 
              rate (9.25% at December 31, 1998), through 
              March 2008, collateralized by real 
              property                                        --       523
            Note payable of interest only at 8.0% until 
              maturity in October 2002, collateralized 
              by letter of credit                            500       500
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      4.  LONG-TERM DEBT, CONTINUED:

                                                        1997      1998
                                                        --------  --------
            Notes payable which were substantially 
              collateralized by real property and
              were paid in full during the year 
              ended December 31, 1998                   $ 58,166  $     --
            Other                                             23       126
                                                        --------  --------
                                                          98,009    45,688
            Less current portion                          (3,590)   (1,538)
                                                        --------  --------
            Total long-term debt                        $ 94,419  $ 44,150
                                                        ========  ========

          The Company used the net proceeds of the initial public offering
          to repay approximately $68.6 million of debt during the year
          ended December 31, 1998.  In connection with the debt repayment,
          approximately $546,000 of deferred loan fees and prepayment
          penalties, net of $282,000 income taxes, were charged to
          operations during the year ended December 31, 1998 and are
          presented as an extraordinary item.

          Contractual maturities for long-term debt outstanding at 
          December 31, 1998, are summarized by year as follows (in
          thousands):

              Years Ending
              December 31,  
              ------------
              1999                                      $  1,538
              2000                                         1,712
              2001                                         1,828
              2002                                         2,459
              2003                                         2,107
              Thereafter                                  36,044
                                                        --------
                                                        $ 45,688
                                                        ========

     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      5.  CAPITAL LEASE OBLIGATIONS:

          The Company leases certain equipment under capital leases.  The
          imputed interest rates on the leases range from 8.0% to 8.6%.
          Cost and accumulated amortization of the equipment as of 
          December 31, 1997 are approximately $4,543,000 and $2,065,000,
          respectively.  Cost and accumulated amortization of this
          equipment as of December 31, 1998 are approximately $4,633,000
          and $1,799,000, respectively.

          Future minimum lease payments due under capital leases at
          December 31, 1998 are as follows (in thousands):

            Years Ending
            December 31,
            ------------
            1999                                        $    779
            2000                                             733
            2001                                             561
            2002                                             396
            2003                                             269
                                                        --------
            Total minimum lease payments                   2,738
            Less amount representing interest               (356)
                                                        --------
            Total obligations under capital lease          2,382
            Less current maturities                         (634)
                                                        --------
                                                        $  1,748
                                                        ========

      6.  NOTES PAYABLE TO BANK:

          In May 1998, the Company obtained an $80 million revolving
          secured credit facility with a consortium of banks.  The credit
          facility is collateralized by certain property and requires that
          the Company maintain certain financial ratios, minimum levels of
          cash flows and restricts the payment of dividends.  Any
          outstanding borrowings bear interest based on the prime rate or
          LIBOR.  At December 31, 1998, the interest rate on outstanding
          borrowings ranged from 7.225% to 8.25%.  The weighted-average
          interest rate on outstanding borrowings was 7.27%.  Interest only
          payments are due monthly.  The credit facility matures in 2003.
          The credit facility requires the initial payment of a 1% fee plus
          an annual standby fee of 0.25%.  At December 31, 1998,
          $76,300,000 is outstanding under the credit facility.  The 
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      6.  NOTES PAYABLE TO BANK, CONTINUED:

          Company was in compliance with all required covenants at 
          December 31, 1998.  The debt agreement allows the Company to pay
          dividends as long as certain minimum financial ratios are
          maintained.  At December 31, 1998, the Company was restricted
          from paying any dividends.  In December 1998, the Company
          received a commitment to amend the credit facility to increase
          the total amount available under the facility to $100 million.

          At December 31, 1998, the Company also had a $6,180,000 note
          payable to the lead bank under the credit facility.  Interest
          only at a variable rate (7.79% at December 31, 1998) was payable
          monthly.  This note will be paid in full upon the closing of the
          amended credit facility.

          At December 31, 1997, the Company had $1,075,000 outstanding
          under a $3.0 million line-of-credit agreement with U.S. Bank of
          Washington.  The outstanding balance on the unsecured credit line
          bore  interest at the bank's prime rate plus 0.25% (8.75% at
          December 31, 1997).


      7.  STOCKHOLDERS' EQUITY AND INITIAL PUBLIC OFFERING:

          After the mergers described in Note 1 were completed, the
          Articles of Incorporation of the Company were amended to
          authorize 50.0 million common shares and 5.0 million preferred
          shares.  The preferred stock rights, preferences and privileges
          will be determined by the Board of Directors.  The stockholders
          of the former companies which were merged received a total of
          7,072,025 newly issued shares in exchange for all of their
          outstanding shares. 

          In April 1998, the Company completed an initial public offering
          of 5,951,250 shares of common stock at $15 per share.  The net
          proceeds, after deducting the underwriting discount and offering
          expenses, of approximately $81,328,000 were primarily used to
          repay certain debt and acquire hotel properties.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      8.  INCOME TAXES:

          Major components of the Company's income tax provision (benefit)
          for the years ended October 31, 1996 and 1997, the two months
          ended December 31, 1996 and 1997 and the year ended December 31,
          1998 are as follows (in thousands):

     
<TABLE>
     <CAPTION>
                                                           Two Months
                                         Years Ended       Ended
                                         October 31,       December 31,      Year Ended
                                         ---------------   ---------------   December 31,
                                         1996     1997     1996     1997     1998
                                         ------   ------   ------   ------   ------------
            <S>                          <C>      <C>      <C>      <C>      <C>
              Current:
                 Federal                 $  641   $  (16)  $ (104)  $   (4)     $3,249
                 State                       --       --       --       --         127
              Deferred                       89      948       --       (2)        934
                                         ------   ------   ------   ------      ------
                                         $  730   $  932   $ (104)  $   (6)     $4,310
                                         ======   ======   ======   ======      ======
      </TABLE>

      
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      8.  INCOME TAXES:

          The income tax provisions (benefits) shown in the statements of
          operations differ from the amounts calculated using the federal
          statutory rate applied to income (loss) before income taxes as
          follows (in thousands):

     
<TABLE>
     <CAPTION>
                                                                               Two Months Ended
                                             Years Ended October 31,           December 31,                      Year Ended
                                             -------------------------------   -------------------------------   December 31,
                                             1996             1997             1996             1997             1998
                                             --------------   --------------   --------------   --------------   --------------
                                             Amount   %       Amount   %       Amount   %       Amount   %       Amount   %
                                             ------   -----   ------   -----   ------   -----   ------   -----   ------   -----
            <S>                              <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>
              Provision (benefit) at
                 federal statutory rate      $  648   34.0%   $  898   34.0%   $  (93) (34.0)%  $   --     --%   $4,204   34.0%
              Effect of tax credits              --     --       (20)  (0.7)       --     --        --     --       (59)  (0.4)
              State taxes, net of 
                 federal benefit                 --     --        --     --        --     --        --     --        84    0.7
              Other                              82    4.3        54    2.0       (11)   4.0        (6)    --        81    0.6
                                             ------   ----    ------   ----    ------   ----    ------   ----    ------   ---- 
                                             $  730   38.3%   $  932   35.3%   $ (104) (38.0)%  $   (6)    --%   $4,310   34.9%
                                             ======   ====    ======   ====    ======  =====    ======   ====    ======   ====
      </TABLE>

      
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      8.  INCOME TAXES, CONTINUED:

          Components of the net deferred tax assets and liabilities as of
          December 31, 1997 and 1998 are as follows (in thousands):

     
<TABLE>
     <CAPTION>
                                              1997                   1998
                                              --------------------   --------------------
                                              Assets   Liabilities   Assets   Liabilities
                                              ------   -----------   ------   -----------
            <S>                               <C>      <C>           <C>      <C>
              Depreciation on property and 
                 equipment                    $   --     $5,612      $   --     $6,222
              Rental income                       --        285          --        437
              Tax credits                        367         --         266         --
              Other                              115         --          44         --
                                              ------     ------      ------     ------
                                              $  482     $5,897      $  310     $6,659
                                              ======     ======      ======     ======
      </TABLE>



          At December 31, 1998, the Company has approximately $177,000 of
          alternative minimum tax credits available to offset future
          regular taxes payable to the extent they exceed alternative
          minimum taxes.  The Company also has approximately $89,000 of
          investment tax credits available to offset future Idaho state
          taxes payable.


