UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

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

For the transition period from                      to                     

Red Lion Hotels Corporation

Washington (State or other jurisdiction of incorporation or organization)		91-1032187 (I.R.S. Employer Identification No.)
201 W. North River Drive, Suite 100 Spokane Washington (Address of principal executive offices)		99201 (Zip Code)

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

     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 þ    No o

     Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o    No þ

     As of November 2, 2007, there were 19,199,140 shares of the registrant’s common stock outstanding.

 

 

TABLE OF CONTENTS

Item No.		Description		Page No.
		PART I – FINANCIAL INFORMATION
Item 1		Financial Statements (unaudited):
		Consolidated Balance Sheets September 30, 2007 and December 31, 2006			3
		Consolidated Statements of Operations Three and Nine Months Ended September 30, 2007 and 2006			4
		Consolidated Statements of Cash Flows Nine Months Ended September 30, 2007 and 2006			5
		Condensed Notes to Consolidated Financial Statements			6
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4		Controls and Procedures			27
		PART II – OTHER INFORMATION
Item 1		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3		Defaults Upon Senior Securities			28
Item 4		Submission of Matters to a Vote of Security Holders			28
Item 5		Other Information			28
Item 6		Exhibits			28
		Signatures			29
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

RED LION HOTELS CORPORATION

		September 30,				December 31,
		2007				2006
		(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	34,618			$	13,262
Investments			—				7,635
Restricted cash			4,187				2,756
Accounts receivable, net			10,661				9,309
Inventories			1,370				1,523
Prepaid expenses and other			4,754				3,907
Assets of discontinued operations			—				14,539
Total current assets			55,590				52,931
Property and equipment, net			253,237				250,575
Goodwill			28,042				28,042
Intangible assets, net			11,706				12,097
Other assets, net			7,694				7,793
Total assets		$	356,269			$	351,438
LIABILITIES
Current liabilities:
Accounts payable		$	6,763			$	8,732
Accrued payroll and related benefits			4,465				6,058
Accrued interest payable			345				422
Advance deposits			439				315
Other accrued expenses			10,697				10,381
Long-term debt, due within one year			5,452				2,267
Liabilities of discontinued operations			—				4,112
Total current liabilities			28,161				32,287
Long-term debt, due after one year			78,298				83,005
Deferred income			9,413				7,017
Deferred income taxes			16,914				14,259
Minority interest in partnerships			44				254
Debentures due Red Lion Hotels Capital Trust			30,825				30,825
Total liabilities			163,655				167,647
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock - 5,000,000 shares authorized; $0.01 par value; no shares issued or outstanding			—				—
Common stock - 50,000,000 shares authorized; $0.01 par value; 19,228,590 and 19,118,692 shares issued and outstanding			192				191
Additional paid-in capital, common stock			149,415				147,891
Retained earnings			43,007				35,709
Total stockholders’ equity			192,614				183,791
Total liabilities and stockholders’ equity		$	356,269			$	351,438

The accompanying condensed notes are an integral part of the consolidated financial statements.

RED LION HOTELS CORPORATION

		Three months ended September 30,								Nine months ended September 30,
		2007				2006				2007				2006
						(In thousands, except per share data)
Revenue:
Hotels		$	50,039			$	47,762			$	129,259			$	119,242
Franchise and management			701				847				2,272				2,064
Entertainment			3,030				2,519				9,019				8,377
Other			750				283				2,268				1,193
Total revenues			54,520				51,411				142,818				130,876
Operating expenses:
Hotels			33,546				33,446				96,311				91,871
Franchise and management			190				213				586				623
Entertainment			2,519				2,107				7,978				7,062
Other			454				296				1,402				1,437
Depreciation and amortization			4,194				3,156				12,210				8,965
Hotel facility and land lease			1,513				1,751				4,964				5,162
Gain on asset dispositions, net			(188	)			(173	)			(427	)			(1,510	)
Undistributed corporate expenses			1,555				1,557				4,510				3,825
Total expenses			43,783				42,353				127,534				117,435
Operating income			10,737				9,058				15,284				13,441
Other income (expense):
Interest expense			(2,320	)			(2,907	)			(6,871	)			(9,644	)
Expense of early extinguishment of debt, net			—				(4,938	)			—				(5,743	)
Minority interest in partnerships, net			(39	)			33				(40	)			43
Other income, net			379				554				971				1,626
Income (loss) from continuing operations before income taxes			8,757				1,800				9,344				(277	)
Income tax (benefit) expense			2,958				461				3,015				(863	)
Net income from continuing operations			5,799				1,339				6,329				586
Discontinued operations:
Income (loss) from operations of discontinued business units, net of income tax benefit (expense) of $17, $(193), $62 and $(98), respectively			(32	)			347				(113	)			178
Net gain (loss) on disposal of discontinued business units, net of income tax benefit (expense) of $(736), $128, $(596) and $112			1,338				(234	)			1,082				(204	)
Income (loss) from discontinued operations			1,306				113				969				(26	)
Net income		$	7,105			$	1,452			$	7,298			$	560
Earnings per share:
Basic
Net income from continuing operations		$	0.30			$	0.07			$	0.33			$	0.04
Income from discontinued operations			0.07				0.01				0.05				—
Net income		$	0.37			$	0.08			$	0.38			$	0.04
Diluted
Net income from continuing operations		$	0.29			$	0.07			$	0.32			$	0.03
Income from discontinued operations			0.07				—				0.05				—
Net income		$	0.36			$	0.07			$	0.37			$	0.03
Weighted average shares — basic			19,226				19,102				19,191				15,840
Weighted average shares — diluted			19,574				19,549				19,573				16,275

The accompanying condensed notes are an integral part of the consolidated financial statements.

RED LION HOTELS CORPORATION

		Nine months ended September 30,
		2007				2006
		(In thousands)
Operating activities:
Net income		$	7,298			$	560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			12,237				9,282
Gain on disposition of property, equipment and other assets, net			(427	)			(1,606	)
(Gain) loss on disposition of discontinued operations, net			(1,678	)			321
Expense of early extinguishment of debt, net			—				5,743
Deferred income tax provision			2,830				1,500
Minority interest in partnerships			40				(44	)
Equity in investments			(62	)			(177	)
Imputed interest expense			157				—
Compensation expense related to stock and option issuance			666				545
Provision for (collection of) doubtful accounts			19				(411	)
Change in current assets and liabilities:
Restricted cash			(1,431	)			997
Accounts receivable			(1,238	)			(654	)
Inventories			158				257
Prepaid expenses and other			(813	)			(2,948	)
Accounts payable			(2,082	)			2,756
Accrued payroll and related benefits			(1,613	)			(661	)
Accrued interest payable			(98	)			(267	)
Other accrued expenses and advance deposits			3,380				2,252
Net cash provided by operating activities			17,343				17,445
Investing activities:
Purchases of property and equipment			(14,002	)			(30,294	)
Proceeds from disposition of property and equipment			18				27
Proceeds from disposition of discontinued operations			7,918				12,724
Proceeds from short-term liquid investments			7,635				1,100
Proceeds from (advances to) Red Lion Hotels Capital Trust			(17	)			498
Other, net			(284	)			111
Net cash provided by (used in) investing activities			1,268				(15,834	)
Financing activities:
Repayment of long-term debt including expense of early extinguishment			(1,894	)			(40,893	)
Borrowings on long-term debt			3,926				—
Proceeds from common stock offering			—				60,420
Repayment of debentures including expense of early extinguishment			—				(17,403	)
Proceeds from issuance of common stock under employee stock purchase plan			196				156
Proceeds from stock option exercises			488				343
Distributions to operating partnership unit holders			(1	)			—
Additions to deferred financing costs			(27	)			(909	)
Net cash provided by financing activities			2,688				1,714
Net change in cash from discontinued operations			57				71
Change in cash and cash equivalents:
Net increase in cash and cash equivalents			21,356				3,396
Cash and cash equivalents at beginning of period			13,262				13,533
Cash and cash equivalents at end of period		$	34,618			$	16,929
Supplemental disclosure of cash flow information:
Cash paid during periods for:
Interest on long-term debt		$	7,040			$	9,987
Income taxes		$	—			$	1,812
Noncash investing and financing activities:
Exchange of property and equipment for minority interest		$	906			$	—
Exchange of common stock for minority interest in partnership		$	—			$	2,273
Exchange of common stock for real estate management business		$	—			$	1,131

The accompanying condensed notes are an integral part of the consolidated financial statements.

RED LION HOTELS CORPORATION

1. Organization

     Red Lion Hotels Corporation (“Red Lion” or the “Company”) is a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the ownership, operation and franchising of midscale and upscale, full service hotels under the Red Lion brand. As of September 30, 2007, the Red Lion system of hotels contained 52 hotels located in eight states and one Canadian province, with 9,078 rooms and 467,529 square feet of meeting space. As of September 30, 2007, the Company operated 30 hotels, of which 18 are wholly owned and 12 are leased, managed one hotel owned by a third-party and franchised 21 hotels that were owned and operated by various third-party franchisees.

     In addition to hotel operations, the Company is engaged in entertainment operations. Through the entertainment division, which includes TicketsWest.com, Inc., the Company engages in event ticket distribution and promotion and presents a variety of entertainment productions.

     Historically, the Company owned certain commercial real estate and engaged in traditional real estate related services, including developing, managing and acting as a broker for sales and leases of commercial and multi-unit residential properties (collectively referred to as the real estate management business). Together with commercial retail and office properties the Company owned, these operations comprised the “Real Estate” segment. Effective April 30, 2006, the Company divested the real estate management business. Any former Real Estate segment activities still part of continuing operations have been included within the “Other” segment for all periods presented. During the third quarter of 2007, the Company sold a wholly-owned commercial real estate properties recorded as a discontinued operation. as discussed further in Note 4.

     The Company was incorporated in the state of Washington in April 1978, and operated hotels until 1999 under various brand names including Cavanaughs Hotels. In 1999, the Company acquired WestCoast Hotels, Inc., and rebranded its Cavanaughs hotels to the WestCoast brand — changing the Company’s name to WestCoast Hospitality Corporation. In 2001, the Company acquired Red Lion Hotels, Inc. In September 2005, after rebranding most of its WestCoast hotels to the Red Lion brand, the Company changed its name to Red Lion Hotels Corporation. The financial statements encompass the accounts of Red Lion Hotels Corporation and all of its consolidated subsidiaries, including its 100% ownership of Red Lion Hotels Holdings, Inc., and Red Lion Hotels Franchising, Inc., and its more than 99% ownership of Red Lion Hotels Limited Partnership (“RLHLP”).

     Up to July 22, 2005, the Company wholly owned a retail and hotel property and included it in consolidation. At that date, the Company sold a 50% tenancy-in-common interest in the property to a third party but continued to consolidate the property in its financial statements. Effective July 1, 2006, the Company determined its 50% ownership interest should be reflected as an equity method investment from the date of the sale and prior period financial statements were reclassified. In December 2006, the Company increased its ownership in the property to 100%. From that date forward, the property was again consolidated.

     The financial statements include an equity method investment in a 19.9% owned real estate venture, as well as certain cost method investments in various entities included as other assets, over which the Company does not exercise significant influence. In addition, the Company holds a 3% common interest in Red Lion Hotels Capital Trust (the “Trust”) that is considered a variable interest entity under FIN-46(R) “Consolidation of Variable Interest Entities,” as revised. The Company is not the primary beneficiary of the Trust; thus, it is treated as an equity method investment.

     All significant inter-company and inter-segment transactions and accounts have been eliminated upon consolidation. Certain amounts disclosed in prior period statements have been reclassified to conform to the current period presentation.

2. Basis of Presentation

     The unaudited consolidated financial statements included herein have been prepared by Red Lion pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in financial statements have been condensed or omitted as permitted by such rules and regulations.

     The balance sheet as of December 31, 2006 has been compiled from the audited balance sheet as of such date. The Company believes the disclosures included herein are adequate; however, they should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2006, previously filed with the SEC on Form 10-K.

     In the opinion of management, these unaudited consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly the consolidated financial position of the Company at September 30, 2007, the consolidated results of operations for the three and nine months ended September 30, 2007 and 2006, and the consolidated cash flows for the nine months ended September 30, 2007 and 2006. The results of operations for the periods presented may not be indicative of those which may be expected for a full year.

     Management makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures of contingent liabilities. Actual results could materially differ from those estimates.