      9.  OPERATING LEASE INCOME:

          The Company leases shopping mall space to various tenants over
          terms ranging from one to ten years.  The leases generally
          provide for fixed minimum monthly rent as well as tenants'
          payments for their pro rata share of taxes and insurance, common
          area maintenance and expenses associated with the shopping mall. 
          In addition, the Company leases commercial office space over
          terms ranging from one to eighteen years.  The cost and
          accumulated depreciation of these properties at December 31, 1997
          was approximately $32,924,000 and $8,323,000, respectively.  The
          cost and accumulated depreciation of these properties at 
          December 31, 1998 was approximately $34,106,000 and $9,421,000,
          respectively.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


      9.  OPERATING LEASE INCOME, CONTINUED:

          Future minimum lease income under existing noncancellable leases
          at December 31, 1998 is as follows (in thousands):

            Years Ending
            December 31,  
            ------------
            1999                                     $ 7,252
            2000                                       7,085
            2001                                       6,339
            2002                                       5,354
            2003                                       5,126
            Thereafter                                19,355
                                                     -------
                                                     $50,511
                                                     =======

          Rental income for the years ended October 31, 1996 and 1997, the
          two months ended December 31, 1996 and 1997 and the year ended
          December 31, 1998 was approximately $6,790,000, $6,539,000,
          $1,191,000, $1,169,000 and $7,155,000, respectively, which
          included contingent rents of approximately $342,000, $217,000,
          $58,000, $93,000 and $147,000, respectively.


     10.  OPERATING LEASE COMMITMENTS:

          The Company leases building space under an operating lease
          agreement which requires monthly payments of $4,500 through March
          2009.  Commencing in 1999, the monthly payments can be increased
          for inflation.

          In 1998, the Company began leasing land at one of its hotel
          properties which requires monthly payments based on either gross
          receipts from the hotel or a monthly minimum, whichever is
          greater, through July 2014, with two 10-year renewal options.  At
          December 31, 1998, monthly minimum lease payments were $4,896.
          The monthly minimum payments can be adjusted every three years
          based on the average monthly payments.

          In 1998, the Company began leasing land at one of its hotel
          properties, which requires monthly payments of $5,454 through May
          2062.  The monthly payments are subject to adjustment annually.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     10.  OPERATING LEASE COMMITMENTS, CONTINUED:

          In October 1997, the Company began operating a hotel in Yakima,
          Washington under an operating lease and purchase option
          agreement.  The lease agreement is for a period of 15 years with
          two five-year renewal options.  The Company pays all operating
          costs of the hotel plus monthly lease payments of $35,000 through
          September 2003.  Commencing October 2003, the monthly lease
          requirement will be $52,083 and monthly payments shall increase
          by $5,208 each year thereafter.  The Company agreed to a $1.0
          million option payment which allows the purchase of this hotel at
          a fixed price.  One-half of this option payment was paid in cash
          and the remaining $500,000 is payable in October 2002.  The
          option is exercisable by the Company between March and September
          2003 for a total purchase price of $6,250,000.  If the Company
          exercises its purchase option, the option payments made by the
          Company will be applied against the total purchase price.

          Assuming the Company exercises its purchase option for the hotel
          in March 2003, total payments due under these leases at 
          December 31, 1998 are as follows (in thousands):

            Years Ending
            December 31,  
            ------------
              1999                                   $   598
              2000                                       598
              2001                                       598
              2002                                       598
              2003                                       283
            Thereafter                                 4,681
                                                     -------
                                                     $ 7,356
                                                     =======

          Total rent expense under these leases for the years ended 
          October 31, 1996 and 1997, the two months ended December 31, 1996
          and 1997 and the year ended December 31, 1998 was $54,000,
          $54,000, $9,000, $79,000 and $573,000, respectively.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     11.  RELATED-PARTY TRANSACTIONS:

          The Company had the following transactions with related parties:

          --  Interest expense of approximately $66,000, $67,000, $11,000,
              $11,000 and $0 was incurred related to a $600,000 payable to
              an affiliated entity due to common control for the years
              ended October 31, 1996 and 1997, the two months ended
              December 31, 1996 and 1997 and the year ended December 31,
              1998, respectively.  The principal balance was paid in full
              during 1998.

          --  The Company recorded management fee and other income of
              approximately $31,000, $35,000, $8,000, $17,000 and $177,000
              during the years ended October 31, 1996 and 1997, the two
              months ended December 31, 1996 and 1997 and the year ended
              December 31, 1998, respectively, for performing management
              and administrative functions for entities which are owned by
              key stockholders and management of the Company, but are
              excluded from the consolidated financial statements.

          --  The Company received commissions for real estate sales from
              entities which are owned by key stockholders and management
              of the Company, but are excluded from the consolidated
              financial statements of $7,000, $87,000, $3,000, $1,000 and
              $42,000 for the years ended October 31, 1996 and 1997, the
              two months ended December 31, 1996 and 1997 and the year
              ended December 31, 1998, respectively.

          --  At December 31, 1997, the Company had a $1,133,000 payable to
              an affiliated entity due to common control.  The payable bore
              interest at the prime rate (8.5% at December 31, 1997).  The
              note was paid in full during 1998.  During the two months
              ended December 31, 1997 and the year ended December 31, 1998,
              the Company incurred $16,000 and $26,000 of interest expense
              associated with this note.

          --  During 1998, the Company held certain cash and investment
              accounts in a bank and had notes payable to the same bank.
              The bank's chairman, chief executive officer and president
              became a director of the Company in April 1998.  At 
              December 31, 1998, total cash and investments of
              approximately $1,306,000 and a note payable totaling
              approximately $1,436,000 were outstanding with this bank.
              Total interest income and interest expense of $74,000 and
              $128,000, respectively, was incurred related to this bank
              during the year ended December 31, 1998.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     12.  EMPLOYEE BENEFIT AND STOCK PLANS:

            1998 STOCK INCENTIVE PLAN

            The 1998 Stock Incentive Plan (the Plan) was adopted by the
            Board of Directors in 1998.  The Plan authorizes the grant or
            issuance of various option or other awards.  The maximum number
            of shares which may be awarded under the Plan is 1,200,000
            shares, subject to adjustment for stock splits, stock dividends
            and similar events.  The Compensation Committee of the Board of
            Directors administers the Plan and establishes to whom, the
            type and the terms and conditions, including the exercise
            period, the awards are granted.  

            Nonqualified stock options may be granted for any term
            specified by the Compensation Committee and may be granted at
            less than fair market value, but not less than par value on the
            date of grant.  Incentive stock options may be granted only to
            employees and must be granted at an exercise price at least
            equal to fair market value on the date of grant and have a ten
            year exercise period.  The maximum fair market value of shares
            which may be issued pursuant to incentive stock options granted
            under the Plan to any individual in any calendar year may not
            exceed $100,000.  Stock Appreciation Rights (SARs) may also be
            granted in connection with stock options or other awards.  SARs
            typically will provide for payments to the holder based upon
            increases in the price of the common stock over the exercise
            price of the related option or award, but alternatively may be
            based upon other criteria such as book value.  Other awards
            such as restricted stock awards, dividend equivalent awards,
            performance awards or deferred stock awards may also be granted
            under the Plan by the Compensation Committee.