3. Property and Equipment

     Property and equipment used in continuing operations is summarized as follows (in thousands):

		September 30,				December 31,
		2007				2006
Buildings and equipment		$	247,030			$	226,164
Furniture and fixtures			36,202				34,505
Landscaping and land improvements			3,559				2,764
			286,791				263,433
Less accumulated depreciation and amortization			(95,712	)			(84,450	)
			191,079				178,983
Land			58,503				58,497
Construction in progress			3,655				13,095
		$	253,237			$	250,575

4. Assets Held For Sale and Discontinued Operations

     In November 2004, the Company announced its plan to divest non-strategic assets, including eleven of its owned hotels, certain commercial office buildings and certain other non-core properties including condominium units and certain parcels of excess land (collectively referred to as “the divestment properties”). Each of the divestment properties met the criteria to be classified as an asset held for sale. The activities of the hotels and commercial office buildings were considered discontinued operations under generally accepted accounting principles and have been separately disclosed on the consolidated statement of operations, comparative for all periods presented when they existed. Likewise, the assets and liabilities of the business units have been segregated and separately stated on the consolidated balance sheet for all periods presented when they existed. Depreciation of these assets, if previously appropriate, was suspended.

     During 2005, the Company sold seven of the eleven hotels included under the November 2004 divestment plan and one commercial building, and during 2006 the Company sold three additional hotels. During the second quarter of 2007, the Company sold the remaining hotel located in Kalispell, Montana listed for sale for gross proceeds of $3.9 million. In total, the Company received $72.6 million in gross proceeds from the sale of these assets which were used primarily to finance a company-wide hotel renovation program, to repay $20.0 million in debt and for general corporate purposes.

     The Company holds undeveloped land that had been classified as held for sale on the consolidated balance sheet. While continuing to pursue the disposition of the assets, the Company determined the land no longer meets the accounting criteria for such classification. During June 2007, approximately $0.7 million was reclassified to property and equipment for all periods presented.

     During the fourth quarter of 2006, the Company listed for sale a commercial office complex located in Spokane, Washington that was included as a component of discontinued operations on the consolidated financial statements. In June 2007, the Company borrowed an additional $3.9 million available on an existing construction loan collateralized by the commercial office complex discussed above. In September 2007, the Company sold the complex to Barbieri Real Estate Company for $13.3 million in a tax advantaged transaction as a result of the surrender of operating partnership units of RLHLP (“OP units”). The consideration for the sale was provided through a combination of a payment of $4.2 million in cash, the exchange for redemption of 97,826 OP units (for further information, see Note 10), and the assumption of $7.6 million of debt. The Company recognized a gain on the sale of $2.1 million. The structure of the sale allowed a portion of the tax on the gain to be deferred, further enhancing the economic return to the Company. The sale was approved by the independent members of the Company’s board of directors.

     A summary of the results of operations for the discontinued operations is as follows (in thousands):

		For the three months ended September 30,
		2007												2006
		Hotel												Hotel
		Properties				Other				Combined				Properties				Other				Combined
Revenues		$	—			$	227			$	227			$	2,578			$	232			$	2,810
Operating expenses			—				(171	)			(171	)			(2,014	)			(102	)			(2,116	)
Depreciation and amortization			—				(9	)			(9	)			(2	)			(104	)			(106	)
Interest expense			—				(96	)			(96	)			(38	)			(13	)			(51	)
Interest income			—				—				—				3				—				3
Income tax benefit (expense)			—				17				17				(203	)			10				(193	)
Net income (loss) from operations			—				(32	)			(32	)			324				23				347
Gain (loss) on disposal of discontinued business units			—				2,074				2,074				(362	)			—				(362	)
Income tax benefit (expense)			—				(736	)			(736	)			128				—				128
Net gain (loss) on disposal of discontinued business units			—				1,338				1,338				(234	)			—				(234	)
Net income		$	—			$	1,306			$	1,306			$	90			$	23			$	113

		For the nine months ended September 30,
		2007												2006
		Hotel												Hotel
		Properties				Other				Combined				Properties				Other				Combined
Revenues		$	623			$	785			$	1,408			$	6,054			$	729			$	6,783
Operating expenses			(853	)			(546	)			(1,399	)			(5,512	)			(489	)			(6,001	)
Depreciation and amortization			(1	)			(25	)			(26	)			(5	)			(312	)			(317	)
Interest expense			—				(159	)			(159	)			(117	)			(75	)			(192	)
Interest income			1				—				1				3				—				3
Income tax benefit (expense)			82				(20	)			62				(158	)			60				(98	)
Net income (loss) from operations			(148	)			35				(113	)			265				(87	)			178
Gain (loss) on disposal of discontinued business units			(396	)			2,074				1,678				(316	)			—				(316	)
Income tax benefit (expense)			140				(736	)			(596	)			112				—				112
Net gain (loss) on disposal of discontinued business units			(256	)			1,338				1,082				(204	)			—				(204	)
Net income (loss)		$	(404	)		$	1,373			$	969			$	61			$	(87	)		$	(26	)

     In the above table, the comparability of the divestment properties’ activity between periods is impacted by the cessation of operations on the date of sale, as applicable.

     A summary of the assets and liabilities of discontinued operations is as follows (in thousands):

		September 30, 2007												December 31, 2006
		Hotel												Hotel
		Properties				Other				Combined				Properties				Other				Combined
Cash and cash equivalents		$	—			$	—			$	—			$	7			$	50			$	57
Accounts receivable, net			—				—				—				107				35				142
Inventories			—				—				—				5				—				5
Prepaid expenses and other			—				—				—				77				7				84
Property and equipment, net			—				—				—				4,080				9,837				13,917
Other assets, net			—				—				—				87				247				334
Assets of discontinued operations		$	—			$	—			$	—			$	4,363			$	10,176			$	14,539
Accounts payable		$	—			$	—			$	—			$	72			$	10			$	82
Accrued payroll and related benefits			—				—				—				20				—				20
Accrued interest payable			—				—				—				—				21				21
Other accrued expenses			—				—				—				99				16				115
Long-term debt			—				—				—				—				3,874				3,874
Liabilities of discontinued operations		$	—			$	—			$	—			$	191			$	3,921			$	4,112

5. Hotel Sublease and Franchise Agreement

     Through June 2007, the Company operated a leased hotel property, the Red Lion Hotel Sacramento. In July 2007, the Company entered into an agreement to turnover operations and sublease the Red Lion Hotel Sacramento to an unrelated third party with an initial lease term expiring in 2020. The sublease agreement provides for annual sublease payments to the Company of $1.4 million, which will effectively reduce the Company’s consolidated annual hotel facility and land lease expense by that amount. In addition as part of the agreement, the Company received deferred lease income of $3.0 million, which will be recognized over the life of the sublease agreement. For 2006 and through July 25, 2007, the date of transition from an owned/leased property to a franchise, the Company recorded revenues from the hotel of $8.6 million and $4.6 million, respectively.

     The third-party subleasing the hotel has entered into a franchise agreement and committed to make a multi-million dollar investment to further improve and reposition the hotel. As part of the agreement, the Company committed to $3.0 million in tenant improvements and as of September 30, 2007, had spent approximately $0.3 million of that amount. Also, the sublease provides the third party a two-year option to purchase the property.

6. Notes Payable to Bank

     In September 2006, the Company entered into a revolving credit facility for up to $50 million with a syndication of banks led by Calyon New York Branch. Subject to certain conditions, including the provision of additional collateral acceptable to the lenders, the size of the facility may be increased at the Company’s request up to $100 million. The initial maturity date for the facility is September 13, 2009, but the Company has the right to extend the maturity for two additional one year terms. Borrowings under the facility may be used to finance acquisitions or capital expenditures, for working capital and for other general corporate purposes. The obligations under the facility are collateralized by a company owned hotel, including a deed of trust and security agreement covering all of its assets, as well as by unsecured guaranties of the Company and certain of its other subsidiaries. In connection with this transaction, the Company paid loan fees and related costs of approximately $0.9 million, which have been deferred and are being amortized over the initial term of the facility.

     Outstanding borrowings under the facility accrue interest as Eurodollar loans with rates ranging from 150 to 225 basis points over LIBOR, with an option for base rate loans based upon the federal funds rate or prime rate. The credit facility requires the Company to comply with certain customary affirmative and negative covenants, the most restrictive of which are financial covenants dealing with leverage, interest coverage and debt service coverage. At September 30, 2007, no amounts were outstanding and the Company was in compliance with all of its covenants.

7. Business Segments

     The Company has three operating segments – hotels, franchise and management, and entertainment. The “other” segment consists primarily of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables and certain property and equipment which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense; therefore, it has not been allocated to the segments.

     The Company has historically owned certain commercial properties and has also engaged in traditional real estate related services, including developing, managing and acting as a broker for sales and leases of commercial and multi-unit residential properties (collectively referred to as the real estate management business). Together, these operations comprised the real estate segment. Effective April 30, 2006, the Company divested the real estate management business. In addition, consistent with the company’s strategy of divesting non-core assets, during the fourth quarter of 2006 the Company listed one of its two remaining wholly-owned commercial real estate properties for sale and classified its results of operations within discontinued operations for all periods presented. As discussed above in Note 4, the Company sold the commercial office building in September 2007. The remaining operations of that segment have been reclassified to “Other” for 2006 and for all comparative periods, where appropriate.

     The franchise and management segment had inter-segment revenues with the hotels segment for management fees which were eliminated in the consolidated financial statements. Likewise, the entertainment segment had intra-segment revenues which were eliminated in the consolidated financial statements. Management reviews and evaluates the operations of all of its segments including the inter-segment and intra-segment revenues. All balances have been presented after the elimination of inter-segment and intra-segment revenues and expenses. Selected information with respect to continuing operations is as provided below (in thousands). For similar information with regard to discontinued operations, see Note 4.

		Three months ended September 30,								Nine months ended September 30,
		2007				2006				2007				2006
Revenues:
Hotels		$	50,039			$	47,762			$	129,259			$	119,242
Franchise and management			701				847				2,272				2,064
Entertainment			3,030				2,519				9,019				8,377
Other			750				283				2,268				1,193
		$	54,520			$	51,411			$	142,818			$	130,876
Operating income (loss):
Hotels		$	11,554			$	9,993			$	18,011			$	15,081
Franchise and management			527				368				1,343				700
Entertainment			427				292				744				913
Other			(1,771	)			(1,595	)			(4,814	)			(3,253	)
		$	10,737			$	9,058			$	15,284			$	13,441

		September 30,				December 31,
		2007				2006
Identifiable assets:
Hotels		$	256,679			$	256,838
Franchise and management			37,424				31,879
Entertainment			7,326				5,259
Other			54,840				42,923
		$	356,269			$	336,899

     As a result of the Red Lion Hotel Sacramento’s transition from an owned/leased hotel to a franchise in July 2007, as discussed above in Note 3, operating results for the third quarter and first nine months of 2007 include Sacramento through July 25, 2007, as compared to the full third quarter and nine month period in 2006. Additionally, as of September 30, 2007, all assets and liabilities attributed to the hotel have been considered as part of the franchise and management segment.

8. Earnings (Loss) Per Share

     The following table presents a reconciliation of the numerators and denominators used in the basic and diluted income (loss) per share computations for the three and nine months ended September 30, 2007 and 2006 (in thousands, except per share amounts):

		Three months ended September 30,								Nine months ended September 30,
		2007				2006				2007				2006
Numerator — basic and diluted:
Net income from continuing operations		$	5,799			$	1,339			$	6,329			$	586
Income (loss) on discontinued operations			1,306				113				969				(26	)
Net income			7,105				1,452				7,298				560
Denominator:
Weighted average shares — basic			19,226				19,102				19,191				15,840
Weighted average shares — diluted			19,574				19,549				19,573				16,275
Earnings per share — basic:
Income before discontinued operations		$	0.30			$	0.07			$	0.33			$	0.04
Income on discontinued operations			0.07				0.01				0.05				—
Net income		$	0.37			$	0.08			$	0.38			$	0.04
Earnings per share — diluted:
Income before discontinued operations		$	0.29			$	0.07			$	0.32			$	0.03
Income (loss) on discontinued operations			0.07				—				0.05				—
Net income		$	0.36			$	0.07			$	0.37			$	0.03

     At September 30, 2007 and September 30, 2006, the effect of converting 44,837 and 142,663 of the outstanding OP Units, respectively, was considered dilutive and included within the above calculations.

     For the three months ended September 30, 2007, 258,594 of the 1,306,617 options to purchase common shares outstanding as of that date were considered dilutive. For the three months ended September 30, 2006, 303,762 of the 1,131,932 options to purchase common shares outstanding as of that date were considered dilutive. For the three months ended September 30, 2007, the 44,473 units of unissued restricted stock outstanding were considered dilutive. For the three months ended September 30, 2006, 11,121 units of unissued restricted stock outstanding were dilutive.

     For the nine months ended September 30, 2007, 301,568 of the 1,306,617 options to purchase common shares outstanding as of that date were considered dilutive. For the nine months ended September 30, 2006, 339,304 of the 1,131,932 options to purchase common shares outstanding as of that date were considered dilutive. For the nine months ended September 30, 2007, 35,175 units of unissued restricted stock were considered dilutive. At September 30, 2006, the then outstanding 11,121 units of unissued restricted stock were considered dilutive.