            During 1998, the Compensation Committee granted 889,919
            options.  All options were designated as nonqualified options,
            with an exercise price equal to or in excess of fair market
            value on the date of grant and for a term of ten years.  Fifty
            percent of each recipients' options will vest on the fourth
            anniversary of the date of grant and the remaining 50% will
            vest on the fifth anniversary of the date of grant.  The
            vesting schedule will change if, beginning one year after the
            option grant date, the stock price of the common stock reaches
            the following target levels (measured as a percentage increase
            over the exercise price) for 60 consecutive trading days:  
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     12.  EMPLOYEE BENEFIT AND STOCK PLANS, CONTINUED:

            1998 STOCK INCENTIVE PLAN, CONTINUED

                Stock Price                Percent of Option
                 Increase                    Shares Vested  
                -----------                -----------------
                    25%                            25%
                    50%                            50%
                    75%                            75%
                   100%                           100%

            Stock option transactions are summarized as follows:

     
<TABLE>
     <CAPTION>
                                                                             Exercise
                                                Number     Weighted-Average  Price      Expiration
                                                of Shares  Exercise Price    Per Share  Date
                                                ---------  ----------------  ---------  ----------
              <S>                               <C>        <C>               <C>        <C>
                 Balance, December 31, 1997           --        $   --        $   --         --
                   Options granted               889,919         15.00         15.00       2008
                   Options forfeited             (54,050)        15.00         15.00       2008
                                                 -------        ------        ------
                 Balance, December 31, 1998      835,869        $15.00        $15.00       2008
                                                 =======        ======        ======
      </TABLE>


            Remaining options available for grant at December 31, 1998 were
            364,131.  None of the options outstanding at December 31, 1998
            are exercisable.

            The Company uses the intrinsic value method versus the fair
            value method of recording compensation expense associated with
            its stock options.  Accordingly, since all options granted in
            1998 were granted at exercise prices equal to or greater than
            the fair market value of the common stock on the grant date, no
            compensation expense has been recognized in the statement of
            operations.  Had compensation cost for the Company's stock
            option plan been determined based on the fair value at the
            grant date consistent with the provisions of SFAS 123, the
            Company's net income and income per share for the year ended
            December 31, 1998 would have been decreased to the pro forma
            amounts indicated below (in thousands, except per share
            amounts):
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     12.  EMPLOYEE BENEFIT AND STOCK PLANS, CONTINUED:

            1998 STOCK INCENTIVE PLAN, CONTINUED

                                                   As Reported   Pro Forma
                                                   -----------   ---------
              Income before extraordinary item       $8,054       $7,392
              Extraordinary item                       (546)        (546)
                                                     ------       ------
              Net income                             $7,508       $6,846
                                                     ======       ======
        
              Income per share before extra-
                ordinary item                        $ 0.71       $ 0.65
              Extraordinary item                      (0.05)       (0.05)
                                                     ------       ------
              Net income per share - basic and 
                diluted                              $ 0.66       $ 0.60
                                                     ======       ======

            The fair value of each option grant is estimated on the date of
            grant using the Black-Scholes option-pricing model with the
            following weighted-average assumptions used for grants in 1998:

              Dividend yield                             0%
              Expected volatility                       58%
              Risk free interest rates                5.55%
              Expected option lives                 4 years

            The weighted-average fair value of options granted during 1998
            was $7.25 per share. 

            In connection with the Company's initial public offering in
            1998, the Company also granted 55,000 restricted shares of
            common stock to certain members of senior management.  Twenty
            percent of these shares were issued in 1998 and twenty percent
            will be issued in each subsequent year provided such employee
            is an employee of the Company at that time.  The Company
            recorded compensation expense of approximately $165,000 during
            the year ended December 31, 1998 associated with these grants.

            EMPLOYEE STOCK PURCHASE PLAN

            In 1998, the Company adopted the Employee Stock Purchase Plan
            to assist employees of the Company in acquiring a stock
            ownership interest in the Company.  A maximum of 300,000 shares
            of common stock is reserved for issuance under this plan. 

     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     12.  EMPLOYEE BENEFIT AND STOCK PLANS, CONTINUED:

            EMPLOYEE STOCK PURCHASE PLAN, CONTINUED

            The Employee Stock Purchase Plan permits eligible employees to
            purchase common stock at a discount through payroll deductions. 
            No employee may purchase more than $25,000 worth of common
            stock under this plan in any calendar year.  During the year
            ended December 31, 1998, 18,752 shares were purchased under
            this plan for approximately $184,000.

            DEFINED CONTRIBUTION PLAN

            The Company and employees contribute to the Cavanaughs
            Hospitality Corporation Amended and Restated Retirement and
            Savings Plan.  The defined contribution plan was created for
            the benefit of substantially all employees of the Company.  The
            Company makes contributions of up to 3% of an employee's
            compensation based on a vesting schedule and eligibility
            requirements set forth in the plan document.  Company
            contributions to the plan for the years ended October 31, 1996
            and 1997, the two months ended December 31, 1996 and 1997 and
            the year ended December 31, 1998 were approximately $93,000,
            $97,000, $18,000, $20,000 and $161,000, respectively.


     13.  ACQUISITIONS:

          During 1998, the Company acquired certain property and equipment
          of hotels in the following locations:

     
<TABLE>
     <CAPTION>

              Month                                           Number of     Purchase
              Acquired    Location                            Hotels        Price
              --------    -------------------------------     ---------     --------------
              <S>         <C>                                 <C>           <C>
              January     Spokane, WA                             1         $ 11.5 million
              February    Idaho Falls, ID                         1            3.8 million
              March       Post Falls, ID                          1            9.5 million
              April       Hillsboro, OR                           1            5.5 million
              June        Kalispell, MT                           1            9.6 million
              June        Salt Lake City, UT                      1           31.6 million
              July        Boise, ID, Twin Falls, ID, 
                            Pocatello, ID, and Helena, MT         4           30.3 million
              December    Olympia, WA                             1           11.7 million
                                                                            --------------
                                                                            $113.5 million
                                                                            ==============
      </TABLE>

      
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     13.  ACQUISITIONS, CONTINUED:

          The Spokane, Washington acquisition was a lease with purchase
          option.  The purchase option was exercised in April 1998.  The
          purchase prices for the hotels were satisfied through a
          combination of the payment of cash, the assumption of debt and
          the issuance of OP Units.  As part of the total purchase price
          above, CHLP issued 245,148 OP Units which were valued at
          approximately $3.7 million.

          All of these acquisitions have been accounted for using the
          purchase method of accounting.  Accordingly, the results of
          operations of these hotels have been included in the consolidated
          statement of operations since their respective dates of
          acquisition.  Total property and equipment acquired was
          approximately $78.0 million, and debt of approximately $8.7
          million was assumed in these acquisitions.  The excess purchase
          price of the assets over their historical cost bases has been
          allocated to property and equipment and is being depreciated over
          the estimated remaining useful life of the related assets
          (approximately 15-40 years).