     All convertible debt instruments outstanding at September 30, 2006 were considered anti-dilutive. In December 2006, all outstanding convertible debt was repaid.

9. Stock Based Compensation

     The 1998 Stock Incentive Plan and the 2006 Stock Incentive Plan (“the Plans”) authorize the grant or issuance of various option or other awards including restricted stock grants and other stock-based compensation. The plans were approved by the shareholders of the Company. The 2006 plan allows awards up to a maximum number of 1.0 million shares, subject to adjustments for stock splits, stock dividends and similar events. The 1998 plan allowed for a maximum number of 1.4 million shares, although as a condition to the approval of the 2006 plan, the Company will no longer grant or issue awards under the 1998 plan. The compensation committee of the board of directors administers the 2006 plan and establishes to whom awards may be granted, and the type, terms and other conditions, including the exercise period, of those awards that may be granted.

     In May 2007, the board of directors granted 184,919 options to purchase common stock and unvested restricted stock units to executive officers and other key employees under terms and assumptions described below. In addition, non-executive directors of the company were granted an aggregate 9,234 shares of common stock with a fair value of $0.1 million as part of the existing director’s compensation arrangement. As of September 30, 2007, there were 615,885 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2006 plan.

     The Company also maintains an employee stock purchase plan (the “ESPP”) to assist its employees in acquiring a stock ownership interest in the Company. Under the ESPP, 300,000 shares of common stock have been authorized for purchase, of which 73,508 remain available as of September 30, 2007, in accordance with its terms. The ESPP permits eligible employees to purchase common stock at a discount through payroll deductions, and no employee may purchase more than $25,000 worth in any calendar year. During the third quarter of 2007, 9,947 shares were issued out of the plan, for a total of 19,246 shares issued during the first nine months of 2007.

     The Company calculates stock based compensation under the provisions of SFAS No. 123(R), including options and other awards issued under the Plans and shares purchased under the ESPP. Stock options issued are valued based upon the Black-Scholes option-pricing model and the Company recognizes this value as an expense over the periods in which the options vest. Use of the Black-Scholes option-pricing model requires that the Company make certain assumptions, including expected volatility, forfeiture rate, risk-free interest rate, expected dividend yield and expected life of the options, based on historical experience. Volatility is based on historical information with terms consistent with the expected life of the option. The risk free interest rate is based on the quoted daily treasury yield curve rate at the time of grant, with terms consistent with the expected life of the option.

     All options granted prior to 2003 were designated as nonqualified options, granted 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. For substantially all options granted, fifty percent of each recipient’s 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. For options issued prior to 2004, the vesting schedule will change if, beginning one year after the option grant date, the stock price of the common stock reaches the below target levels (measured as a percentage increase over the exercise price) for 60 consecutive trading days. During the first nine months of 2007, 12,293 and 400 options granted in 2003 and 2002, respectively, vested and became eligible for exercise in accordance with these provisions.

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

     For options issued in 2004 and 2005, the vesting schedule will change if, between the two year anniversary and the four year anniversary of the option grant date, the stock price of the common stock reaches the below target levels (measured as a percentage increase over the exercise price) for 60 consecutive trading days. During the first nine months of 2007, 25% of the options granted in 2004, or 114,726 options, vested and became eligible for exercise in accordance with these provisions.

				Percent of
Stock				Options
Price				Shares
Increase				Vested
	100	%			25	%
	200	%			50	%

     Options issued in 2006 and 2007 vest 25% each year for four years with no stock price acceleration provision. During the first nine months of 2007, 1,494 options granted in 2006 vested and became eligible for exercise. For the options granted in May 2007, the below assumptions were used. No options were granted during the first nine months of 2006.

Weighted-average fair value of options granted		$	4.36
Dividend yield			0	%
Expected volatility			33	%
Forfeiture rate			0	%
Risk free interest rates			4.85	%
Expected option lives		4 years

     In the third quarter and first nine months of 2007, the Company recognized approximately $0.2 million and $0.5 million, respectively, in compensation expense for previously granted options, compared with $0.1 million and $0.4 million in the prior year periods. The Company also recognized tax benefits related to the exercise of stock options of $0.2 million during the first nine months of 2007.

     At September 30, 2007, the fair value of options vested was approximately $1.7 million. As options vest, the Company expects to recognize approximately $1.8 million in additional compensation expense, before the impact of income taxes, over a weighted average

period of 36 months. The $1.8 million includes $0.2 million in compensation expense expected to be recognized during the remainder of 2007. A summary of stock option activity at September 30, 2007, is as follows:

						Weighted
						Average
		Number				Exercise
		of Shares				Price
Balance, December 31, 2006			1,256,874			$	7.14
Options granted			166,249			$	13.00
Options exercised			(81,418	)		$	6.00
Options forfeited			(35,088	)		$	5.82
Balance, September 30, 2007			1,306,617			$	7.99
Exercisable, September 30, 2007			439,578			$	7.02

     During the first nine months of 2007 and 2006, the total intrinsic value received by the grantees upon exercise of the 81,418 and 57,205 stock options was $0.5 million and $0.3 million, respectively. From those exercises, the Company issued new shares of common stock and received approximately $0.5 million and $0.3 million, respectively, in gross proceeds.

     Additional information regarding stock options outstanding and exercisable as of September 30, 2007, is as follows:

						Weighted
						Average								Weighted				Aggregate								Weighted				Aggregate
Range of						Remaining								Average				Intrinsic								Average				Intrinsic
Exercise		Number				Contractual				Expiration				Exercise				Value(1)				Number				Exercise				Value(1)
Prices		Outstanding				Life (Years)				Date				Price				(in thousands)				Exercisable				Price				(in thousands)
5.10 - 6.07			673,729				6.49				2011-2014			$	5.30			$	3,359				329,550			$	5.52			$	1,573
7.46 - 8.31			232,508				7.08				2009-2015				7.56				634				41,508				8.03				94
10.88-10.94			27,471				2.90				2009-2016				10.93				—				22,991				10.94				—
12.21-15.00			372,909				8.31				2008-2017				12.90				—				45,529				15.00				—
			1,306,617				7.04				2008-2017			$	7.99			$	3,993				439,578			$	7.02			$	1,667

     In May 2007, November 2006 and November 2004, the Company granted 18,670, 18,389 and 18,535 restricted shares of common stock, respectively, to executive officers and other key employees as compensation. The Company did not grant restricted shares of common stock in 2005. While all of the shares are considered granted, they are not considered issued or outstanding until vested. The 2007 and 2006 awards vest 25% on each anniversary of the grant date. The 2004 award vested 20%, or 3,707 shares, upon grant and vests an additional 20% at each subsequent anniversary date. The May 2007, November 2006 and November 2004 awards had fair values of $0.2 million, $0.2 million and $0.1 million on grant date, respectively, based on grant date prices of $13.00 per share, $12.21 per share and $5.04 per share during the respective periods.