          The following unaudited pro forma summary presents the
          consolidated results of operations of the Company as if the
          acquisitions had occurred at the beginning of the fiscal year
          ended October 31, 1997:

                                                       1997       1998
                                                       --------   --------
            Revenue                                    $105,424   $105,006
                                                       ========   ========
            Net income                                 $  3,255   $  7,720
                                                       ========   ========
            Net income per share - basic and diluted   $   0.46   $   0.68
                                                       ========   ========

     14.  FAIR VALUE OF FINANCIAL INSTRUMENTS:

          The following estimated fair value amounts have been determined
          using available market information and appropriate valuation
          methodologies.  However, considerable judgment is required to
          interpret market data and to develop the estimates of fair value.
          Accordingly, the estimates presented herein are not necessarily
          indicative of the amounts the Company could realize in a current
          market exchange.
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     14.  FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:

          The following methods and assumptions were used to estimate the
          fair value of each class of financial instruments for which it is
          practicable to estimate that value.  Potential income tax
          ramifications related to the realization of unrealized gains and
          losses that would be incurred in an actual sale or settlement
          have not been taken into consideration.

          The carrying amounts for cash and cash equivalents, accounts
          receivable and current liabilities are a reasonable estimate of
          their fair values.  The fair values of long-term debt and capital
          lease obligations are based on the discounted value of
          contractual cash flows.  The discount rate is estimated using the
          rates currently offered for debt or capital lease obligations
          with similar remaining maturities.

          The estimated fair values of financial instruments at 
          December 31, 1997 and 1998 are as follows (in thousands):

     
<TABLE>
     <CAPTION>
                                                  1997                 1998
                                                  ------------------   ------------------
                                                  Carrying   Fair      Carrying   Fair
                                                  Amount     Value     Amount     Value
                                                  --------   -------   --------   -------
            <S>                                   <C>        <C>       <C>        <C>
              Financial assets:
                 Cash and cash equivalents        $ 4,955    $ 4,955   $ 4,267    $ 4,267
                 Accounts receivable                2,785      2,785     5,427      5,427

              Financial liabilities:
                 Current liabilities, excluding 
                   debt                             8,921      8,921     9,709      9,709
                 Notes payable to bank              1,075      1,075    82,480     82,480
                 Long-term debt                    98,009     99,776    45,688     47,462
                 Capital lease obligations          2,641      2,641     2,382      2,382
      </TABLE>



     15.  BUSINESS SEGMENTS:

          As described in Note 1, the Company operates in three segments:
          (1) hotels and restaurants; (2) entertainment, management and
          services; and (3) rental operations.  Revenues and identifiable
          assets of each segment are those that are directly identified
          with those operations.  Capital expenditures and identifiable
          assets for the entertainment, management and services segment are
          not separated from corporate.  General corporate assets consist
          primarily of cash and cash equivalents, receivables and certain
     
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     15.  BUSINESS SEGMENTS, CONTINUED:

          property and equipment.  Operating income for each segment
          represents revenues less direct operating expenses of each
          segment.  Undistributed operating expenses are not identified by
          segment.  Interest expense related to debt which is specifically
          associated with a segment is presented as an expense of the
          segment.  Interest expense not allocated to a segment is
          presented as general corporate interest expense.  Selected
          information with respect to the segments is as follows (in
          thousands):

     
<TABLE>
     <CAPTION>
                                              Years Ended         Two Months Ended    Year Ended
                                              October 31,         December 31,        December 31,
                                              ------------------  ------------------  ------------
                                              1996      1997      1996      1997      1998
                                              --------  --------  --------  --------  ------------
            <S>                               <C>       <C>       <C>       <C>       <C>
              Revenues:
                 Hotels and restaurants       $ 35,205  $ 41,662  $  5,683  $  6,829    $ 75,172
                 Entertainment, management 
                   and services                  3,168     3,842       483       840       4,006
                 Rental operations               6,790     6,539     1,191     1,169       7,155
                                              --------  --------  --------  --------    --------
                                              $ 45,163  $ 52,043  $  7,357  $  8,838    $ 86,333
                                              ========  ========  ========  ========    ========
              Operating income:
                 Hotels and restaurants       $ 18,297  $ 22,293  $  2,754  $  3,284    $ 41,220
                 Entertainment, management 
                   and services                    964     1,790        86       238       1,321
                 Rental operations               5,326     5,033       948       866       5,585
                 Undistributed operating 
                   expenses                    (15,673)  (18,481)   (2,864)   (3,045)    (27,816)
                                              --------  --------  --------  --------    --------
                                              $  8,914  $ 10,635  $    924  $  1,343    $ 20,310
                                              ========  ========  ========  ========    ========
              Capital expenditures:
                 Hotels and restaurants       $ 11,705  $  4,960  $  1,407  $  1,322    $118,899
                 Rental operations               1,631       980       150     1,060       1,056
                 General corporate, including 
                   entertainment, management 
                   and services                    121       252        32        18       1,194
                                              --------  --------  --------  --------    --------
                                              $ 13,457  $  6,192  $  1,589  $  2,400    $121,149
                                              ========  ========  ========  ========    ========
      </TABLE>

      
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     15.  BUSINESS SEGMENTS, CONTINUED:

     
<TABLE>
     <CAPTION>
                                              Years Ended         Two Months Ended    Year Ended
                                              October 31,         December 31,        December 31,
                                              ------------------  ------------------  ------------
                                              1996      1997      1996      1997      1998
                                              --------  --------  --------  --------  ------------
            <S>                               <C>       <C>       <C>       <C>       <C>
              Depreciation and amortization:
                 Hotels and restaurants       $  2,840  $  3,457  $    573  $    581    $  4,789
                 Rental operations               1,210     1,179       172       188       1,005
                 General corporate, including 
                   entertainment, management 
                   and services                    165       139        14        29         321
                                              --------  --------  --------  --------    --------
                                              $  4,215  $  4,775  $    759  $    798    $  6,115
                                              ========  ========  ========  ========    ========
              Interest expense:
                 Hotels and restaurants       $  4,812  $  6,343  $    890  $  1,040    $  3,395
                 Rental operations               2,243     2,235       368       356       1,990
                 General corporate, including 
                   entertainment, management 
                   and services                    264       239        59        26       2,742
                                              --------  --------  --------  --------    --------
                                              $  7,319  $  8,817  $  1,317  $  1,422    $  8,127
                                              ========  ========  ========  ========    ========
              Identifiable assets:
                 Hotels and restaurants       $ 90,345  $ 91,431  $ 89,591  $ 92,415    $209,539
                 Rental operations              24,049    24,035    24,645    25,965      26,327
                 General corporate, including 
                   entertainment, management 
                   and services                  5,693     8,638     5,705     6,737       9,037
                                              --------  --------  --------  --------    --------
                                              $120,087  $124,104  $119,941  $125,117    $244,903
                                              ========  ========  ========  ========    ========
      </TABLE>

      
<PAGE>
     CAVANAUGHS HOSPITALITY CORPORATION
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
     (Information for the two months ended December 31, 1996 is unaudited)


     16.  EARNINGS PER SHARE:

          The following table presents a reconciliation of the numerators
          and denominators used in the basic and diluted EPS computations
          (in thousands, except per share amounts).  Also shown is the
          number of dilutive securities (stock options) that would have
          been included in the diluted EPS computation if they were not
          anti-dilutive.