     As of September 30, 2007 and 2006, there were 44,473 and 11,121 unvested shares outstanding, respectively. No shares have been forfeited since grant. During the first nine months of 2007 and 2006, the Company recognized approximately $77,000 and $14,000, respectively, in compensation expense related to these awards. As the restricted shares vest, the Company expects to recognize approximately $0.4 million in additional compensation expense over a weighted average period of 40 months.

10. Stockholders’ Equity

     Share Repurchases

     In September 2007, the Company announced a common stock repurchase program for up to $10 million. Any stock repurchases will be made through open market purchases, block purchases or privately negotiated transactions. The timing and actual number of share repurchases will depend on several factors including price, corporate and regulatory requirements and other market conditions. As of September 30, 2007, the Company had not repurchased shares under the program although during October 2007, the Company had repurchased 20,700 shares for an aggregate cost of $0.2 million.

     Operating Partnership Units

     As discussed in Note 1, the Company is a general partner of RLHLP and up through December 31, 2006, held an approximately 99% interest in that entity. Partners who hold operating partnership units (“OP Units”) have the right to put those OP Units to RLHLP, in which event either (a) RLHLP must redeem the units for cash, or (b) the Company, as general partner, may elect to acquire the OP Units for cash or in exchange for a like number of shares of its common stock.

     In September 2007 and as a component of the sale of a commercial office complex discussed in Note 4 above, the Company accepted 97,826 OP Units held by limited partners for a fair market value of $9.27 per share, based upon the trading price five days before the sale. The redemption resulted in a non-cash adjustment of the minority interest balance of $0.3 million and an increase of $0.6 million to property and equipment as a result of the step-up in value of the Company’s investment in RLHLP. At September 30, 2007, 44,837 OP Units held by limited partners remained outstanding.

11. Recent Accounting Pronouncements

     In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by establishing minimum standards for the recognition and measurement of tax positions taken or expected to be taken in a tax return. Under the requirements of FIN 48, a company must review all of its uncertain tax positions and make a determination as to whether its position is more-likely-than-not to be sustained upon examination by regulatory authorities. If a position meets the more-likely-than-not criterion, then the related tax benefit is measured based on the cumulative probability analysis of the amount that is more-likely-than-not to be realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of the provisions of FIN 48 did not have an impact on the Company’s financial condition or results of operations.

     In June 2006, the Emerging Issues Task Force (“EITF”) issued EITF No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences.” Under EITF No. 06-2, the compensation cost associated with a sabbatical or other similar benefit arrangement should be accrued over the requisite service period if an employee’s right to such absence (a) requires the completion of a minimum service period and (b) in which the benefit does not increase with additional years of service pursuant to paragraph 6(b) of SFAS No. 43 for arrangements in which the individual continues to be a compensated employee and is not required to perform duties for the entity during the absence. EITF No. 06-2 was effective for the Company on January 1, 2007, and the adoption of the provisions of EITF No. 06-2 did not materially impact the Company’s financial condition or results of operations.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements itself. However, this statement applies under other accounting pronouncements that require or permit fair value measurements and may therefore change current practice if an alternative measure of fair value has been used. SFAS No. 157 applies an exchange price notion for fair value consistent with previously preferred practice, with a focus on exit price and market-based measurements as compared to entry price and entity-specific measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged and the new measurement criteria are generally to be applied prospectively. The Company is currently evaluating the impact SFAS No. 157 will have on its consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, the objective of which is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with FASB’s long-term measurement objectives for accounting for financial instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 “Fair Value Measurements.” The Company is currently evaluating the impact SFAS No. 159 will have on its consolidated financial statements.

12. Subsequent Event

     In October 2007, the Company completed an acquisition of a leasehold interest in a 314 room, full service hotel in Anaheim, California. The purchase price for the leasehold, which runs through 2107 if all extension options are exercised, was $8.0 million. As required under the terms of the leasehold agreement, the Company will pay $1.8 million per year for five years in lease payments, to be adjusted every five years thereafter based on the terms of the agreement and tied directly to the Consumer Price Index. The Company plans to spend approximately $10.0 million on extensive renovations to guest rooms and public areas and reposition the hotel to meet Red Lion brand standards.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This quarterly report on Form 10-Q includes forward-looking statements. We have based these statements on our current expectations and projections about future events. When words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will” and similar expressions or their negatives are used in this quarterly report, these are forward-looking statements. Many possible events or factors, including those discussed in “Risk Factors” under Item 1A of our annual report filed on Form 10-K for the year ended December 31, 2006, could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report.

     In this report, “we,” “us,” “our,” “our company” and “the company” refer to Red Lion Hotels Corporation and, as the context requires, all of its wholly and partially owned subsidiaries, including, but not limited to, its 100% ownership of Red Lion Hotels Holdings, Inc. and Red Lion Hotels Franchising, Inc. and its approximate 99% ownership of Red Lion Hotels Limited Partnership. “Red Lion” refers to the Red Lion brand. The term “the system,” “system-wide hotels” or “system of hotels” refers to our entire group of owned, leased, managed and franchised hotels.

     The following discussion and analysis should be read in connection with our unaudited consolidated financial statements and the condensed notes thereto and other financial information included elsewhere in this quarterly report, as well as in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2006, previously filed with the SEC on Form 10-K.

Introduction

     We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the ownership, operation, development and franchising of midscale and upscale, full service hotels. Established over 30 years ago, the Red Lion brand is nationally recognized and particularly well known in the western United States where most of our hotels are located. The Red Lion brand is typically associated with three and four-star full-service hotels by our customers. As of September 30, 2007, our hotel system contained 52 hotels located in eight states and one Canadian province, with 9,078 rooms and 467,529 square feet of meeting space as provided below:

						Total				Meeting
						Available				Space
		Hotels				Rooms				(sq. ft.)
Owned Hotels			18				3,649				199,472
Leased Hotels (1)			12				1,807				80,212
Franchised Hotels			21				3,368				151,845
Managed Hotel			1				254				36,000
Total			52				9,078				467,529

     Red Lion is about “Staying Comfortable” and our product and service culture works in both large urban and smaller markets. The character of our hotels strives to reflect our individual local markets while maintaining consistent brand standards, which we feel makes our hotels an attractive choice for customers within the markets we currently operate. We believe our adherence to consistent customer service standards and brand touch-points makes guests feel at home no matter where they are.