     
<TABLE>
     <CAPTION>
                                          Year Ended
                                          October 31, 1997   Two Months Ended    Year Ended
                                          (Pro Forma)        December 31, 1997   December 31, 1998
                                          ----------------   -----------------   -----------------
            <S>                           <C>                <C>                 <C>
              Numerator:
                 Income before extra-
                   ordinary item               $ 1,709            $     6             $ 8,054
                 Extraordinary item                 --                 --                (546)
                                               -------            -------             -------
                 Net income after extra-
                   ordinary item - basic         1,709                  6               7,508
                 Income effect of 
                   dilutive OP Units                --                 --                 223
                                               -------            -------             -------
                 Net income after extra-
                   ordinary item - diluted     $ 1,709            $     6             $ 7,731
                                               =======            =======             =======
              Denominator:
                 Weighted-average shares 
                   outstanding - basic           7,072              7,072              11,347
                 Effect of dilutive OP Units        --                 --                 319
                 Effect of dilutive common 
                   stock options                    --                 --                  (A)
                                               -------            -------             -------
                 Weighted-average shares 
                   outstanding - diluted         7,072              7,072              11,666
                                               =======            =======             =======
                 Earnings Per Share - basic
                   and diluted:
                     Income per share before 
                       extraordinary item      $  0.24            $    --             $  0.71
                     Extraordinary item             --                 --               (0.05)
                                               -------            -------             -------
                     Net income per share - 
                       basic and diluted       $  0.24            $    --             $  0.66
                                               =======            =======             =======

      </TABLE>

          (A) At December 31, 1998, 835,869 stock options are outstanding.
              The effects of the shares which would be issued upon the
              exercise of these options have been excluded from the
              calculation of diluted earnings per share for the year ended
              December 31, 1998 because they are anti-dilutive.
     
<PAGE>

 
    ITEM 9. Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure
     -------------------------------------------------------------------
     None



     PART III


     ITEM 10. Directors and Executive Officers of the Registrant
     -----------------------------------------------------------
     DIRECTORS AND EXECUTIVE OFFICERS

     The information required by this item is contained in, and
     incorporated by reference from, the Proxy Statement for the Company's
     1999 Annual Meeting of Shareholders under the caption "Directors and
     Officers of the Registrant."

     COMPENSATION OF DIRECTORS

     The information required by this item is contained in, and
     incorporated by reference from, the Proxy Statement for the Company's
     1999 Annual Meeting of Shareholders under the caption "Compensation of
     Directors."
      

     ITEM 11. Executive Compensation
     -------------------------------
     The information required by this item is contained in, and
     incorporated by reference from, the Proxy Statement for the Company's
     1999 Annual Meeting of Shareholders under the caption "Executive
     Compensation."


     ITEM 12. Security Ownership of Certain Beneficial Owners and
              Management
     ------------------------------------------------------------
     The information required by this item is contained in, and
     incorporated by reference from, the Proxy Statement for the Company's
     1999 Annual Meeting of Shareholders under the caption "Security
     Ownership of Certain Beneficial Owners and Management."


     ITEM 13. Certain Relationships and Related Transactions
     -------------------------------------------------------
     The information required by this item is contained, and incorporated
     by reference from, the Proxy Statement for the Company's 1999 Annual
     Meeting of Shareholders under the caption "Certain Relationships and
     Related Transactions."
     
<PAGE>

     ITEM 14. Exhibits, Financial Statement Schedules, and Reports on 
              Form 8-K.
     ----------------------------------------------------------------
     A.  List of documents filed as part of this report.

         1.  Index to financial statements:
             a.  Cavanaughs Hospitality Corporation - Consolidated Balance
                 Sheets
             b.  Cavanaughs Hospitality Corporation - Consolidated
                 Statements of Operations
             c.  Cavanaughs Hospitality Corporation - Consolidated
                 Statements of Changes in Stockholders' and Partners'
                 Equity
             d.  Cavanaughs Hospitality Corporation - Consolidated
                 Statements of Cash Flows
             e.  Cavanaughs Hospitality Corporation - Notes to Consolidated
                 Financial Statements

         2.  Index to financial statement schedules:

             All schedules for which provisions are made in the applicable
             accounting regulations of the Securities and Exchange
             Commission are not required under the related instructions or
             are inapplicable or the information is contained in the
             Financial Statements and therefore have been omitted.

         3.  Index to exhibits:
        
     EXHIBIT NO.    DESCRIPTION
     ---------------------------------------------------------------------
     3.1*           Amended and Restated Articles of Incorporation of the
                    Company
     3.2*           Amended and Restated By-Laws of the Company
     4.1*           Specimen Common Stock Certificate
     10.1*          Form of Revolving Credit Facility Agreement
     10.2           Amendment to Revolving Credit Facility Agreement
     10.3*          Amended and Restated Agreement of Limited Partnership
                    of Cavanaughs Hospitality Limited Partnership
     10.4*          Employee Stock Purchase Plan of Cavanaughs Hospitality
                    Corporation
     10.5*          1998 Stock Incentive Plan of Cavanaughs Hospitality
                    Corporation
     10.6*          Form of Stock Option Award Agreement
     10.7*          Form of Restricted Stock Award Agreement
     10.8*          Gateway Property Lease Agreement
     10.9*          Gateway Property Option Agreement
     10.10*         Ridpath Property Lease Agreement
     10.11*         Form of Indemnification Agreement
     21*            List of Subsidiaries of the Company
     23.1           Consent of PricewaterhouseCoopers LLP
     24.1*          Power of Attorney (see signature pages)
     27.1           Financial Data Schedule
     
<PAGE>
     *Previously filed with the Securities and Exchange Commission as an
      exhibit to the Company's Form S-1 or the Company's periodic reports
      required pursuant to the Securities Exchange Act of 1934, as amended.


     B.  Reports on Form 8-K:

         During the fourth quarter 1998, the Company filed with the
         Securities and Exchange Commission a Form 8-K, dated December 1,
         1998, with respect to an acquisition of a hotel by the Company.


     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.



                        Cavanaughs Hospitality Corporation
                        --------------------------------------------------
                        Registrant


                        By:  /s/  Donald K. Barbieri
                             ---------------------------------------------
                             Donald K. Barbieri
                             Chairman, President and Chief Executive
                               Officer

                        March 10, 1999
                        --------------------------------------------------
                        Date


     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. 


                        By:  /s/ Arthur M. Coffey
                             ---------------------------------------------
                             Arthur M. Coffey
                             Executive Vice President, Chief Financial
                               Officer and Director

                        March 10, 1999
                        --------------------------------------------------
                        Date
     
<PAGE>
                        By:  /s/ Thomas M. Barbieri
                             ---------------------------------------------
                             Thomas M. Barbieri
                             Executive Vice President Operations and
                               Director

                        March 10, 1999
                        --------------------------------------------------
                        Date


                        By:  /s/ Richard L. Barbieri
                             ---------------------------------------------
                             Richard L. Barbieri
                             Senior Vice President, General Counsel and
                               Director

                        March 10, 1999
                        --------------------------------------------------
                        Date


                        By:  /s/ David M. Bell
                             ---------------------------------------------
                             David M. Bell
                             Senior Vice President-Project Design,
                               Development and Construction

                        March 10, 1999
                        --------------------------------------------------
                        Date


                        By:  /s/ Peter F. Stanton
                             ---------------------------------------------
                             Peter F. Stanton
                             Director

                        March 10, 1999
                        --------------------------------------------------
                        Date


                        By:  /s/ Ronald R. Taylor
                             ---------------------------------------------
                             Ronald R. Taylor
                             Director

                        March 10, 1999
                        --------------------------------------------------
                        Date
     
<PAGE>
                        By:  /s/ Robert G. Templin
                             ---------------------------------------------
                             Robert G. Templin
                             Director

                        March 10, 1999
                        --------------------------------------------------
                        Date


     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
     TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
     SECURITIES PURSUANT TO SECTION 12 OF THE ACT.