     We operate in three reportable segments:

	•		The hotels segment derives revenue primarily from guest room rentals and food and beverage operations at our owned and leased hotels.
	•		The franchise and management segment is engaged primarily in licensing the Red Lion brand to franchisees and managing hotels for third-party owners. This segment generates revenue from franchise fees that are typically based on a percent of room revenues and are charged to hotel owners in exchange for the use of our brand and access to our central services programs. These programs include the reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. It also reflects revenue from management fees charged to the owners of our managed hotels, typically based on a percentage of the hotel’s gross revenues plus an incentive fee based on operating performance.
	•		The entertainment segment derives revenue primarily from ticketing services and promotion and presentation of entertainment productions.

     We have historically owned certain commercial real estate. We also have engaged in traditional real estate related services, including developing, managing and acting as a broker for sales and leases of commercial and multi-unit residential properties (collectively referred to as the real estate management business). Together, these operations comprised our real estate segment. Effective April 30, 2006, we divested the real estate management business. In addition, consistent with our strategy of divesting non-core assets, during the fourth quarter of 2006, we listed one of our two remaining wholly-owned commercial real estate properties for sale and have classified its results of operations within discontinued operations for all periods presented. In September 2007, we sold the property for approximately $13.3 million and recognized a gain on sale of $2.1 million. For additional information, see Note 4 of Notes to Consolidated Financial Statements.

     Our remaining activities, none of which constitutes a reportable segment, have been aggregated into “other,” including the remaining operations of our former real estate segment, which have been reclassified for all comparative periods, where appropriate.

Executive Summary

     Our mission is to create the most memorable guest experience possible, allowing us to be the leader in our markets through personalized, exuberant service. To continually achieve and improve upon that goal, we have and will continue to focus our resources – monetary, capital and human — in four primary areas.

     Infrastructure. Improving the foundation of the corporation including continually focusing on our core competencies and improving the infrastructure used to manage reservations and support our hotel system. Over the last several years, we have completed the installation of the MICROS Opera Property Management System (“Opera”) in 16 of our hotels. Opera shares a single database with our central reservations system that allows us better yield management. Combined with a multi-million dollar redesigned website, Opera has enhanced our ability to manage reservations generated through all electronic channels and has positioned us to take advantage of electronic travel bookings. Guests continue to book more reservations through our branded website, as well as third-party on-line travel agents (“OTAs,” or also referred to as alternative distribution systems or “ADS”), and our central reservations and distribution management technology allows us to manage the yield on these OTA channels on a real-time, hotel-by-hotel basis.

     Our focus on driving customers to our RedLion.com website has made it our fastest growing source of online reservations, the revenue from which has more than doubled in the first nine months of 2007 compared to the same period in 2006, accounting for approximately 7.0% of total hotel revenues. We also have strong merchant model agreements with leading OTA providers and during 2007 have expanded our promotional activity with various travel agents that has resulted in an increase in revenues of 16.7% through these channels.

     Physical Assets. Improving our product, including the physical assets presented to our guests and the feel of our guest experience. In 2005, we completed the implementation of our “Stay Comfortable” initiative and began major room renovations at all of our hotels including new floor and wall coverings, tiled bathroom floors, granite vanities and other bathroom upgrades, enhanced guest room features including new plush pillow top mattresses and upgraded linen and pillow packages, large work desks and ergonomic chairs and amenities such as complimentary wireless internet access. By the end of 2006, we began work on common areas such as lobbies and restaurants and as of September 30, 2007, substantially all hotel renovations announced at the end of 2004 have been completed. During 2005, 2006 and the first nine months of 2007, we have spent over $40 million on the largest capital renovation plan in our history.

     Since we began our hotel renovations in 2005, guest reaction has been positive and has strengthened the performance of our hotel system. During the third quarter and first nine months of 2007, RevPAR and ADR at our owned and leased properties increased 9.5% and 13.2% and 5.2% and 7.2%, respectively, over the comparable periods in 2006, as provided in the below table. From 2005, when we began our renovations, to 2007, ADR and RevPAR for the comparable third quarter and year-to-date periods has improved 20.1% and 25.5% and 20.8% and 22.1%, respectively. During the 2005 periods, ADR and RevPAR were $79.47 and $57.99 for the three months ended September 30, 2005, and $74.35 and $48.16 for the nine month period, respectively.

		For the three months ended September 30,																								For the nine months ended September 30,
		2007												2006												2007												2006
		Average (2)												Average (2)												Average (2)												Average (2)
		Occupancy				ADR (3)				RevPAR (4)				Occupancy				ADR (3)				RevPAR (4)				Occupancy				ADR (3)				RevPAR (4)				Occupancy				ADR (3)				RevPAR(4)
Red Lion Hotels:
Owned and Leased Hotels			76.3	%		$	95.43			$	72.79				73.2	%		$	90.75			$	66.45				65.4	%		$	89.84			$	58.79				61.9	%		$	83.84			$	51.92
Franchised Hotels			69.7	%		$	76.95			$	53.63				70.8	%		$	73.90			$	52.35				63.0	%		$	74.46			$	46.89				64.7	%		$	71.60			$	46.33
Total Red Lion Hotels			74.2	%		$	89.85			$	66.63				72.4	%		$	85.30			$	61.79				64.6	%		$	84.94			$	54.89				62.8	%		$	79.67			$	50.07
System-wide (1)			74.0	%		$	90.56			$	67.00				72.7	%		$	86.17			$	62.68				64.8	%		$	85.95			$	55.66				63.2	%		$	80.81			$	51.10
Change from prior comparative period:
Red Lion Hotels:
Owned and Leased Hotels			3.1				5.2	%			9.5	%															3.5				7.2	%			13.2	%
Franchised Hotels			(1.1	)			4.1	%			2.4	%															(1.7	)			4.0	%			1.2	%
Total Red Lion Hotels			1.8				5.3	%			7.8	%															1.8				6.6	%			9.6	%
System-wide (1)			1.3				5.1	%			6.9	%															1.6				6.4	%			8.9	%

     Our strategy has been to increase occupancy through strategic marketing and investment in our properties, followed by increasing rates as demand increased for our rooms. Revenues during 2007 compared to the first nine months of 2006 have been directly impacted by our efforts to target a higher-paying customer base by concentrating our focus on more corporate business and group stays, instead of lower rate promotional and permanent contract business. System-wide during 2007, we have experienced a gain in occupied rooms of 1.3 and 1.6 percentage points quarter-on-quarter and year-on-year over 2006, respectively, with 5.1% and 6.4% increases in ADR during those same periods. Occupancy at our owned and leased properties has increased as a result of this shift in customer base as well as the impact of rooms not available due to the renovations through much of 2006. For the year ending December 31, 2007, we anticipate RevPAR increases at our owned and leased properties in the range of 11 – 12%, driven by increases in ADR and occupancy.