     (a) Except to the extent that the materials enumerated in (1) and/or
         (2) below are specifically incorporated into this form by
         reference (in which case see Rule 12b-23(d)), every registrant
         which files an annual report on this form pursuant to
         Section 15(d) of the Act shall furnish to the Commission for its
         information, at the time of filing its report on this form, four
         copies of the following:

         (1) Any annual report to security holders covering the
             registrant's last fiscal year; and
         (2) Every proxy statement, form of proxy or other proxy soliciting
             material sent to more than 10 of the registrant's security
             holders with respect to any annual or other meeting of
             security holders.

     (b) The foregoing material shall not deemed to be "filed" with the
         Commission or otherwise subject to the liabilities of Section 18
         of the Act, except to the extent that the registrant specifically
         incorporates it in its annual report on this form by reference.

<PAGE>





<TABLE> <S> <C>

<ARTICLE> 5
       
<MULTIPLIER> 1000
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-END>                               DEC-31-1998
<CASH>                                            4267
<SECURITIES>                                         0
<RECEIVABLES>                                     5427
<ALLOWANCES>                                         0
<INVENTORY>                                        858
<CURRENT-ASSETS>                                 11909
<PP&E>                                          267725
<DEPRECIATION>                                 (40302)
<TOTAL-ASSETS>                                  244903
<CURRENT-LIABILITIES>                            11881
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                           186
<OTHER-SE>                                       93805
<TOTAL-LIABILITY-AND-EQUITY>                    244903
<SALES>                                          86333
<TOTAL-REVENUES>                                 86333
<CGS>                                            38207
<TOTAL-COSTS>                                    66023
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                8127
<INCOME-PRETAX>                                  12364
<INCOME-TAX>                                      4310
<INCOME-CONTINUING>                               8054
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                  (546)
<CHANGES>                                            0
<NET-INCOME>                                      7508
<EPS-PRIMARY>                                      .66
<EPS-DILUTED>                                      .66
        

</TABLE>





                                                               Exhibit 23.1
                                                               ------------


     CONSENT OF INDEPENDENT ACCOUNTANTS


     We consent to the incorporation by reference in the registration
     statement of Cavanaughs Hospitality Corporation on Form S-8 (File 
     No. 333-60791) of our report dated January 29, 1999, on our audits of
     the consolidated financial statements of Cavanaughs Hospitality
     Corporation as of December 31, 1997 and 1998 and for the years ended
     October 31, 1996 and 1997, the two months ended December 31, 1997 and
     the year ended December 31, 1998 which report is included in this
     Annual Report on Form 10-K.


                         /s/ PricewaterhouseCoopers LLP


     Spokane, Washington
     March 15, 1999

<PAGE>




                                                               Exhibit 10.2
                                                               ------------


                       FIRST AMENDMENT TO CREDIT AGREEMENT

     This first amendment to credit agreement ("Amendment") is made and
     entered into as of July 23, 1998, among CAVANAUGHS HOSPITALITY LIMITED
     PARTNERSHIP, a Delaware limited partnership (the "Borrower"), the
     several financial institutions that are party to this Agreement
     (collectively, the "Lenders"; individually, a "Lender"), and
     U. S. BANK NATIONAL ASSOCIATION ("U. S. Bank"), as administrative
     agent for the Lenders (the "Agent").

     RECITALS:

     A.   On May 5, 1998, the Borrower and U. S. Bank, as the Agent and a
          Lender, entered into that certain credit agreement (together with
          all amendments, supplements, exhibits, and modifications thereto,
          the "Credit Agreement") whereby the Lenders agreed to extend
          certain credit facilities to the Borrower.  The other Lenders
          that are parties to this Amendment have become Lenders under the
          Credit Agreement since May 5, 1998.

     B.   The Borrower has requested the Lenders to (1) modify certain
          provisions of the Credit Agreement, (2) consent to the
          acquisition of certain hotel properties by the Borrower, and
          (3) consent to the inclusion as Eligible Real Property of hotel
          properties owned by the Borrower and located in Salt Lake City,
          Utah and Post Falls, Idaho (collectively,
 the "Additional
          Property").

     C.   The purpose of this Amendment is to set forth the terms and
          conditions under which the Lenders will agree to the Borrower's
          requests.

     NOW, THEREFORE, in consideration of the mutual covenants and
     conditions set forth herein, the parties agree as follows:


     ARTICLE I.  AMENDMENT

     The Credit Agreement, as well as all of the other Loan Documents, are
     hereby amended as set forth herein.  Except as specifically provided
     for herein, all of the terms and conditions of the Credit Agreement
     and each of the other Loan Documents shall remain in full force and
     effect throughout the terms of the Loans, as well as any extensions or
     renewals thereof.
     
<PAGE>
     ARTICLE II.  DEFINITIONS

     As used herein, capitalized terms shall have the meanings given to
     them in the Credit Agreement, except as otherwise defined herein, or
     as the context otherwise requires.


     ARTICLE III.  ACQUISITION AND ADDITIONAL PROPERTY

     3.1  Consent to Acquisition

     Notwithstanding the provisions of Sections 8.4(d) and 8.7 of the
     Credit Agreement, the Lenders hereby consent to (a) the acquisition by
     the Borrower from Sunstone Hotels, L.L.C. of four hotel properties,
     one each located in Boise, Idaho, Twin Falls, Idaho, Pocatello, Idaho
     and Helena, Montana for a total purchase price of $30,516,050, and (b)
     the use of Loan proceeds to finance such acquisition.

     3.2  Consent to Inclusion

     Notwithstanding the provisions of Section 7.13 of the Credit
     Agreement, and subject to the satisfaction of the conditions set forth
     in Section 5.3 of the Credit Agreement as to the Additional Property,
     the Lenders hereby consent to the inclusion of the Additional Property
     as "Eligible Real Property."

     3.3  Advance Against Additional Property

     (a)  The Approved Appraised Value has not been established for the
          Additional Property.  However, subject to the satisfaction of the
          conditions set forth in Section 5.3 of the Credit Agreement as to
          the Additional Property, the Lenders hereby agree to include
          $20,300,000 in the Borrowing Base until the earlier of
          (i) October 31, 1998, or (ii) the date that the Approved
          Appraised Value of the Additional Property is established.

     (b)  As a condition to establishing the Approved Appraised Value of
          the Additional Property, the Agent shall have ordered, reviewed
          and approved in writing an M.A.I. appraisal of each of the
          Additional Properties that is in compliance with the Financial
          Institutions Reform, Recovery and Enforcement Act.  Once the
          Approved Appraised Value of the Additional Property has been
          established and provided that the conditions set forth in
          Section 5.3 of the Credit Agreement have been complied with as to
          the Additional Property, such Approved Appraised Value shall be
          added to the Collateral Pool Value.

     
<PAGE>
     ARTICLE IV.  MODIFICATION OF COVENANTS

     4.1  Use of Proceeds

     Section 8.7(g) of the Credit Agreement is hereby deleted in its
     entirety and replaced with the following:

          (g) except as otherwise approved in writing by Lenders holding
          51% or more of the then aggregate unpaid principal amount of the
          Loans, or, if no such principal amount is then outstanding,
          Lenders then having Pro Rata Shares equal to or greater than 51%
          of the Commitments, to finance or refinance Acquisitions in an
          aggregate amount in excess of (i) $80,000,000 in any 12-month
          period through June 2, 1999, and (ii) $50,000,000 in any 12-month
          period thereafter.

     4.2  Capitalization Ratio

     (a)  Section 8.14(d) of the Credit Agreement is hereby deleted in its
          entirety and replaced with the following:

          As of the end of each fiscal quarter, the Capitalization Ratio
          shall not exceed 0.60:1.00.

     (b)  The reference to a Capitalization Ratio of 0.50:1.00 in Section
          8.10(c)(iv) of the Credit Agreement is hereby amended to
          0.60:1.00.

     ARTICLE V.  FORM OF DEED OF TRUST

     The form of Deed of Trust attached to the Credit Agreement as
     Exhibit B shall be modified to the form attached to this Amendment as
     Exhibit A in order to reflect changes to the Deed of Trust Act of the
     State of Washington enacted since the date of the Credit Agreement.

     ARTICLE VI.  CONDITIONS PRECEDENT

     The modifications set forth in this Amendment shall not be effective
     unless and until the following conditions have been fulfilled to
     Lenders' satisfaction:

     (a)  The Agent shall have received this Amendment, duly executed and
          delivered by the Borrower and each of the Lenders;

     (b)  The Agent shall have received an opinion of counsel to the
          Borrower addressed to the Agent and the Lenders, substantially in
          the form of Exhibit B;

     (c)  The Borrower shall have paid to the Agent a nonrefundable fee in
          the amount of $80,000;
     
<PAGE>
     (d)  The Agent shall have received, at the Borrower's sole cost and
          expense, a 110.5 endorsement in a form acceptable to the Agent to
          each of the Title Insurance Policies insuring Deeds of Trust on
          each parcel of Eligible Real Property (excluding the Additional
          Property) as of the date of this Amendment;

     (e)  There shall not exist any Default or Event of Default under the
          Credit Agreement or any other Loan Document; 

     (f)  All representations and warranties of the Borrower contained in
          the Credit Agreement or otherwise made in writing in connection
          therewith or herewith shall be true and correct and in all
          material respects have the same effect as though such
          representations and warranties had been made on and as of the
          date of this Amendment; and

     (g)  The Agent shall have received a certified resolution of the board
          of directors of CHC in the form attached hereto as Exhibit C.

     ARTICLE VII.  GENERAL PROVISIONS

     7.1  Representations and Warranties

     The Borrower hereby represents and warrants to the Lenders that as of
     the date of this Amendment, there exists no Default or Event of
     Default.  All representations and warranties of the Borrower contained
     in the Credit Agreement and the other Loan Documents, or otherwise
     made in writing in connection therewith, are true and correct as of
     the date of this Amendment.  The Borrower acknowledges and agrees that
     all of the Borrower's Indebtedness to the Lenders under the Credit
     Agreement is payable without offset, defense or counterclaim.

     7.2  Security

     All Loan Documents evidencing the Agent's security interest in the
     Collateral on behalf of the Lenders shall remain in full force and
     effect, and shall continue to secure, without change in priority, the
     payment and performance of the Loans and all other secured obligations
     of the Borrower to the Agent on behalf of the Lenders.

     7.3  Survival of Loan Documents

     The terms and conditions of the Credit Agreement and each of the other
     Loan Documents shall survive until all of the Borrower's obligations
     under the Credit Agreement have been satisfied in full.  By execution
     of this Amendment, CHC consents to this Amendment and reaffirms its
     obligations under the Guaranty, the Security Agreement and each of the
     other Loan Documents executed by CHC.

     
<PAGE>
     7.5  Counterparts

     This Amendment may be executed in one or more counterparts, each of
     which shall constitute an original agreement, but all of which
     together shall constitute one and the same agreement.

     7.6  Statutory Notice

     ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR
     TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE
     UNDER WASHINGTON LAW.

     IN WITNESS WHEREOF, the Borrower, the Agent, and the Lenders have
     caused this Agreement to be duly executed by the respective, duly
     authorized signatories as of the date first above written.

                              CAVANAUGHS HOSPITALITY LIMITED PARTNERSHIP

                              By: Cavanaughs Hospitality Corporation,
                                  General Partner

                              By    ______________________________________

                              Title ______________________________________


                              CAVANAUGHS HOSPITALITY CORPORATION

                              By    ______________________________________

                              Title ______________________________________


                              U. S. BANK NATIONAL ASSOCIATION, as Agent

                              By    ______________________________________

                              Title ______________________________________


                              U. S. BANK NATIONAL ASSOCIATION, as a Lender

                              By    ______________________________________

                              Title ______________________________________


                              BANK OF SCOTLAND

                              By    ______________________________________

                              Title ______________________________________
     
<PAGE>
                              BANK LEUMI USA

                              By    ______________________________________

                              Title ______________________________________


                              IMPERIAL BANK

                              By    ______________________________________

                              Title ______________________________________


                              FIRST SECURITY BANK, N.A.

                              By    ______________________________________

                              Title ______________________________________
     
<PAGE>
                                    EXHIBIT A
                     to First Amendment to Credit Agreement
                              FORM OF DEED OF TRUST
     
<PAGE>
                                    EXHIBIT B
                     to First Amendment to Credit Agreement
                             FORM OF OPINION LETTER
     
<PAGE>
                                    EXHIBIT C
                     to First Amendment to Credit Agreement
                   FORM OF CAVANAUGHS HOSPITALITY CORPORATION
                               ACTION OF DIRECTORS
     
<PAGE>
     SECOND AMENDMENT TO CREDIT AGREEMENT

     This second amendment to credit agreement ("Amendment") is made and
     entered into as of February 5, 1999, among CAVANAUGHS HOSPITALITY
     LIMITED PARTNERSHIP, a Delaware limited partnership (the "Borrower"),
     the several financial institutions that are party to this Agreement
     (collectively, the "Lenders"; individually, a "Lender"), and
     U. S. BANK NATIONAL ASSOCIATION ("U. S. Bank"), as administrative
     agent for the Lenders (the "Agent").

                                    RECITALS:

     A.   On May 5, 1998, the Borrower and U. S. Bank, as the Agent and a
          Lender, entered into that certain credit agreement (together with
          all amendments, supplements, exhibits, and modifications thereto,
          the "Credit Agreement") whereby the Lenders agreed to extend
          certain credit facilities to the Borrower.  The other Lenders
          that are parties to this Amendment have become Lenders under the
          Credit Agreement since May 5, 1998.  The Credit Agreement has
          been amended by that certain first amendment to credit agreement
          dated as of July 23, 1998.

     B.   The Borrower has requested the Lenders to (1) increase the
          Commitment from $80,000,000 to $100,000,000, and (2) eliminate
          the limitations on the use of the proceeds of the Loans for the
          acquisition of hotel properties.

     C.   The purpose of this Amendment is to set forth the terms and
          conditions under which the Lenders will agree to the Borrower's
          requests.

     NOW, THEREFORE, in consideration of the mutual covenants and
     conditions set forth herein, the parties agree as follows:

     ARTICLE I.  AMENDMENT

     The Credit Agreement, as well as all of the other Loan Documents, are
     hereby amended as set forth herein.  Except as specifically provided
     for herein, all of the terms and conditions of the Credit Agreement
     and each of the other Loan Documents shall remain in full force and
     effect throughout the terms of the Loans, as well as any extensions or
     renewals thereof.

     ARTICLE II.  DEFINITIONS

     2.1  Defined Terms

     As used herein, capitalized terms shall have the meanings given to
     them in the Credit Agreement, except as otherwise defined herein or as
     the context otherwise requires.
     
<PAGE>
     2.2  Amended Defined Terms

     Section 1.1 of the Credit Agreement is hereby amended to modify the
     following defined terms:

     "Commitment" means $100,000,000 less the aggregate amount of mandatory
     prepayments made in accordance with Section 2.6.