     The Red Lion Way. We want our guests to feel our commitment to their memorable experience through our employees. In order to live up to our mission statement, management believes strongly in associate retention and development and is committed to competitive compensation and benefit packages, advancement opportunities and demonstrated support by leaders throughout all levels of our organization who understand a culture of employee satisfaction and excellent service is an integral component of our long-term growth strategy. We have instilled the foundation for our culture through the development of “The Little Red Book,” a guide to our identified essential principles of Red Lion culture that each of our associates has been and will continue to be trained on. Our goal is to be known in our industry for leadership excellence and being a great company to work for in each of our markets.

     Growth. Preparing for growth, especially in the franchise arena, means improving our liquidity and capital resources and increasing the depth of financial resources available to us. In order to grow, we must also be successful in creating consistent upscale brand standards throughout our hotel system and enhancing the service delivery presented to our guests. Our strategy continues to include a growth goal of expansion to 100 markets, primarily by expanding the number of hotels franchised under the Red Lion brand, including joint ventures and direct acquisition in hub markets. We expect to add properties in large, western U.S. urban markets, complemented by leading properties in smaller, secondary cities, and progressively move east, leveraging the momentum of our growth in the western states. In October 2007, we acquired a long-term leasehold interest in a 314-room hotel in Anaheim, California, for $8.0 million and will undergo extensive renovations to meet Red Lion brand standards. Once repositioned, the hotel will be a strong property for us in an important California market that we anticipate will provide a strong platform for further expansion.

     During the third quarter, we subleased the Red Lion Hotel Sacramento to a third party and simultaneously entered into a long-term franchise agreement. Including Sacramento, we had 21 franchised hotels at of September 30, 2007, with one additional hotel in Baton Rouge, Louisiana scheduled to come on-line during the fourth quarter of 2007. All franchised hotels are required to meet Red Lion’s upscale brand standards by the end of 2007. Currently, we expect sixteen franchised hotels to meet our elevated brand standards. We anticipate that between three and five franchised hotels may not meet the elevated brand standards, which may result in the termination of these franchises in the first half of 2008.

     With the completion of the room renovations and our resulting ability to increase room rates, as well as overall strength in the industry, we saw increases of 10.8% in hotel revenues during both the first and second quarters of 2007 and 4.8% during the third quarter, for total hotel revenues during the first nine months of 2007 of $129.3 million compared to $119.2 million in 2006. Third quarter results reflect the transition from the Red Lion Hotel Sacramento from an owned/leased hotel to a franchise during July 2007, reducing comparable revenues by $1.5 million.

     Through the sale of non-core assets that has generated $72.6 million in gross proceeds since 2005, not including the commercial office building sold in September 2007 for $13.3 million, the public offering in May 2006 for gross proceeds of $64.3 million, and the repayment of $50.0 million in long-term debt during 2006, financially we believe we have a strong balance sheet and financial position to advance our objectives. We had almost $35.0 million in cash at September 30, 2007, as well as a revolving credit facility for up to $50 million available to us that can be increased to $100 million subject to satisfaction of various conditions. We believe we have a solid foundation for continued growth and are positioned to achieve our long-term strategic goals.

Results of Operations

     For the three and nine months ended September 30, 2007, total revenue increased $3.1 million and $11.9 million over the third quarter and first nine months of 2006 primarily due to increased revenues generated from our hotels segment, offset by the sublease of the Red Lion Hotel Sacramento in July 2007 and its subsequent transition from an owned/leased hotel to a franchise property. Results for the third quarter and first nine months of 2007 include Sacramento through July 25, 2007, the date of transition from an owned/leased property to a franchise, as compared to the full third quarter and nine month period in 2006. Revenues at the hotel in 2006 and through July 25, 2007, were $8.6 million and $4.6 million, respectively, with EBITDA at the hotel before lease expense of $0.7 million and $43,000, respectively, during those same periods.

     Net income during the 2007 periods improved over the comparative periods, a direct result of the increased revenues discussed above as well as the exclusion of expense for the early extinguishment of debt of approximately $4.9 and $5.7 million included in the three and nine-month 2006 results, respectively, and lower interest expense from the repayment of approximately $50.0 million in long-term debt during the second and third quarters of 2006. These factors were offset by increased depreciation and amortization expense from the completed hotel renovations and a $1.0 million net gain from the sale of the real estate management business recorded during the second quarter of 2006. During the third quarter and first nine months of 2007, we reported net income of approximately $7.1 million (or $0.37 per share) and $7.3 million (or $0.38 per share), respectively, compared to net income of $1.5 million (or $0.08 per share) and $0.6 million (or $0.04 per share) during the third quarter and first nine months of 2006. A summary of our consolidated statement of operations is as follows:

		Three months ended September 30,								Nine months ended September 30,
		2007				2006				2007				2006
Total revenue		$	54,520			$	51,411			$	142,818			$	130,876
Operating expenses			43,783				42,353				127,534				117,435
Operating income			10,737				9,058				15,284				13,441
Other income (expense):
Interest expense			(2,320	)			(2,907	)			(6,871	)			(9,644	)
Expense of early extinguishment of debt			—				(4,938	)			—				(5,743	)
Minority interest in partnerships, net			(39	)			33				(40	)			43
Other income, net			379				554				971				1,626
Income (loss) from continuing operations before income taxes			8,757				1,800				9,344				(277	)
Income tax (benefit) expense			2,958				461				3,015				(863	)
Net income from continuing operations			5,799				1,339				6,329				586
Income (loss) from discontinued operations			1,306				113				969				(26	)
Net income		$	7,105			$	1,452			$	7,298			$	560
Earnings per share — basic		$	0.37			$	0.08			$	0.38			$	0.04
Earnings per share — diluted		$	0.36			$	0.07			$	0.37			$	0.03