     "Interest Margin" means the number of basis points per annum
     determined in accordance with the following matrix and based upon the
     quarterly financial statements of the Borrower provided to the Agent
     in accordance with the terms of this Agreement for the preceding
     fiscal quarter.  Adjustments shall be made 45 days after the end of
     each fiscal quarter (when quarterly financial statements are required
     to be delivered to the Agent); provided, however, that if the Borrower
     has not delivered its financial statements for the previous fiscal
     quarter within 45 days of the end of such fiscal quarter, then the
     Interest Margin in effect for the previous fiscal quarter shall
     continue to apply unless the Agent exercises its right to impose
     interest at the default rate as provided for in this Agreement:

     Funded Debt Ratio    Level I    Level II       Level III     Level IV
     -----------------    -------    -----------    -----------   --------
     Funded Debt Ratio    <3.00      >3.00 <35.0    >3.50 <4.00   >4.00
                                     -              -             -

     Reference Margin     0          0              25            37.5

     LIBOR Margin         180        200            225           250



     > means greater than or equal to
     -

     < means less than


     The margins set forth above shall apply unless there exists an Event
     of Default, in which case the Agent may elect to impose the default
     rate as provided for in this Agreement.
     
<PAGE>
     ARTICLE III.  MODIFICATION OF THE LOANS

     3.1  Modification of Pro Rata Shares

     Schedule 2.1 to the Credit Agreement is hereby replaced with
     Schedule 2.1 attached to this Amendment.

     3.2  Renewal Promissory Note

     Concurrently with the execution of this Amendment, the Borrower shall
     execute and deliver to the Agent, for the benefit of the Lenders, a
     renewal promissory note in the form attached hereto as EXHIBIT A
     ("Renewal Note").  The Renewal Note shall be in substitution for, but
     not in payment of, the Note, which shall be marked "renewed" and shall
     be retained by the Agent until the Loans have been repaid in full and
     the Commitment under the Credit Agreement is terminated.


     ARTICLE IV.  COVENANTS

     4.1  Deletion of Covenant Limiting Use of Proceeds

     Section 8.7(g) of the Credit Agreement is hereby deleted in its
     entirety.

     4.2  Repayment of Bridge Loan

     Concurrently with the first Loan advanced after the date of this
     Amendment, the Borrower shall pay in full the $6,180,000 loan extended
     by U. S. Bank to the Borrower on November 30, 1998.


     ARTICLE V.  CONDITIONS PRECEDENT

     The modifications set forth in this Amendment shall not be effective
     unless and until the following conditions have been fulfilled:

     (a)  The Agent shall have received this Amendment and the Renewal
          Note, duly executed and delivered by the respective parties
          thereto;

     (b)  The Agent shall have received, duly executed and delivered by the
          Borrower, amendments to the Deeds of Trust on each parcel of
          Eligible Real Property as of the date of this Amendment in the
          form attached hereto as EXHIBITS B-1 through B-6;

     (c)  The Agent shall have received, at the Borrower's sole cost and
          expense, a 110.5 endorsement and such other endorsements as
          reasonably deemed necessary by the Agent in forms acceptable to
          the Agent to each of the Title Insurance Policies insuring Deeds
          of Trust on each parcel of Eligible Real Property as of the date
          of this Amendment;
     
<PAGE>
     (d)  The conditions set forth in that certain commitment letter dated
          as of December 18, 1998, between the Agent and the Borrower shall
          have been satisfied;

     (e)  The Agent shall have received an opinion of counsel to the
          Borrower, addressed to the Agent and the Lenders, substantially
          in the form of EXHIBIT C;

     (f)  There shall not exist any Default or Event of Default under the
          Credit Agreement or any other Loan Document;

     (g)  All representations and warranties of the Borrower contained in
          the Credit Agreement or otherwise made in writing in connection
          therewith or herewith shall be true and correct and in all
          material respects have the same effect as though such
          representations and warranties had been made on and as of the
          date of this Amendment; and

     (h)  The Borrower shall have paid an amendment fee to the Agent for
          the benefit of each of the Lenders that evidences its approval of
          this Amendment by executing a counterpart original of this
          Amendment and returning the same to the Agent on or before
          February 28, 1999.  The amount of the amendment fee shall be
          equal to 20 basis points of each such Lender's Pro Rata Share of
          $80,000,000 prior to this Amendment becoming effective, as
          reflected on Schedule 2.1 attached to this Amendment.

     ARTICLE VI.  GENERAL PROVISIONS

     6.1  Representations and Warranties

     The Borrower hereby represents and warrants to the Lenders that as of
     the date of this Amendment, there exists no Default or Event of
     Default.  All representations and warranties of the Borrower contained
     in the Credit Agreement and the other Loan Documents, or otherwise
     made in writing in connection therewith, are true and correct as of
     the date of this Amendment.  The Borrower acknowledges and agrees that
     all of the Borrower's Indebtedness to the Lenders under the Credit
     Agreement is payable without offset, defense or counterclaim.

     6.2  Security

     All Loan Documents evidencing the Agent's security interest in the
     Collateral on behalf of the Lenders shall remain in full force and
     effect, and shall continue to secure, without change in priority, the
     payment and performance of the Loans and all other secured obligations
     of the Borrower to the Agent on behalf of the Lenders.

     6.3  Survival of Loan Documents

     The terms and conditions of the Credit Agreement and each of the other
     Loan Documents shall survive until all of the Borrower's obligations
     under the Credit Agreement have been satisfied in full.
     
<PAGE>
     6.4  Consent of CHC

     By execution of this Amendment, CHC consents to this Amendment,
     including, without limitation, the increase in the Commitment provided
     for herein, and reaffirms its obligations under the Guaranty, the
     Security Agreement and each of the other Loan Documents executed by
     CHC.

     6.5  Year 2000

     The Borrower has reviewed and assessed its business operations and
     computer systems and applications to address the "year 2000 problem"
     (that is, that computer applications and equipment used by the
     Borrower, directly or indirectly through third parties, may be unable
     to properly perform date-sensitive functions before, during and after
     January 1, 2000).  The Borrower reasonably believes that the year 2000
     problem will not result in a material adverse change in the Borrower's
     business condition (financial or otherwise), operations, properties or
     prospects or ability to repay the Lenders.  The Borrower agrees that
     this representation will be true and correct on and shall be deemed
     made by the Borrower on each date that the Borrower requests any
     advance under a Loan or delivers any information to the Agent.  The
     Borrower will promptly deliver to the Agent such information relating
     to this representation as the Agent requests from time to time.

     6.6  Counterparts

     This Amendment may be executed in one or more counterparts, each of
     which shall constitute an original agreement, but all of which
     together shall constitute one and the same agreement.

     6.7  Statutory Notice

     ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR
     TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE
     UNDER WASHINGTON LAW.

     IN WITNESS WHEREOF, the Borrower, the Agent, and the Lenders have
     caused this Amendment to be duly executed by the respective, duly
     authorized signatories as of the date first above written.

                          CAVANAUGHS HOSPITALITY LIMITED PARTNERSHIP

                              By: Cavanaughs Hospitality Corporation,
                                  General Partner

                              By    ______________________________________

                              Title ______________________________________


     
<PAGE>
                              CAVANAUGHS HOSPITALITY CORPORATION

                              By    ______________________________________

                              Title ______________________________________


                              U. S. BANK NATIONAL ASSOCIATION, as Agent

                              By    ______________________________________

                              Title ______________________________________


                              U. S. BANK NATIONAL ASSOCIATION, as a Lender

                              By    ______________________________________

                              Title ______________________________________


                              BANK OF SCOTLAND

                              By    ______________________________________

                              Title ______________________________________
     
<PAGE>
                              BANK LEUMI USA

                              By    ______________________________________

                              Title ______________________________________


                              IMPERIAL BANK

                              By    ______________________________________

                              Title ______________________________________


                              FIRST SECURITY BANK, N.A.

                              By    ______________________________________

                              Title ______________________________________

<PAGE>